How do you convert brand power into investment returns?

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We live in an idea-driven economy. In the digital age, the main assets of a company may not necessarily be the ones that you can see or touch. Intangibles – such as brand, trademarks, patents, copyrights, trade secrets, proprietary processes, customer relationships, and employees – now have more weight than physical assets, and can generate significant value for a company.

Determining value of the intangible

Intangible assets today represent a much larger share of a business’ balance sheet and, therefore, its market value. To put this in perspective, contribution of intangible assets in market value of S&P500 companies increased almost fivefold from 17.5% in 1975 to 84% in 2015[1].

Brand is a vital component of this intangible asset value, representing on average 19.5% of the enterprise value of S&P 500 companies in 2015[2]. As ESG performance forms an integral part of brand building, strong brands will most likely score high on these parameters.

Strong brands deliver on many levels

To assess the performance of brands and further explore the connection between brand and ESG, we selected the Brand Value Index[3] as a proxy indicator. We looked at various investment approaches with the aim of identifying a methodology that incorporates customers’ perception of the brand (and hence its value) in the investment process. Our work found that the Brand Value Index is the only index of its kind that captures the essence of customer perception of brands in its investment approach.

The Brand Value Index combines qualitative brand signals with financial data to identify undervalued strong brands. We further assessed the performance of the index and found that it:

  • Performs better on environmental, social, and governance (ESG) parameters
  • Generates non-traditional alpha (vis-à-vis benchmark) while keeping the portfolio beta
  • Identifies companies that have strong balance sheets, and generate superior market returns
  • Is less volatile and has lower drawdown risk

A strong brand is a leading indicator of future performance. So, using qualitative determinant variables, like brands, can play an important part in an investment strategy.

Want to know more?

Our latest white paper explores how investors can use brands as a determinant in their investment strategy to improve a portfolio’s ESG performance and achieve higher risk-adjusted returns.

 

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[1] Ocean Tomo Annual Study of Intangible Assets 2017

[2] Applying the S&P 500 Implied Brand Value Study findings, Marketing Accountability Standards Board, 2017; Ocean Tomo Annual Study of Intangible Assets 2015

[3] Brandometry developed the Brand Value Index with EQM Indexes. It sponsors investment vehicles that allow investors to access brand value investment strategy. More information can be found at www.brandometry.net

Bhavna Khurana

Bhavna Khurana

With more than 11 years of financial and investment research experience, Bhavna is the client solutions architect for the Financial Services practice of The Smart Cube. In her role, she acts as the relationship manager for key client accounts and is responsible for business development and designing of new financial research products and services for the practice. Bhavna is a certified Chartered Accountant (India) and a CFA charterholder. After spending more than 7 years in The Smart Cube’s Financial Research team in India, Bhavna now works in the Chicago office. She is a reading enthusiast and loves to pen down her thoughts on topics of varied interests.

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