Untangling the role of intangibles in value stocks

Analysis of stock markets investigates possible link between intangible assets and performance of value stocks

Untangling the role of intangibles in value stocks

To many investors, the years-long drought in value performance has been both a frustration and a mystery, with some suggesting that intangible assets might be the culprit. But a new commentary suggests that the search for answers is a long way from being over.

In a blog post published by the CFA Institute, Nicholas Rabener, managing director of FactorResearch, analysed how the ratio of intangibles to market capitalization across stock markets in the U.S., Europe, and Japan have compared and moved over the period from 2009 until 2020.

“Intangibles as a percentage of market capitalization in the US markets increased between 2009 and 2020,” Rabener said. “But Europe hasn’t seen similar growth over the last decade and the ratio in Japan is where it was in 2013.”

Drawing from the Kenneth R. French data library, a subsequent analysis showed that in a long-short portfolio of cheap and expensive U.S. stocks, the value factor performance worsened as the proportion of intangibles rose – not surprising given the role of tech stocks’ performance in the surging U.S. market. But in Europe and Japan, where the proportion of intangibles hasn’t risen as dramatically, the value factor’s performance has been similarly dismal.

Taking the analysis further, Rabener examined whether the performance of the long-short value factor in the U.S. would change if it were measured based on price-to-book, price-to-earnings, and price-to-cash flow multiples. On that front, he found that from 2009 to 2020, the trends were substantially identical across all three metrics.

“Intangibles may impact the price-to-book ratio, but they have less of an influence on the other two metrics,” he said. “This is further evidence that the increase in intangibles does not explain the poor performance of the value factor.”

Based on FactorResearch’s work, Rabener said that investors tend to buy cheap stocks when they are comfortable with the market environment. The simple working theory behind it, he said, relies the heuristic that companies with low valuations tend to be distressed, and investors are more likely to bet on struggling companies when the outlook is benign rather than risky.

Lower expected economic growth is one interpretation of a declining yield curve. That would not bode well for struggling companies,” Rabener said. “In such environments, it would seem intuitive to pursue firms with better growth prospects and ignore cheap ones until the outlook improves.”


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