Superior human capital management is an extremely powerful predictor of an organization’s ability to outperform its competition.

This is not just an idle assertion; for over ten years now, my business partner, Dan McMurrer, and I have been actively managing portfolios. Our investment criterion is straightforward – our portfolios consist of firms that have superior human capital management practices.

Since both Dan and I are registered investment advisers, I need to include the obligatory caution that nothing I say here should be construed as investment advice, and of course, past performance is not a guarantee of future performance. With that said, we can now move on to the evidence (see the figure below). This is the track record of our longest-running portfolio.

As you can see, it has significantly outperformed the standard benchmark – the S&P 500. Despite the fact that we do this as our nights-and-weekends-labor-of-love hobby jobs, our track record is better than many “high-powered,” full-time, and highly-paid analysts. That is because we are investing based on a powerful, fundamental insight – ultimately organizations can only create value through their people.

When we first launched this portfolio in 2001, our investment strategy was remarkably simple – we invested in companies that made unusually large investments in training and developing their employees. (Interestingly, we first stumbled upon this as a potential investment strategy when both Dan and I worked in the Research Department at ASTD.)  As we’ve learned more about how to quantify human capital management, we have correspondingly expanded our portfolio selection criteria to encompass this broader concept (although firms’ investment in employee training and development still weighs heavily in our investment decisions).

The track record of our portfolio strongly suggests that human capital management is fast emerging as an essential core capability (possibly the essential core capability) for organizations. Although the firms that we hold in our portfolios are among the world’s leaders in human capital management, even these companies, on average, are still relatively unskilled at measuring and optimizing their investments in human capital.

Why?  For most of the human resource professionals in these (and other) firms, measurement remains a critical area of weakness.  To allow their organizations to tap the full potential of human capital as a source of competitive advantage, their HR strategists need to engage the emerging field of human capital analytics.  (See my previous ASTD blog How to Create Actionable Business Intelligence on the ‘People Side of Your Business.’) This would make it possible for organizations to develop and execute human capital strategies grounded in actionable business intelligence - rather than relying on the old standbys (intuition, one-size-fits all benchmarking, or accepted measurement myths within the HR profession).Only then will organizations truly reap the benefits of unleashing their employees’ full capabilities.

Laurie Bassi is the CEO of McBassi & Company. [email protected]