Intangible Value: A Sixth Factor

Sparkline Capital

Kai Wu

Research

8 Pages

Sparkline Capital introduces the Intangible Value factor as an additional building block alongside market, size, value, quality and momentum. The piece argues that traditional value underweights modern, asset light innovators and shows how intangible assets like intellectual property, brands and human capital can be quantified. It then places Intangible Value inside a six factor framework and illustrates how investors can access it through factor and market ETFs.

Date published: May 2023

Source: S&P, USPTO, LinkedIn, Sparkline. All figures relative to S&P 500. Calculations weighted by position and do not predict performance. Tech defined as GICS IT sector. A.I. and disruptive companies defined using proprietary classifications. All other metrics are calculated over a trailing 1-year period, with the exception of prices. Patents are scaled by billions. Value is a long-only portfolio of the top tercile stocks on book/market. Intangible value is the same but using intangible value. Universe consists of the top 1000 largest U.S. stocks and portfolios are cap-weighted. Growth is an equal-weighted basket of the holdings of QQQ, IWF, ARKK, and XT. As of 3/31/2023.

Key Takeaways

Intangible value defined: Factor focuses on firms whose intangible assets like IP, brands and human capital are systematically underpriced.
Distinct sixth factor: Exhibits low average correlations to market, size, value, quality and momentum, improving factor diversification.
Portfolio application: Six factor model can be implemented using factor ETFs plus broad market funds to tilt portfolios toward innovation friendly exposures.
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