It’s been a year since the inception of the UX Fund. Today we’ll look at the results and compare the fund against the indices and some of the individual holdings competitors.
UX Fund Background
The UX Fund was created to test our belief that companies who deliver a great user experience will see it reflected in their stock price. On November 1, 2006 we invested $50,000 in 10 companies we felt:
1. Demonstrated care in the design of their products and Web site
2. Has a history of innovation
3. Inspired loyalty in their customer base
4. Doing business with them was a positive experience
The idea for this fund was inspired by a presentation given by Jeneanne Rae and a study by the Design Council.
( Nov 1, 2006 – Nov 1, 2007)
UX Fund: 39.3% $19533.48
S&P 500: 10.3%
Nasdaq 100: 28.7%
6 of 10 stocks in the fund gained
52 week low: -1.03%
52 week high: 40.93%
Value on Nov 1, 2006: $49,672.90
Value on Nov 1, 2007: $69,195.38
Below is a chart that compares our UX Fund with the Nasdaq, S&P 500, Nasdaq 100 and the NYSE from Nov 1, 2006 to Nov 1, 2007.
Perhaps this stock was an obvious choice. Apple has always been at the forefront of creating great experiences that bridge hardware and software. During our hold, Apple released new ipods, imacs and the iphone. They redesigned their Web site as well as their dotmac services. Recently, they launched a new OS (Leopard). Leopard launched late due to Apple pulling QA resources onto the iphone. Early usage of Leopard has revealed quite a few bugs and oddities that need to be rectified, likely as a result of the on-again, off-again QA of it. Apple will need to be careful in the coming year not to neglect it’s core offering – the OS.
The chart below shows how apple performed against Dell, HP and Microsoft.
Electronic Arts (ERTS)
EA has been through a lot of change this year. As if developing games for 3 relatively new platforms, PCs and MACs wasn’t enough they hired a new CEO which reorganized the company under four units (sports, casual games, “Sims” franchise, and other games including action, driving and strategy titles). They have also been acquiring a number gaming studios to fill product gaps.
On the downside EA under developed its offering for the Wii. EA is pretty invested in the big console games and just didn’t see the potential in titles that rely on great game play over pure graphic muscle.
The chart below shows how EA performed against Activision, Konami and THQ.
Google has made its share of purchases this year including DoubleClick, Feedburner and Youtube, though that was 2006 – right around when we bought in. They introduced new search features, a new homepage and continue to develop out more applications launching them in their Labs section. Of late, there has been a lot of mobile buzz around Google. They been planning a search service for mobile content as well as collaborating with Sprint Nextel on WiMax Mobile services.
The chart below compares Google with Yahoo during our hold.
JetBlue Airways (JBLU)
JetBlue’s performance this year can likely be boiled down to one incident – Valentine’s Day 2007. Over a period of 2 days they canceled nearly 250 flights. Some of these flights were on the runway for nearly 8 hours. The weather was a factor, but it wasn’t the real problem. JetBlue got by in the past with sub-standard communication systems, limited staff and experience. When a crisis of this magnitude arose they just didn’t have the systems, people or experience to properly deal with it – and they’ve paid the price. They did an excellent job in the following weeks managing PR but it was too late, the damage was done, the trust was gone. Hopefully time is a healer.
JetBlue seems focussed on improving its systems and processes. With founder and CEO David Neeleman now gone it remains to be seen whether UX innovation will continue at JetBlue.
The chart below shows how Jet Blue performed against American, Southwest and United.
Netflix found itself in a price war with Blockbuster this year. Instead of focusing on innovation, they chose to position themselves as a commodity and lower their prices. This response was their way of “staying competitive”. Why not focus on bettering your service? It’s easy to justify a slightly higher price if you’re better. I don’t think I saw a single press release this year short of the January announcement of the IP rentals that had anything to do with improving the service.
Netflix just seems paralyzed in the past year. They have no real response to the downloadable movies. Amazon and Apple have made greater strides in the category and Netflix is just kind of sitting there. The stock has rallied in the past month but not because of any innovation just lowering costs and commoditization of their service, a value this fund doesn’t invest on.
The chart below compares Netflix and Blockbuster.
Aside from Nike’s various product launches and the announcement of 50 new House of Hoops retail stores and the purchase of Umbro there hasn’t been a ton of news this year for Nike. Nike Plus continues to be a huge success helping them to capture 56.7% of the $3.6 billion U.S. running-shoe market (compared with 47.4% last year).
The chart below shows how Nike performed against Adidas and Under Armour.
Progressive Insurance (PGR)
Progressive has had a tough year. This is a company that really defies our investing strategy. They do a great job with innovating on their site, their sales channel and their service channel. Despite all the right markers, the stock price has struggled.
There is underlying weakness in the industry due to claims and underwriting. On the positive side, the Bill and Melinda Gates Foundation have invested heavily in Progressive this would indicate that they believe the current stock price is not indicative of the long term value of the company. We tend to agree with them.
The chart below shows how Progressive performed against Allstate and Nationwide.
Research In Motion (RIMM)
RIM, made famous for its Blackberry devices and service, was our biggest gainer in the portfolio up over 200%. This year they introduced a number of great new handsets including the BlackBerry Pearl. They announced they’d be bringing their product to China and most recently, news of a solution aimed at small to medium sized businesses was announced. Rim continues to be a market leader in their category. They have an incredibly loyal customer base and are constantly innovating and improving their already great product lineup – all things the UX Fund values.
The chart below shows how RIM performed against Palm, Motorola and Nokia.
Target had an up and down year although overall it outperformed Wal-Mart, its closest competitor, but not Costco.
While the company ended down for the year, it should be noted that fears in the retail category and consumer spending on October 31, 2007 took the stock from positive territory to negative.
While Target has a culture of valuing well designed, well priced products over just the lowest price, it hasn’t done a lot of innovating over the past year.
Target has had a great Web site for several years and has lead Wal-Mart in e-tailing (Wal-Mart has been non-existent in the channel). However, Wal-Mart has closed the gap with a very good site, launched in the past year.
We would have liked to have seen more innovation and focus on the customer from Target during this past year. We believe it would have reflected better in their stock price.
The chart below shows how Target performed against Costco and Wal-Mart.
Yahoo has been a difficult company to own. Over the past year they have been doing a great job with their site. The redesign of Yahoo Food, the proper integration of Flickr (didn’t just turn it into Yahoo Photos), Yahoo Answers, the introduction of the design pattern library, their commitment to opening up and supporting developer communities all put them squarely in the right place for the Fund.
However, it hasn’t been easy. There is a lot of turmoil in the executive office with Sr people leaving frequently. This included CEO Terry Semel. Yahoo’s Panama has not captured the ad revenue to the degree that Google has.
Overall, if Yahoo keeps smartly acquiring and properly integrating companies like Flickr into their offering and developing things like Yahoo Answers in house, we believe they’ll succeed.
The chart below compares Yahoo and Google.
It’s clear that the fund did well from a performance perspective, beating out all of the major indices. However, that wasn’t the case during the entire hold. Up until September there was usually one index that was outperforming it. On two occasions the fund was actually in the red. It wasn’t until financial news or new product announcements from holdings like Apple, Google and RIM boosted its overall value nearly 30% in less than 2 months.
Even though the impact that UX has on a companies stock price is but one of many factors, we feel confident that it was a major contributer to the UX Fund’s success. It’s likely that the fund could have been more successful if we had allowed ourselves to:
1) Time the market – We bought and sold on predefined dates not allowing for us to buy on dips in value. Several of the companies were at 52 week highs when we bought and took several months to begin performing positively.
2) Rebalance the portfolio – We set out a buy and hold strategy which did not allow us to sell under performing stocks. We also couldn’t sell companies that had stopped meeting our criteria. Netflix is a good example of this. A company that stopped innovating in 2007 and focussed on price as a core business value. They no longer met our investment philosophy and we had no ability to remove them form the fund.
3) UX isn’t everything – JetBlue and Progressive showed us that a great UX doesn’t protect you from the harsh realities of business. A winter storm on Valentine’s Day unravelled JetBlue and Progressive just couldn’t get past fundamental claims and underwriting issues no matter how many customer innovations they made.
4) Innovate and win – Our strongest performers and the engine of our fund were Apple and RIM. They were also the companies who best embodied our investment values.
What will happen to the UX Fund
We haven’t yet decided what to do with the fund or its proceeds now that the the experiment has concluded. Ideas are welcomed. For now, we’ve kept everything invested, you can continue to track its progress here.