Leveraging Axiomatic data's capability to track these filings in real time, Alan Kwan shows that simple indicators of company growth derived from benefit plans predict company stock returns. The returns to this strategy exceed compensation for market risk. Companies scoring well on employee benefits outperform especially well during the Covid 19 pandemic.
Complete Paper can be downloaded here
New York, NY February 11, 2021 - Axiomatic Data, the Form 5500 Information Company, announced today the creation and release of ThriveScores™ to its database covering over 650,000 US public and private companies. Using information extracted from Form 5500 filings, Axiomatic Data has developed a scoring methodology that predicts corporate growth, or likelihood to thrive, across the vast majority of US companies. ThriveScores can be used as a measure of financial health for all US companies and as an investment signal for US public companies.
The Form 5500 series is a compliance, research, and disclosure tool for US employee benefit plans. The Department of Labor has mandated that a Form 5500 must be filed for welfare benefit plans by companies with over 100 employees and for all retirement plans such as 401Ks. Axiomatic Data aggregates, harmonizes, and normalizes several million Form 5500 filings annually to create an accurate, robust database serving multiple use cases.
“Customers asked if we could make stock price performance and financial health predictions based upon changes in employment and corporate benefits reported in Form 5500 filings. ThriveScores do just that,” said Steve Goldstein, a partner at Axiomatic Data. “We’ve developed algorithms that capsulize these changes and deliver this information in ThriveScores.”
“We analyzed the last 4 years of Axiomatic Data’s ThriveScores and found that Russell 3000 companies with higher ThriveScores outperform companies with lower ThriveScores,” said Larry Green, President of SmartMarketData, LLC, an alternative data analytics firm. “The data was compelling, and we’ve published a white paper that summarizes our findings.”
The ThriveScores algorithms incorporate changes in employment and employer contributions to employee benefit plans, among other attributes, from Form 5500. The SmartMarketData white paper can be downloaded here.
While technology companies dominated the large-cap index, the highest percentage of new entrants in Russell 3000 in 2020 belonged primarily to the Professional and Scientific.
On the other hand, not surprisingly (post COVID-19), there were five companies belonging to the Accommodation and Food Services industry that exited the Russell 3000, but none within that industry entered the Russell.
Companies exiting the Russell were more likely to have a legacy defined-benefit plan, leading to additional financial pressue on these bigger companies wih under-funded defined benefit plans (see this post).
Download the full press release here.
Statistically significant correlations were found between contributions to defined contribution pension plans and corporate financial performance for Russell 3000 companies.
Employer contributions were found to be more correlated with financial performance than participant contributions, consistent with findings from a research paper by T. Rowe Price.
Companies with higher contributions per employee were found to be more likely to have higher revenue and EBITDA per employee, accounting for company size, age, and industry.
Above findings were found to hold for all industry sectors, except Professional, Scientific and Technical Services, which has little correlation between EBITDA and pension contributions per employee.
Current economic downturn and likely cut in stock dividends caused by the COVID-19 pandemic could lead to financial pressure on companies with under-funded defined-benefit plans.
Approximately 27% of companies in the Russell 3000 still have a defined-benefit pension plan.
Companies with a high target normal cost and a high concentration of active defined-benefit
plan participants will have additional liability in the form of future company contributions.
Companies in the air transportation and retail industries that are historically vulnerable to plan failures and low funding ratios have a more significant problem during the current market downurn with “at-risk” underfunded defined-benefit plans.