Research
Research
IP-based investing represents the vanguard of investor value creation as the global economy progresses deeper into the innovation age.
The value of a corporation's IP is a unique, forward looking indicator of corporate value. IP value reflects itself in stock price, and can be used to create investment alpha that is uncorrelated with investments made using traditional '34 Act data. The reason for this is intuitive: the most innovative companies -- those companies with the strongest IP porftolios -- outperform their peers as a results of:
- A Federal government grated exclusionary right on the production of the patented product or service
- Proprietary market position
- Related economies of scale
- Premium pricing associated with the unique features
- Lower cost due to protected methods of manufacturing
IP alpha becomes more focused and exploitable as the U.S. economy progresses from a manufacturing base to an innovation base. The U.S. economy is now dominated by innovation value creation. A 2005 report by economists Kevin Hassett and Robert Shapiro estimated U.S. IP is worth $5-5.5 trillion, more than the GDP of any other country.
Despite their familiarity, historical market indices have not adapted to current market realities. In the past quarter century, a large and striking macroeconomic value inversion has occurred. As show in the chart below, in 1975 more than 80% of corporate value reflected in the S&P® 500 was tangible assets, while intangible assets comprised less than 20% of market capitalization.
Today, the ratio of tangible to intangible assets has inverted - over 80% of corporate value is represented in intangible assets.
