Market & Topical Perspectives

Intangible Assets in Value Investing

Intangible Assets in Value Investing

The performance of value strategies in recent years has led some to question whether the traditional signals of underpriced stocks remain a reliable source of long-term excess returns, as they have since emerging in the wake of the Great Depression. Ongoing structural changes in the economy may be at least partially to blame for the modern underperformance, as the knowledge-based businesses emblematic of the new economy increasingly are focused on the development of intangible assets rather than the property, plant and equipment investments that were the hallmarks of the old guard. Current financial accounting standards fail to capture the bulk of these intangible assets, however, thus understating the true value of many businesses and distorting the valuation ratios often relied on to identify mispriced stocks.

Key Takeaways

  • Key-Takeaway

    While growth has outperformed value significantly since the global financial crisis, the two styles have traded leadership in recent decades and value has dominated over the long term.

  • Key-Takeaway

    The ongoing structural shift toward a knowledge-based economy heavily reliant on intangible assets—which, for the most part, are not captured in current financial accounting standards—has presented a challenge to investors seeking to identify undervalued stocks.

  • Key-Takeaway

    With the rise of intangible assets, traditional metrics like book value seem to have become increasingly unmoored from the intrinsic value of many businesses, exacerbating flaws inherent in purely statistical approaches to value investing and index composition.

  • Key-Takeaway

    By first defining the fundamental character of a business—the tangible and intangible assets from which value is derived—before attempting to attach a price to its stock, First Eagle seeks to uncover attractive businesses selling at a discount to our estimate of their intrinsic value and to selectively construct portfolios offering an investment experience differentiated from that of statistical value managers and indexes.