Research Firm: ISS-EVA

About the Firm

Founded in 1985, Institutional Shareholder Services Inc. ("ISS"), ISS is the world's leading provider of corporate governance and responsible investment solutions for asset owners, asset managers, hedge funds, and asset service providers. ISS' solutions include objective governance research and recommendations; responsible investment data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities Class Action Services, LLC); and reliable global governance data and modeling tools. Clients rely on ISS' expertise to help them make informed corporate governance and responsible investment decisions.

ISS acquired EVA Dimensions in February 2018, and the products and services are now delivered under the ISS-EVA brand. ISS-EVA measures and values corporate performance based on the Economic Value Added (EVA) framework. Solutions for the institutional community include PRVit, a stock ranking model, and CPI, the Corporate Performance Index ranking of financial quality. Both cover 18,000 companies globally and have historical data going back two decades.

As a global company, ISS has more than 1,200 employees in 19 offices across 13 countries. ISS provides research approximately 42,000 shareholder meetings in more than 115 global markets annually while working on behalf of clients to execute approximately 9.6 million global proxy ballots representing approximately 3.7 trillion shares. ISS' Responsible Investment research covers more than 20,000 companies across the globe. ISS' flexible coverage universe expands correspondingly with clients' holdings. ISS analysts have unique expertise, insight, and perspective on developments shaping the governance landscape underpinned by expertise in varied fields, such as law, Mergers and Acquisitions, compensation, and data & analytics.

Methodology

ISS utilizes the EVA methodology to evaluate companies and provide recommendations and in the form of "PRVit" scores.

EVA Method: In contrast to reported earnings figures, EVA measures profit only after deducting the full cost of capital, which is not just the interest on borrowed money. It also includes the cost of providing shareholders with a minimum competitive return on their equity investment in a firm. With that extra charge deducted, firms that look profitable by conventional profit figures often aren't when judged by EVA.

EVA also repairs other accounting distortions: restructuring charges are added back and treated like investments to streamline costs, research is treated as valuable capital and written off over time and instead of expensed down the drain, leased assets are treated as if owned, which effectively they are, and unusual tax gyrations are smoothed, to name a few.

The result: EVA is a far sounder and more comparable measure of a firm's true economic profit and a more reliable indicator of its true market value than are EPS, net income, EBITDA or any other standard accounting-based measures of profit.

PRVit Model: The PRVit model is based on the premise that investors should only pay market value premiums over a firm's capital – a spread referred to as MVA, short for "market value added" – in an amount that equals the discounted present value sum of the EVA profit the firm is expected to earn in the future. A firm that just covers its overall cost of capital and that breaks even on its EVA should break on its MVA, too. It should trade at a value that closely matches its capital. Only firms that are earning and increasing EVA deserve to trade for significant market value premiums, and vice versa.

PRVit thus rates a firm's true intrinsic value by examining a series of metrics that reflect its ability to reliably earn and increase its EVA profit, and compares the intrinsic value to the firm's actual market valuation as expressed through a family of MVA multiples. The resulting PRVit score is the ratio of intrinsic value to actual value, or if you will, it is a risk-adjusted rate of return on market value, compared to all other firms in the market. Highly rated firms offer a bargain – a better return, net of risk, per unit of value, and thus they are expected to outperform lower rated firms in their sectors.

PRVit scores are re-computed daily for the entire Russell 3000 universe and approximately 200 large ADR's. PRVit scores all stocks on a forced percentile scale, from 0 to 100. There are always as many buys as sells; there is no implicit (or indeed arbitrary) bias to buy, or to sell, as is often the case with Street research. Moreover, the final PRVit score has been neutralized within each of 60 industry sectors, so that the median score within a sector is always 50, so that there is not a bias in favor of one sector over another. The "in-sector" PRVit score is simply a guide to the best stocks to own or shun once a decision to invest in a sector has been made.

PRVit, in short, is designed to help investors objectively assess whether what they are buying is really worth it. That's why we call the PRVit style of investing VARP, standing for "value at a reasonable price." PRVit is just as inclined to rate a rapidly expanding, high-multiple growth stock a buy if its EVA is advancing in step with its value as it is to rate a mature, challenged, value stock a sell if its EVA cannot justify its lowly valuation.

PRVit is deeply grounded in economic science and business logic. It systematically penetrates accounting fictions to better discern true performance and genuine value. The metrics it calls upon are assembled in an established, fundamental model of market valuation that links MVA with the risk-adjusted, discounted sum of EVA profit. And it benefits, as do all quantitative strategies, from making robust statistical comparisons across an entire spectrum of over 3,000 stocks, a feat even the most experienced team of professional researchers could not come close to matching.

Besides serving as a guide stock to stock, PRVit can also be used to rate the overall score of your portfolio. If that score, weighted by the relative value of your holdings, is low or falling, you may be right, but you are betting your wealth against PRVit and its considerable analytical firepower.

Coverage

EVA coverage includes Russell 3000 stocks and some 200 of the largest and most important ADR's traded on the NYSE, AMEX and NASDAQ.

What's Provided on Fidelity.com

• Individual stock research reports, updated daily. The reports feature tables and graphs that chronicle a firm's EVA and MVA trends over the past 6 years, and assemble the metrics into an EVAbased Performance Score, Risk Score, and Valuation Score that in turn lead to the overall PRVit Score. Another unique feature of the report is the PRVit "Matrix," a visual depiction of a firm's PRVit score on a grid that plots a firm's intrinsic value (as evidenced by its comparative Performance Score minus Risk score) against its relative market Valuation Score on the other axis.
• Stock ratings: EVA Dimensions uses the following terms in its assessment of a stock's potential performance over the one to six month period.
  • Buy: Expected to significantly outperform its sector average
  • Overweight: Expected to slightly outperform its sector average
  • Hold: Expected to perform in line with its sector average
  • Underweight: Expected to slightly underperform its sector average
  • Sell: Expected to significantly underperform its sector average