Are traders and investors underestimating the power of brands, asks Boris Schlossberg of BK Asset Management?

According to some research, the answer is yes, and if this dynamic continues to remain place it offers the possibility of better than market long-term returns.

Kai Wu, chief investment officer of Sparkline Capital has produced some innovative work on the value of intangible assets. In several papers titled Investing in the Intangible Economy and Measuring Culture, as well as his latest piece called Brand in the Influencer Era, Wu tries to isolate the brand “factor” by measuring the strength of the brand via social media mentions.

According to Wu’s research, buying the strongest brands while shorting the weakest brands within the sector produced nearly a 2% excess annual return over the past decade. Wu’s study did not account for transaction costs and was based on both long and short entries, making it impractical for most long-term investment accounts; but despite the shortcomings of the methodology, Wu's general thesis may be correct. In a highly digitized and virtualized world where attention is the most scarce commodity, the power of the brand to capture and retain the interest of the market cannot be underestimated. 

While betting on brand leaders in any given category may be a path to market-beating results, it is rife with risk. Individual investors may be better served with a simple strategy of three—picking the top three brands within the sector would offer both the power of concentration and the safety of diversification. For example, an investor in the chip sector who bet on brand leader Intel (INTC) in 2010 would have woefully underperformed the market, but an investor who simply chose the top three brands—Intel, Advanced Micro Devices Inc. (AMD), and NVIDIA Corporation (NVDA)—would have done much better and would have handily beat the averages.

In today’s world of fractional shares and commission-free trading, it’s relatively easy to construct a simple ten-sector portfolio of brand leaders that an investor would be willing to hold for ten years or more. This ten by ten portfolio may still be subject to idiosyncratic risk as whole sectors could suffer from competitive decay, but the combination of brand leadership and diversification could offer investors the prospect of market-beating returns within the safety and comfort of household names.  Tomorrow we will look at some possible combinations.

To learn more about Boris Schlossberg visit BKForex.com.