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Using Design to Pick Stocks?

Slide Show >>

Few things can jolt a jaded businessman out of his routine. Walking into the Club World section of a British Airways (BAB) plane, with its award-winning pod-shaped flat beds, is one of them.

Within minutes even the most well-traveled exec is apt to start behaving like a kid with a new toy, pushing buttons, adjusting the seat, and flipping out the flat screen. Beyond the obvious cool factor, the bed's early 2000 launch helped British Airways pull up from a previously rocky financial year, increasing seat yield in one quarter by a company record-breaking 9% and stabilizing its stock.

Numbers like these have inspired the London-based British Design Council, a publicly funded advocacy group whose mission is to research and promote the role of design in Britain, to examine the link between corporate design investment and stock performance. Its findings are surprising and refreshing.

"TANGIBLE BENEFIT." The council tracked the share prices of the 61 British companies that were the biggest award winners in four major British design contests over a period of 10 years. For the decade ending in December, 2004, the basket of 61 companies, called the Design Index, outperformed the Financial Times Stock Exchange 100 (FTSE100) stock index by more than 200%.

"Now we can show U.K. industries that there's a tangible benefit to design and innovation," says Harry Rich, deputy chief executive of the council and creator of the Design Index.

Rich hopes the compelling correlation will persuade even the most conservative execs that design affects the bottom line of more than just media companies and furniture makers. To underscore his point, he notes the striking mix of companies that scooped up top prizes in the design competitions the council used as a filter.

NO-BRAINERS. One such contest, Britain's Design Effectiveness Awards, specifically highlights innovative projects that have improved a company's financials, as well as its street cred.

Some businesses in the basket are no-brainers: The world's second-largest advertising agency, London-based WPP Group (WPPGY), has created blockbuster campaigns for such clients as Dove (UN) and Ford (F). Another Design Index natural is computer games outfit Eidos (EIDSY), which dreamed up the top-selling video-game series, Tomb Raider.

Both companies have outperformed the FTSE over the past 10 years, even though Eidos has recently been battered by tough times in the fast-moving video-game industry, where takeover rumors and one-upmanship have been rife this year.

ATM PIONEER. Not all members of the basket are from such typically design-centric industries, though. Sanitation specialists Rentokil Initial (RTOKY), for instance, has won awards for its humane "Radar" mousetrap, and its stock has outpaced the FTSE by 60% in the last three years.

Small orthopedics outfit, Smith & Nephew (SNN), has scooped up innovation prizes for its artificial knee implants, and in five years as a publicly traded stock, it has outperformed the FTSE by 200%.

Just as surprising is the inclusion of blue-chip, but less obviously jazzy, stocks like the Royal Bank of Scotland (RBS-K) and Barclays (BCS). Turns out, there's plenty of room for clever ideas that set banks apart from the crowd.

Barclays has a particularly strong history of innovation: It created the world's first ATM, way back in 1967 (a pretty primitive affair technologically featuring a rubber band and punch cards, but clearly a groundbreaking idea) and was the first to introduce credit cards in Europe. Barclays has mirrored the FTSE100's performance over the past few years, but it's betting that a new multimillion dollar branding campaign will push it ahead of the pack.

"PEOPLE WILL BUY." Even former state-owned monopoly British Telecom (BT) is trying to shake its fusty image with products like the recent Fusion phone. Designed in collaboration with the king of cell-phone cool, Motorola (MOT), the Fusion uses Wi-Fi and Bluetooth technology to seamlessly switch between fixed and mobile networks as the user's location changes. The result is a cheaper bill for its customers.

"Design is something that tends to get ignored by tech-centric companies," says Ryan Jarvis, chief of convergence products for BT. "But if you make something appealing, people will buy it."

Just after the press launch in June, BT's Web site notched 20,000 orders for the Fusion phone, and the company's once-battered stock is now a performance leader among European telcos.

ALREADY APPLICABLE? Rich admits that critics have dismissed the index as simplistic, saying it confuses correlation with causality. "The issue is whether you can prove cause and effect," says Paul Cooper, deputy chief investment officer at British fund management company Sarasin Chiswell. "It would be difficult to quantify the exact contribution made by the design, as opposed to all the other market forces in play. Nothing exists in a vacuum."

Certainly, a company's stock performance is based on far more than just its design impact. But while Rich freely admits the index needs to show a clearer causal link, he believes it's already practically applicable. "Fund managers often look at soft [unquantifiable] reasons to invest, like the CEO's competency, so design is just as valid," he explains.

While the primary value of the Design Index is to persuade design-averse companies to ramp up their innovation budgets, Rich also thinks the index would make a great investment tool for fund managers and venture capitalists. It doesn't currently have a ticker symbol, however, and no brokerages sell a tracking portfolio.

ON THE RISE. "Design is about market-oriented, user-centric product development, and I can't believe the City will ignore this index for long," says Martin Rigby, managing director of Cambridge-based venture firm ET Capital, which has long invested in companies that believe that great design equals great sales.

Investors willing to take more risk might even want to place bets on another Design Council portfolio -- the Emerging Index -- of companies that, based on design-award wins, are on the rise. Again, the basket has some strange bedfellows, lumping together funky new outfits like, with century-old companies, like foodmaker Tate & Lyle, which is increasingly producing innovative ingredients.

This basket of stocks outperformed even the regular Design Index over the same 10-year period, beating the FTSE100 by more than 300%. But, by the very nature of the index, these could be riskier stocks.

LESSON FOR INVESTORS. To give his indexes a wider audience, Rich is now on the hunt for a commercial partner to sell tracking shares on the open market. He hopes to announce a deal in the next few months.

In the meantime, the lesson for investors could be to keep a closer eye on design awards and be ready to click the "buy" button for companies using design to boost their bottom line.


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