Next, we review the alternatives in detail, including intangible investments, and offer a guide for thinking about the prospects for value creation. We finish with a framework for assessing a company’s capital allocation skills.

Results, Analysis, and Assessment

• Capital allocation is an essential part of creating value and is one of management’s prime responsibilities. Not all senior executives know how to allocate capital effectively.
• We establish a foundation by reviewing the sources and uses of capital and then show how companies in the Russell 3000 Index have allocated capital since 1985.
• We review capital allocation alternatives in detail, including a novel discussion of intangible investments, and offer a guide for thinking about the prospects for value creation.
• We finish with a framework for assessing a company's capital allocation skills, which includes looking at past behavior, calculating return on invested capital, an evaluation of incentives, and five principles of effective capital allocation.

^DEFINITIONS

^{Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.}

^{The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.}

^{IMPORTANT INFORMATION}

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^{This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.}

^{Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.}

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