It has been a long time coming, but fund managers are starting to incorporate human capital indicators into their assessments. Credit ratings agency Moody's, one of the most influential in the corporate world, now assesses an organization's talent management. Moody's has made it clear that these types of factors will now influence its bond ratings. The publicity came in the same month that consumer goods giant Unilever formally abandoned short-term investors and announced a commitment to long-term stewardship and sustainability. The combination indicates a significant break with the orthodoxy of recent decades to assess corporate performance by financial benchmarks alone.

The global financial crisis has shown the limitations of using purely quantitative measures for investment decisions. Strategies based on "sophisticated" quantitative models blew up spectacularly and dragged down mutual funds, hedge funds and investment banks. Numbers also proved limited in assessing risk. The three major credit ratings agencies had investment-grade ratings on the credit of Lehman Brothers just before it collapsed. The growing recognition of quantitative analysis's limitations, and the related obsession with simple proxy models, has triggered fresh interest in casting a qualitative eye over businesses, which includes analysing factors such as the quality of management. Interest has been bolstered by research showing a clear link between human capital and investment outcomes. Many investors and fund managers - particularly those running ethical funds - are now promoting human capital credentials. While many fund managers have latched onto human capital analysis as the "next big thing", they are using it as a marketing angle without understanding the complexity of systems that drive sustainable value.

Investment decisions have long been hung on traditional quantitative financial analysis and financial ratios, such as debt-to-equity, price-to-equity (PE ratio) and loan-to-valuation. But, research is now showing that quantitative analysis, when used in isolation (as usual), has let down investors.

David Li, known as the world's most influential actuary, developed the method for coupling the behaviour of two or more variables (the Gaussian copula function) that was used by fund managers, investment banks, credit rating agencies and even by Basel II regulators. In part, the method has been blamed for the financial crisis because it oversimplified the complexities of the behaviour of listed firms. Overly simplistic pricing and trading models fail to incorporate the underlying complexities that are the basis of these investments. It's not possible to sum up human capital dynamics within firms, or in the broader market, with one correlation number. This has created widespread problems for investors, including mispricing of assets.

Even Li said of his formula: "The most dangerous part is when people believe everything coming out of it." Quantitative techniques are valuable to appreciate outcomes where there are multiple uncertain inputs, but users need to understand the imperfections of their assumptions. Non-readily quantifiable issues may need to be taken into account. One of the problems with quantitative analysis is its lagging nature - it tells a story about the past.

Qualitative indicators of value creation that analyse human capital serve as better pointers for where a company is heading in the future. Human capital analysis looks at the human elements of a firm - management quality, leadership, and human capital systems - as the basis for investments.

Research has shown a strong correlation between human capital and future investment performance. In a very competitive market, fund managers and investors are constantly looking for an investment and marketing edge. So it's no surprise that fund managers are increasingly turning to the role of human capital in investment analysis. But the way they're going about it is questionable. For a start they are falling into a "not surprising" trap of trying to turn something as sophisticated as people-management systems into simple models.

Many fund managers are looking at things that can be measured - such as safety and occupational health, employee statistics for turnover, recruitment, and in some cases, employment engagement surveys - rather than things that should be measured. "Those elements of human capital are helpful; but even collectively, they're not a proxy for the deep analysis of the underlying systems by which people are managed," an analyst asserts. "They're necessary, but not sufficient to understanding what's going on at the deep level of the organization."

Ethical funds that use underlying "ESG" principles (environmental, social and governance) are trying to use "S" as a proxy for human capital. But they're using metrics such as labour law statistics, occupational health and safety, and staff turnover, which may not tell the full story.

One case analysis of international investment banking found more than 90% of financial analysts had degrees in quantitative analysis, including econometrics, actuarial studies, economics, engineering and accounting. "There's an obvious technical gap, which leads to a gap in both knowledge and understanding," one human capital analyst says. It seems to be clear that fund managers have to look beyond the metrics to ask very fundamental, qualitative human capital questions.

As Rumelt and Bryan put it: "Does it make any sense to have people riding in a gondola, strapped to a giant sack of flammable hydrogen gas?" No metrics answer those fundamental questions.