Following the pandemic, many employers have come to realize how crucial it is to put employee happiness and well-being first as they believe it will help them retain employees and increase their bottom line. Asset management company Irrational Capital is taking advantage of this change by creating an unorthodox stock-picking method that prioritizes employee satisfaction over standard financial metrics. According to the business, organizations with happier employees see an increase in stock values and improved retention and morale.
Large-scale employee satisfaction has always been challenging to measure, but Irrational Capital has developed a unique approach. The company creates "human capital factor scores" for thousands of publicly traded U.S. corporations by combining public information from employment review sites like Glassdoor with proprietary data from employee surveys. The ratings evaluate multiple aspects of worker contentment, encompassing organizational efficiency, inventiveness, affective involvement, and material benefits like salary and work-life equilibrium.
Irrational Capital tested this theory two years ago when it introduced three exchange-traded funds (ETFs) in association with the boutique asset manager Harbor Capital. Since its inception in October 2022, the primary ETF, HAPI, which invests in large-cap equities with the greatest human capital scores, has beaten over 90% of its rivals, according to Morningstar. This achievement lends credence to the idea that improved financial performance can be attributed to higher employee happiness.
The strategy used by Irrational Capital fits with more general research patterns. For example, Khuram Chaudhry, head of JPMorgan's European quantitative strategy, and his colleagues have investigated how the COVID-19 epidemic is driving changes in how individuals view their work in their lives and how these changes are affecting market dynamics. Work used to be just a way to make ends meet. However, according to Chaudhry, it is now also a source of identity and community, taking over places that were previously held by more established social organizations like neighborhoods and churches.
HAPI owns the research and consulting company Gartner, where Keyia Burton, a senior principal, works. She highlights the importance of emotional engagement in influencing business outcomes. Performance can be greatly increased when workers feel appreciated and invested in the success of the company-an impact that is frequently underappreciated.
Since the pandemic, a lot of businesses have implemented wellness efforts to increase employee enthusiasm and retention. However, it has been difficult to connect these programs to financial results. Nonetheless, there is an increasing focus in this field. For instance, S&P Global's environmental, social, and governance (ESG) assessments now incorporate measures such as job satisfaction, happiness, stress, and meaning at work.
Professor of finance at London Business School Alex Edmans has studied decades' worth of U.S. stock market data and discovered that companies with high employee satisfaction typically beat their competitors by as much as 3.8% a year. Edmans does, however, issue a warning that these conclusions could not hold everywhere, particularly in nations with less flexible labor markets.
Though the first results are encouraging, other experts advise caution. While acknowledging that motivated workers are more productive, Bryan Armour, director of passive strategies research for Morningstar in North America, cautions that the evidence supporting "human capital factors" is still mostly unreliable.
Behavioral economist Dan Ariely, veteran investor David van Adelsberg, and co-founder of a non-profit that certifies B Corporations, Bart Houlahan, formed Irrational Capital. Over 20% of the gains this year have come from the HAPI ETF. Van Adelsberg maintains that the fund's outperformance is not exclusively attributable to its top holdings, which include numerous major tech firms that have recently fueled market advances. Successful holdings include JPMorgan Chase and Eli Lilly.
Not all of Irrational's endeavors, however, have been as successful. HAPS, a sibling ETF that concentrates on small-cap stocks with strong employee sentiment, is more costly than HAPI and has lagged most of its rivals, according to Morningstar.
According to Chaudhry and Burton, larger businesses typically can carry out comprehensive and consistent staff surveys, producing more accurate data. By providing human capital ratings to publicly traded companies and private equity firms looking for deeper insights into their personnel, Irrational Capital is currently growing its company.
Irrational Capital contends that the HAPI ETF's strong performance provides strong evidence for businesses to place a high priority on employee satisfaction and to spend money getting thorough workforce surveys.