The strategy invests in Russell 3000 stocks, buying high-intangible-asset (IAI) firms and shorting low-IAI firms, calculated using R&D and SG&A data, rebalancing annually within size-based groups.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Yearly | MARKET: equities | KEYWORD: Intangible
I. STRATEGY IN A NUTSHELL
This strategy focuses on Russell 3000 stocks (excluding financials), measuring intangible asset intensity (IAI) via R&D and SG&A-based knowledge and organizational capital. Stocks are sorted into high, medium, and low IAI portfolios within Russell 1000 (large-cap) and Russell 2000 (small-cap). The strategy goes long high-IAI and short low-IAI stocks, equally weighted and rebalanced annually.
II. ECONOMIC RATIONALE
U.S. GAAP expensing of internally generated intangibles underreports assets, causing investors to undervalue high-IAI firms. Mispricing corrects over time, producing excess returns for high-IAI stocks. Traditional Fama-French models fail to capture this, but incorporating an INT factor explains the anomaly.
III. SOURCE PAPER
Intangible assets and the cross-section of stock returns [Click to Open PDF]
Dion Bongaerts, Erasmus University Rotterdam (EUR) – Rotterdam School of Management (RSM); Xiaowei Kang, Erasmus University Rotterdam (EUR) – Rotterdam School of Management (RSM); Mathijs van Dijk, Erasmus University Rotterdam (EUR)
<Abstract>
We examine whether intangible assets are priced in the cross-section of stock returns. Intangible asset intensity is strongly positively related to stock returns and has more explanatory power than size, value, profitability, and investment. An intangibles-based longshort factor has a higher Sharpe ratio than these established factors. Adding the intangibles factor to the Fama-French five-factor model improves the description of average returns and makes the investment factor redundant. Intangibles are priced as a characteristic rather than as a risk factor, consistent with intangibles-based mispricing. Intangible intensity also strongly predicts future gross profit growth in the cross-section. Overall, we interpret our evidence as consistent with investor underreaction to intangibles as a result of accounting mismeasurement.
IV. BACKTEST PERFORMANCE
| Annualised Return | 4.66% |
| Volatility | 8.87% |
| Beta | 0.04 |
| Sharpe Ratio | 0.51 |
| Sortino Ratio | 0.107 |
| Maximum Drawdown | -38.2% |
| Win Rate | 51% |
