// WETENSCHAP & PRAKTIJK
PATENTS AS AN INNOVATIVE SOURCE OF ALPHA By Oliver Murschall
Smart ideas create a competitive advantage and added value for enterprises. The challenge in portfolio management is to determine the value of such innovations and to apply this to stock selection. The reported value of patents offers little help in this regard, which is why alternative data are being used. Based on univariate and multivariate analyses, our organisation incorporates patent information into our alpha and risk models. The analyses show that investment strategies that buy companies with high patent values and sell those with low patent values have the potential to generate excess returns.
Photo: Archive Quoniam
We use alternative data from a provider that specialises in carrying out patent valuations for companies, due to the fact that the balance sheet value of patents is not very helpful here. This database for traded patents is based on transaction information gained from mergers and acquisitions, auctions or manual valuations. The data set is
trained using a learning process in order to identify indicators which are relevant to valuation – including market-based, legal or technical details of patents. To assess individual patents, they are compared to traded patents with similar characteristics. At present, the global data set contains usable data for around 10,000 enterprises covering more than 86% of the MSCI World market capitalisation. The five companies with the most valuable patent portfolios account for an aggregate value of more than EUR 267 billion.
PATENT VALUE AFFECTS THE OVERALL COMPANY VALUATION
second is the quality of the patents. The first aspect, the value of the patent portfolio, impacts the enterprise value. The more valuable the patents, the higher the valuation. Even though carrying amounts provide an indication of the value of patents, under US Generally Accepted Accounting Principles these must be recognised at cost – meaning that only purchased patents are reflected here. Under IFRS, patents may be carried at their development costs – which, however, frequently provide little information concerning their economic potential.
Two aspects of patent portfolios are relevant for enterprises: the first one is the value of the patent portfolio, the
The importance of an enterprise’s innovation activity – relative to its
Aggregated by country, Japan and the US account for more than 70% of global patent values, as shown in Figure 1; these countries are the major innovators in terms of patent value by a large margin, followed by South Korea, Germany and France. Taking a sector view, the technology sector comes first – as one would expect – with just under 40% of global patent values.
Oliver Murschall
32
FINANCIAL INVESTIGATOR
NUMMER 5 / 2020
Based on univariate and multivariate analyses, we incorporate patent value and quality in our alpha and risk models in the form of factor composites.
