California-based investment boutique ROC Investments has debuted its first ETF, an actively managed fund targeting US companies with CEOs considered to possess strong moral character.
Dan Cooper, Founder and CEO of ROC Investments.
The ROC ETF (ROCI US), whose name is derived from an acronym for ‘Return On Character’, has been listed on Cboe BZX Exchange with an expense ratio of 0.49%.
The fund has come to market through white-label ETF platform ETF Architect.
The prime concern of CEOs is the maximization of shareholder wealth; however, they are also ultimately responsible for managing the interests of employees, customers, suppliers, creditors, communities, and government agencies.
The ETF’s investment thesis is based on the notion that CEOs exhibiting higher levels of integrity will be better able to successfully navigate the interests of these many groups, leading to lower business risk and a more efficient execution of company strategy over the long term.
According to ROC, the market’s general disregard for measuring the value of exceptional character leadership creates a mispricing opportunity that can be exploited in the pursuit of alpha.
While the strategy is very much underexplored, it is backed up by research conducted by global consulting firm KRW International. KRW issued a report which found that firms containing leadership teams with high character scores exhibited greater workforce engagement, higher profitability (as measured by return on assets), and lower levels of corporate risk compared to the broad market.
Dan Cooper, Founder and CEO of ROC Investments, said: “Integrity, responsibility, forgiveness, and compassion are the same principles parents seek to instill in their children, and yet they are often found lacking in the financial world. Far more than exterior characteristics like education, tenure, politics, age, industry, or religion, it is these interior traits that determine character. Our hope is that the ROC ETF will show that not only does character matter, but it is the best way to live and invest.”
Investment approach
In a bid to outperform the benchmark Russell 1000 Index, the ETF invests in 75 to 150 US-listed large-cap equities of companies whose CEOs score highly according to ROC’s proprietary character model.
ROC’s framework consists of two inputs: an Integrity Score and a Behavioral Assessment.
The Integrity Score is derived from a natural language processing algorithm that scours a company’s public documents to evaluate the level of transparency contained within those reports. According to ROC, company transparency and CEO integrity are closely related.
The Behavioral Assessment, meanwhile, consists of a qualitative assessment of a CEO’s character which is ascertained through direct interviews with close professional colleagues as well as supplementary sources such as biographies, company surveys, and media appearances.
Constituents chosen for the ETF are weighted so that the portfolio mirrors the return profile of the benchmark Russell 1000. Weightings are modified quarterly, while character scores are evaluated on an annual basis.
The fund will typically exit individual positions if the high-character CEO exits the company, the CEO’s behavior violates the character model’s integrity criteria, or if the removal of the firm would be beneficial to the ETF’s broader return profile.
According to ROC, however, as high-character CEOs tend to stay at a single company for long periods of time, portfolio turnover is expected to be relatively low.