Announcement


New Research Challenges the Impact of Intangibles

Dimensional research suggests no tangible performance benefits from adjusting for intangibles


September 28, 2020

New research from Dimensional Fund Advisors, a leader in systematic factor investing, suggests that adjusting for intangibles – such as patents, licenses, computer software, branding, and reputation – is not helpful in identifying differences in expected stock returns. Estimating the value of internally developed intangibles may introduce many arbitrary assumptions into systematic investment processes with no consistent tangible benefit.

Dimensional’s Global Head of Research, Savina Rizova, PhD, and co-author Namiko Saito, PhD, summarize their deep-dive research on intangibles in a paper called Intangibles and Expected Stock Returns. The paper challenges the narrative that intangible assets should be fully accounted for on the balance sheet because of their recent growth in importance. Rizova and Saito note that intangible assets have always been part of the economic landscape and capital markets.

“Mickey Mouse, a key brand for Disney, was introduced to the world as the main character in the animated film ‘Steamboat Willie’ in 1928,” Rizova and Saito observe. “Disney has been a publicly traded company with this important intangible since 1940."

There are two types of intangibles: externally acquired and internally developed. Externally acquired intangibles are reported on the balance sheet and reflected in valuation metrics such as price-to-book. Internally developed intagibles, on the other hand, are expensed on the income statement and reflected in metrics like operating profitability.

In contrast to the emerging narrative, Dimensional’s analysis suggests that while externally acquired intangibles have grown over time relative to companies’ assets, internally developed intangibles have accounted for a fairly steady fraction of assets.

Dimensional is one of the first asset management firms to detail the complexities of valuing internally developed intangibles and the potential issues associated with incorporating those values into investment strategies. Rizova and Saito point out that there are many arbitrary assumptions required when estimating the current value of a firm’s internally developed intangible assets. Because this value is already baked into the price at which that firm’s stock trades, there is no clear benefit to using these estimates when making investment decisions.

“Internally developed intangibles do not go through a market valuation process, while externally acquired intangibles go through a competitive market valuation,” Rizova and Saito write. “There is more uncertainty around the value of internally developed intangibles."

Due to the high uncertainty around the value of internally developed intangibles, Rizova and Saito find that these intangibles appear to contain little additional information about future sales and profits beyond what is contained in current company financials. The research finds that incorporating estimates of internally developed intangibles into relative price and profitability metrics does not yield consistently higher value and profitability premiums.

Given the issues involved in the estimation of internally developed intagibles, the paper also examines the impact of removing externally acquired intangibles from the balance sheet as an alternative approach to infer differences in expected returns across companies with different sources of intangibles. The researches find no compelling performance benefit from excluding externally acquired intangibles from fundamentals.

The takeaway for investors? According to Rizova and Saito, “Investors are better off continuing to incorporate externally acquired intangibles reported on the balance sheet and not adding noisy estimates of internally developed intangibles to value and profitability metrics."

Dimensional’s research arrives at a moment when the investment industry is seeking explanations for the decade-long underperformance of value stocks relative to growth stocks. Rizova and Saito caution against abandoning valuation theory or trying to backtest the way to a conclusion.

“Just like the equity premium, the value premium is volatile and can go through pronounced periods of negative returns,” said Rizova. “Through robust research and implementation, we focus on pursuing premiums the right way, not the easy way."

____________________________________________

###

FOR MORE INFORMATION OR TO ARRANGE AN INTERVIEW, CONTACT:
USA: Taylor Smith, 1 (502) 641-7220, taylor.smith@dimensional.com
ASIA, AUS: Jim Parker, (02) 8336-7168 or 0404075-932 jim.parker@dimensional.com.au
EMEA: Andrew Webb, +44 (20) 30333358, andrew.webb@dimensional.com


DISCLOSURES

“Dimensional” and “Dimensional Fund Advisors” refer to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

CANADA: These materials have been prepared by Dimensional Fund Advisors Canada ULC. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

AUSTRALIA and NEW ZEALAND: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

Neither Dimensional Ireland Limited (DIL) nor Dimensional Fund Advisors Ltd. (DFAL), as applicable (each an “Issuing Entity,” as the context requires), give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.

WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED
Issued by Dimensional Ireland Limited (DIL), with registered office 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland. DIL is regulated by the Central Bank of Ireland (Registration No. C185067). Information and opinions presented in this material have been obtained or derived from sources believed by DIL to be reliable, and DIL has reasonable grounds to believe that all factual information herein is true as at the date of this document.

DIL issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from DIL will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.

WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD.
Issued by Dimensional Fund Advisors Ltd. (DFAL), 20 Triton Street, Regent’s Place, London, NW1 3BF. DFAL is authorised and regulated by the Financial Conduct Authority (FCA). Information and opinions presented in this material have been obtained or derived from sources believed by DFAL to be reliable, and DFAL has reasonable grounds to believe that all factual information herein is true as at the date of this document.

DFAL issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from DFAL will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.

RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

SINGAPORE
This document is deemed to be issued by Dimensional Fund Advisors Pte. Ltd., which is regulated by the Monetary Authority of Singapore and holds a capital markets services license for fund management. This advertisement has not been reviewed by the Monetary Authority of Singapore. This information should not be considered investment advice or an offer of any security for sale. All information is given in good faith without any warranty and is not intended to provide professional, investment, or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation, or needs of individual recipients. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Dimensional Fund Advisors Pte. Ltd. does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. Neither Dimensional Fund Advisors Pte. Ltd. nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors.

FOR PROFESSIONAL INVESTORS IN HONG KONG.
This document is deemed to be issued by Dimensional Hong Kong Limited (CE No. BJE760) (“Dimensional Hong Kong”), which is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

This document should only be provided to “professional investors” (as defined in the Securities and Futures Ordinance [Chapter 571 of the Laws of Hong Kong] and its subsidiary legislation) and is not for use with the public. This document is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence, or otherwise) the publication or availability of this document are prohibited or which would subject Dimensional Hong Kong (including its affiliates) or any of Dimensional Hong Kong’s products or services to any registration, licensing, or other such legal requirements within such jurisdiction or country. When provided to prospective investors, this document forms part of, and must be provided together with, applicable fund offering materials. This document must not be provided to prospective investors on a standalone basis. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.

Unauthorized copying, reproducing, duplicating, or transmitting of this material are prohibited. This document and the distribution of this document are not intended to constitute and do not constitute an offer or an invitation to offer to the Hong Kong public to acquire, dispose of, subscribe for, or underwrite any securities, structured products, or related financial products or instruments nor investment advice thereto. Any opinions and views expressed herein are subject to change. Neither Dimensional Hong Kong nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors. Financial advisors in Hong Kong shall not actively market the services of Dimensional Hong Kong or its affiliates to the Hong Kong public.

JAPAN
Provided for institutional investors only. This document is deemed to be issued by Dimensional Japan Ltd., which is regulated by the Financial Services Agency of Japan and is registered as a Financial Instruments Firm conducting Investment Management Business and Investment Advisory and Agency Business. This material is solely for informational purposes only and shall not constitute an offer to sell or the solicitation to buy securities or enter into investment advisory contracts. The material in this article and any content contained herein may not be reproduced, copied, modified, transferred, disclosed, or used in any way not expressly permitted by Dimensional Japan Ltd. in writing. All expressions of opinion are subject to change without notice.

Dimensional Japan Ltd.
Director of Kanto Local Finance Bureau (FIBO) No. 2683
Membership: Japan Investment Advisers Association