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At AlbaCore, we focus on the long-term. As one of Europe’s leading alternative credit specialists, we invest in private capital solutions, opportunistic and dislocated credit and structured products. 

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Specialist in Asia Pacific, China, India and South East Asia and Global Emerging Market equities.

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Our philosophy is very simple. We are constantly searching for high quality businesses and when we acquire them, we will work relentlessly with them to create long-term sustainable value through innovation, ESG-led and proactive asset management.

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Leader in active quantitative equities across Australian equities, global equities, emerging markets and global small companies.

Backed by a unique blend of research, portfolio construction and risk management, focused on uncovering original insights and translating them into investment strategies that are active and systematic, aiming to generate alpha.

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Specialists in equity portfolios in Asia Pacific, emerging markets, global and sustainable investment strategies

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Intangible Assets and Goodwill: Growth, Recognition and Alpha?

  • Latest insights
  • Intangible Assets and Goodwill: Growth, Recognition and Alpha?

Intangible Assets and Goodwill: Growth, Recognition and Alpha?

The debate over the importance of intangible assets continues, in academia and in the market1. Parts of the investment community dispute the inclusion of intangible assets in a company’s asset base, claiming that the definition of intangibles is too restrictive or perhaps not restrictive enough. Other parts claims that valuation of intangible assets for accounting purposes is too subjective. A final group acknowledges that intangible assets are important, that defining and including them in company asset valuations is important, but that conservatism is better than the alternative. We at RQI are in this third camp.

Further to this, no-one really disputes the difficulties associated with accounting for and valuing goodwill, but almost everyone agrees that it exists and is important. Our main aim here is to better understand goodwill in the context of intangible assets, so we want to:
 

  • Outline the idea of goodwill in the context of intangible assets
  • Look at its size, evolution and importance
  • Discuss excess build-up of goodwill and why it is probably a negative signal
     

An important note: in RQI Value strategies, we use accounting metrics to calculate the four factors in our Core portfolio: cash flows, dividends, adjusted sales (gross profit) and adjusted book value. Book value is simply the difference between total assets and total liabilities, which includes only the intangible assets that the firm chooses or is required to report. So this final element of Core – adjusted book value - is reported book value with two sets of further intangible assets added back; Research and Development (R&D) (as cumulative R&D expenditure over the preceding 5 years) and brand value. (We choose to measure brand value conservatively as cumulative sales and marketing expenses, also over the preceding 5 years. Different methods and proxies exist but in general they are more subjective in nature.) Of course, reported goodwill is already in total book value so no further adjustment is made for it. 

We also note that excessive build-up of reported goodwill can be a sign of an overly aggressive acquisition strategy, which on average leads to write downs and future underperformance. So it is as an alpha source, rather than a core measure, that we use goodwill. 

1 See Lev, B. (2018) “Intangibles” NYU Working paper  (2018) or Corrado C. and C. Hulten (2010) “How do you measure technological revolution?”, American Economic Review, 100 (2) or https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/getting-tangible-about-intangibles-the-future-of-growth-and-productivity

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document and does not constitute an offer, invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document. 

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this document. 

References to “we” or “us” are references to First Sentier Investors a member of MUFG, a global financial group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, Igneo Infrastructure Partners and RQI Investors, all of which are part of the First Sentier Investors group. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

If this document relates to an investment strategy which is available for investment via a UK UCITS but not an EU UCITS fund then that strategy will only be available to EU/EEA investors via a segregated mandate account.

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