Introduction: The Changing Landscape of Investment Strategies
The investment landscape is continuously evolving. One vector for this evolutions relates to advancements in technology and the growing importance of intangible assets. In a recent episode of The Meb Faber Podcast, Kai Wu, founder and CIO of Sparkline Capital, shared his insights on the significance of intangible assets and the impact of innovation on investment strategies.
Unlocking the Value of Intangibles
Traditionally, investors focused on tangible factors like earnings and book value when assessing the value of a company. However, Kai Wu emphasizes the need to look beyond these traditional metrics and consider intangible assets such as brand equity, human capital, network effects, and intellectual property. He utilizes machine learning to track these factors and measure each firm's intangible value.
By correctly valuing intangible assets, investors can identify potential opportunities that may have been overlooked as too expensive.
To properly evaluate a company's intangible value, traditional accounting data is often inadequate. Kai Wu advocates the use of advanced tools such as artificial intelligence, unstructured data, and social media to assess the true worth of intangible assets. By building a robust research platform that can handle diverse data sources, Sparkline Capital provides a comprehensive analysis of intangible value.
Shifting to a New Definition of Value
The rise of tech giants like Google, Amazon, and Apple has fundamentally changed the value landscape. These companies rely heavily on intangible assets rather than tangible physical assets. However, traditional accounting methods do not adequately capture the value of investments in research and development (R&D), advertising, and human capital. Sparkline argues for the need to adopt more modern and inclusive measures of value that reflect the growing importance of intangibles.
Quantifying intangible assets can be a complex task, but Kai Wu highlights four key pillars of intangible value: intellectual property, brand value, human capital, and network effects. Innovative approaches, such as using LinkedIn to track talent flow between companies, help understand a company's ability to attract and retain top talent. Sentiment analysis of social media can quantify brand perception and correlate it with stock market performance.
Investment Opportunities in Intangible Value
Launched mid 2021, The Sparkline Intangible Value ETF (ITAN) offers investors exposure to companies with high intangible value ratios at reasonable prices, blending both value and growth elements.
The above chart shows the iShares S&P Value ETF (IVE) vs the Sparkline Intangible Value ETF ITAN since ITAN launch. Using IVE as the benchmark in this case, we see that the relationship between the two instruments is highly variable - the dotted green line rolling100 day beta of ITAN against IVE is at times much high and at times much lower than the overall average beta of 1.19 .
So ITAN is definitely implementing a meaningfully different strategy.
That said, over this period, IVE has a cumulative return of 15.02% vs 4.79 % for ITAN. This is a short comparison period, and ITAN launched at a particularly difficult time, given very high overall stock valuations in mid 2021. It will be necessary to keep an eye on these relationships over time.
Conclusion: Embracing a New Era of Investment Strategies ?
The emergence of intangible assets and the recognition of their significant impact on company value signal a new era in investment strategies. Investors may no longer be able to rely solely on traditional metrics but must consider the intangible factors that drive innovation and create long-term value. By leveraging advanced tools and adopting a comprehensive approach, investors can potentially uncover hidden opportunities and navigate the evolving investment landscape with confidence. But the proof, as always, will be in the pudding.
While there is a massive amount of innovation in the ETF space, it is by no means certain that even the most conceptually appealing new products will improve upon the results available from more basic instruments. Diligence and education are, as always, paramount.
Disclaimer: The information provided in this blog post is for educational purposes only and should not be considered as financial advice. Always conduct thorough research and consult with a qualified financial advisor before making any investment decisions.