Value investing redefined for the new era of intangible assets

Oct 8th, 2019 | By | Category: Equities

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By Susan Avarde, Co-Founder of Brandometry.

Susan Avarde, co-Founder of Brandometry

Susan Avarde, co-Founder of Brandometry.

It is popular to describe the modern economy as the second industrial revolution. However, at Brandometry we prefer to call it the second renaissance because the impact of technology has resulted in the reinvention of almost everything, and that is especially true when it comes to value creation.

The latest estimates indicate that US companies have more than $21 trillion in intangible assets. Another way of thinking about the scale of the value inversion (tangible to intangible) which has occurred over the last 40 years is that 84% of the value of the S&P 500 now sits in intangibles. This staggering tranche of value doesn’t show up “on the books” because GAAP accounting is predicated on the principle of accounting for tangibles.

So how can investors mine intangible value? One way is to understand that intangibles are made up of many subcategories, a large one of which is brand, and brand can be measured.

Brand value has been tracked for over 20 years because academics, having identified a link between powerful brands and strong financial performance, had the foresight to begin collecting data around various brand metrics. However, until recently the clients for most brand databases consisted of corporate leaders who wanted to understand the ROI they were getting on their marketing deployment.

Corporations build brands because they know strong brands not only generate a reputational halo resulting in stakeholder loyalty but also brands tend to have a wide economic moat, giving them a distinct competitive advantage in the marketplace. Which is why brand measurement has been a partner in the C-Suite and is now generating interest from Wall Street.

EQM Brand Value Index methodology

Source: Brandometry.

While quantitative measures are the backbone of how the investment community evaluates a product or strategy, they have been missing out on important qualitative measures to give the necessary insights to define which companies will outperform in this new era.

FEATURED PRODUCT

Brand Value ETF (BVAL US)

– Created through a partnership between
Exponential ETFs and Brandometry.

– Tracks the EQM Brand Value Index, an
equal-weighted index of 50 US companies
determined to have the most undervalued brands
relative to their market capitalization.

– Comes with an expense ratio of 0.65%.

Combining quantitative and qualitative measures, (as seen in the chart above) Brandometry is the first company to create an index leveraging brand measure to identify the right time to invest in undervalued strong brands. The EQM Brand Value Index was created utilizing brand data from CoreBrand analytics, a database designed by academic Dr. Jim Gregory.

CoreBrand tracks and evaluates 500 large and mega-cap domestic brands on a scale of 1-100 along three key measures: strength of leadership, reputation, and investability. The brands with the strongest power scores of 60+ are then filtered for a positive ROIC and $1bn market cap threshold.

The last step is then to marry these qualitative measures with traditional quantitative measures to identify the largest disconnect between brand power and stock price. The resulting index is equal-weighted and comprises of 50 of the strongest brands which for various reasons are underpriced.

Chart showing a decade of EQM Brand Value Index contributors

Source: Brandometry. 

The seismic shift in the modern economy has many investors and analysts beginning to think about how to leverage intangibles in ways that positively impact their investment strategies and portfolio composition. Advisors and retail investors can now future proof their portfolios by including a strategy like the Brand Value Index because, as any good marketer knows, strong brands return to value, and now investors can enjoy the benefit.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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