Intangible Assets Are Now Tangible

June 08, 2021 EDT

Benjamin Graham, Warren Buffett, Charlier Munger, and Seth Klarman are all extraordinary investors and they have one crucial commonality – value investing.

A value investor picks stocks that appear to be trading for less than their intrinsic value. Just as savvy shoppers will buy clothes on sale, savvy value investors treat stocks the same way. Of course, stock discounts are not as transparent as clothes discounts, as stocks do not post their sale percentages or original values.

Although value investing has been profitable for many decades, it appears the strategy has been faltering in recent years. The failure could be attributable to multiple factors; from the tech bubble of the 1990s to the recent pandemic in 2020.

But what if the reason is because the traditional metrics for value calculations are just too outdated? What if the lenses of the investing gurus we religiously followed are now too blurry? 

One of the major financial metrics value investors rely upon is the price-to-book ratio1, which compares a company’s market value to its asset valuations. The lower the ratio is, the better the potential price is for value investors. The more accurately this ratio is measured, the more likely value investing would succeed.

It could be said that the traditional asset valuation metric is potentially misleading. By immediately overlooking R&D and SG&A as expenses, the traditional metrics largely disregard the value of intangible assets2.

As of September 2020, the value of intangible assets of the top 10 companies in the world was $10.8 trillion as of 10/22/2020 according to Brand Finance, a leading brand valuation consultancy. Given the technological advancements within the business paradigm, companies’ proportion of intangible assets are increasing exponentially. In 1975, intangible assets represented only 14% of S&P 500 companies’ assets. As of 12/31/2018, the percentage was at least 84%, according to Aon and Ponemon Institute. Perhaps this is potentially the reason why value investors got away without regarding intangibles 40 years ago.

- Brand Finance. (2020, October). Global Intangible Finance Tracker (GIFT) – an annual review of the world’s intangible value. https://brandirectory.com/reports/gift-2020

- Ross, J. (2020, February 11). Intangible Assets: A Hidden but Crucial Driver of Company Value. Visual Capitalist. https://www.visualcapitalist.com/intangible-assets-driver-company-value/

1. Price-to-book ratio – P/B ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares.

2. Intangible assets – an intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.

 

It may sound like a big ask for the average investor to valuate companies’ intangibles. Hence, many retail investors have been relying upon ETFs to invest in value stocks. One popular option is iShares S&P 500 Value ETF (IVE), a passively managed ETF that tracks the S&P 500 value index. While the fund holds large assets under management and high liquidity, it is far from perfect, as returns are humble and the index the fund utilizes potentially outdated valuation methods as described above. 

Perhaps, the whole valuation process is out of a man’s reach. How can one possibly compute values that are almost impossible to quantify? This question is why some investors are newly turning to robots. Through machine learning, artificial intelligence can pick up important data in a plethora of fields and produce accurate projections for stocks’ growth potential. NVQ, of Qraft Technologies, is an ETF seeks to that invest in value stocks, depending on their intangibles. The AI model, by attempting to gauge intangible assets to correct the traditional value metrics, is up 22,67% since its inception on 12/02/20 on the New York Stock Exchange until 3/31/21.

The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. Short Term Performance may not be indicative of long term results. Performance data current to the most recent month end may be obtained by visiting qraftaietf.com.

Market Price: The current price at which shares are bought and sold. Market returns are based upon the midpoint of the last bid/ask spread at 4:00 PM Eastern Time.

NAV: The dollar value of a single share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.

Annual Expense Ratio is 0.75%.

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 1-855-973-7880 or visit our website at www.qraftaietf.com. Read the prospectus or summary prospectus carefully before investing.

The Funds are distributed by Foreside Fund Services, LLC

Investing involves risk, including loss of principal. The Funds are subject to numerous risks including but not limited to: Equity Risk, Sector Risk, Large Cap Risk, Management Risk, and Trading Risk. The Funds rely heavily on a proprietary artificial intelligence selection model as well as data and information supplied by third parties that are utilized by such model. To the extent the model does not perform as designed or as intended, the Fund’s strategy may not be successfully implemented and the Funds may lose value. Additionally, the funds are non-diversified, which means that they may invest more of their assets in the securities of a single issuer or a smaller number of issuers than if they were a diversified fund. As a result, each Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. A new or smaller fund's performance may not represent how the fund is expected to or may perform in the long term if and when it becomes larger and has fully implemented its investment strategies. Read the prospectus for additional details regarding risks.


QRAFT AI-Enhanced U.S. Large Cap ETF: Companies in the health care sector are subject to extensive government regulation and their profitability can be significantly affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines and an increased emphasis on the delivery of health care through outpatient services.

QRAFT AI-Enhanced U.S. Large Cap Momentum ETF: The Fund is subject to the risk that market or economic factors impacting technology companies and companies that rely heavily on technology advances could have a major effect on the value of the Fund’s investments. The value of stocks of technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, the loss of patent, copyright and trademark protections, government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower production costs. Technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market.

QRAFT AI-Enhanced US High Dividend ETF: Securities that pay dividends, as a group, may be out of favor with the market and underperform the overall equity market or stocks of companies that do not pay dividends. In addition, changes in the dividend policies of the companies held by the Fund or the capital resources available for such company’s dividend payments may adversely affect the Fund. In the event a company reduces or eliminates its dividend, the Fund may not only lose the dividend payout but the stock price of the company may also fall.

QRAFT AI-Enhanced U.S. Next Value ETF: The value approach to investing involves the risk that stocks may remain undervalued, undervaluation may become more severe, or perceived undervaluation may actually represent intrinsic value. Value stocks may underperform the overall equity market while the market concentrates on growth stocks. The small- and mid-capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic evens than larger, more established companies, and may underperform other segments of the market or the equity market as a whole. Securities of small- and mid-capitalization companies generally trade in lower volumes, are often more vulnerable to market volatility, and are subject to greater and more unpredictable price changes than larger capitalization stocks or the stock market as a whole.

Alpha – Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.

AutoML – Short for Automated Machine Learning, AutoML is the automation of the machine learning process to make machine learning jobs simpler, easier, and faster.

Kirin API - Developed by Qraft’s data scientists, integrates multiple vendors to provide both macroeconomic and company fundamentals with the correct point-in-time data.