LatinFinance - March/April 2013 - 50

Brazil Stars Index

In good company
By Katie Llanos-Small

Strong management practices pay off: the M&E LatinFinance Brazil
Stars Index outperforms the IBovespa by 53.6%

50 LatinFinance

March/April 2013

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he 2013 M&E LatinFinance
Brazil Stars Index has vastly
outperformed the country’s
other sustainability indices over the
past three years. The index, which
picks and weights companies by the
practices of the 16 components. Itaú, in particular, stands out: it
strength of their management practices, returned 42.62% in the
has improved its efficiency ratio by 9% since 2010, and has made
three years to December 28, 2012 – outperforming the Ibovespa,
the benchmark index of the São Paulo Stock Exchange, by 53.6%, progress on restructuring since merging with Unibanco in 2009.
Despite an increase
and ISE, Brazil’s main corporate
in non-performing loans
sustainability index, by 19.31%.
Diverging fortunes
and a slowdown in SME
The Brazil Stars Index comprises
M&E LatinFinance Brazil Stars Index
lending, Bicbanco is ranked
the 16 best-run Brazilian companies,
150
second for its management
weighted according to how sustainably
140
practices.
they are run, in terms of management,
M&E LF Index
Vale, Embraer and
performance and risks. The index takes
130
Natura, meanwhile,
into account several factors to weight
120
are making the most
components. It assesses how companies
110
of their community
comply with regulatory standards
100
spending, according to
and best practice on ethics and
M&E calculations of the
transparency. Financial performance
90
correlation between trends
is the second measure. Here, firms’
80
in those expenses and net
financial histories – including revenues,
Base=100, 12/31/2009
IBovespa Index
70
sales. Vale is also the biggest
return on equity and assets – are
spender of the Brazil Stars
reviewed, and companies with upward
on social programs – it
trends get a higher grade.
spent 416 million reais on
The volatility of that data forms
Source: Management & Excellence SA
such initiatives in 2011.
the third metric for the index. The
Itaú and Bradesco are big
standard deviation of revenue changes
community spenders as well, questions remain over the return
is subtracted from the overall score. Finally, the company’s
on that investment. Itaú generates 177 reais per real spent on the
strategy is compared with the sector overall.
community, suggesting it is overspending.
Market capitalization also contributes to the weightings.
Ambev’s weight in the index has gone up five-fold with its
Diversification ahead
increase in market capitalization from 98.3 billion reais to 264.8
The Brazil Stars Index is set to expand to include retail,
billion reais over the three-year reference period, for example.
construction, and healthcare firms in the coming years. As
Meanwhile, the index’s exclusion of underperformer
well as incorporating firms in sectors that investors are keen
Petrobras has played an important role in its success.
on, expanding the index is expected to allay any concerns over
The Brazilian oil firm has lost over a third of its value over
concentration risk.
the past three years – falling to 255 billion reais from 347 billion
Not that diversification is everything. Brazil Stars also
reais, according to M&E. The company failed to make it into the
outperformed Dow Jones’s much larger Sustainability World
Brazil Stars Index because of its poor risk rating.
Index by 38% over the three year to December 2012.
TAM and Redecard fell out of the index last year when they
Lending well
delisted. The year before, Banco do Brasil was replaced by
Of the 16 companies in the index, the three banks – Banco
BMFBovespa in the index. LF
Bradesco, Bicbanco and Itaú – have the best management

LatinFinance - March/April 2013

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