Companies know all too well about the importance a strong brand can bring in discerning themselves from market competition within their respective sectors as well as allowing current and prospective customers to identify their brand. However, research firm Brandometry published a white paper that underscores the importance of branding to not only companies and their customers, but to investors when it comes to locating potential opportunities.
The white paper, titled “Converting Brand Power into Investment Returns,” features a study developed by The Smart Cube, a global provider of research and analytics solutions. What the results revealed is that branding can serve as one of the primary indicators of value that an investor can utilize when it comes to screening for profitable investment alternatives–an intangible asset that can communicate value in ways that fundamentals like price-to-earnings ratios or revenue cannot specifically quantify.
“Current accounting frameworks fail to capture the full worth of intangible assets, underscoring the need for investors to look beyond financial statements and consider innovative ways to incorporate brand value into their investment strategies,” said Bhavna Khurana, Director and Global Head of Financial Services Client Solutions at The Smart Cube, in a press release. “In this paper, we studied how investors can use brand as a determinant to achieve higher risk-adjusted returns.”
Main findings of the white paper reveal that the EQM Brand Value Index exhibits the following:
- Generates non-traditional alpha over the S&P 500 and provides exposure to multiple sectors (not just consumer-centric companies).
- Identifies companies with strong balance sheets that generate superior market returns.
- Is less volatile and has lower drawdown risk than the S&P 500.
- Performs strongly on environmental, social and governance (ESG) parameters.
The index itself is comprised of top companies with unrealized value in the U.S. markets using their own scoring process. The EQM Brand Value Index (.BVAL Index) is rules-based, equally weights its constituents and derives its data as far back as December 31, 2008.
While the importance of branding is vital in the business marketing circles, its importance has yet to penetrate the financial industry–until now.
“The correlation between Brand investment and Growth has been long understood by marketers, yet the financial sector has largely ignored its impact,” Brandometry states on its company website. “For the first time, the power of this Index is leveraging data from both business disciplines of marketing and finance. Marketing measurement and financial analytics come together to determine an opportune time to own large brands. Qualitative and quantitative data sets intersect to provide a complete view of corporate value.”
Against major indexes like the S&P 500, S&P 500 Equal Weight, S&P 500 Growth, S&P 500 Value, and the Russell 1000 Value, the EQM Brand Value Index has been able to outperform them in every major benchmark within the past 10 years.
“A strong brand is a leading indicator of future performance,” said Larry A. Medin, Founder and Chief Executive Officer of Brandometry. “Recognizing which companies have strong brands and are also undervalued can markedly improve a value investment strategy. Our philosophy isn’t just about investing in the strongest brands. What drives performance is knowing when to own strong brands.”
To read the full white paper, click here.
For investment trends in the exchange-traded fund space and more, visit ETF Trends.