Brand Finance and Solactive AG have announced the launch of two financial indices which offer investors exposure to companies deemed to have a strong brand value. While geared towards the investment market, the move could have a positive payback for trademark counsel further down the road.
Writing in the April/May 2016 edition of World Trademark Review, David Haigh, CEO of Brand Finance, expanded on the company’s efforts to quantify the positive impact brands have on stakeholder attitudes and behaviour, and by extension shareholder value. In December 2015 the company took a retrospective look at the share price of the brands that it has valued and their subsequent stock market performance, the findings suggesting that highly branded businesses, and those with strong brands, can outperform the market. Reflecting on the research, he noted: “The most striking finding is that an investment strategy based on the most highly branded companies (those where brand value makes up a high proportion of overall enterprise value) would have led to a return almost double that of the average for the S&P 500 as a whole.”
Between 2007 and 2015, the average return across the S&P was 49%. However, Haigh contends that, by targeting companies with strong brands, “investors could have generated returns of up to 97%. Investing in companies with a brand value to enterprise value (BV/EV) ratio of greater than 30% would have generated returns of 94%. Investing exclusively in the 10 companies with the highest BV/EV ratios would have resulted in a 96% return”.
Of the top 500 brands in the most recent Brand Finance Global 500 list, 115 fall into the above categories. The group includes luxury goods businesses such as Burberry, Gucci and Ralph Lauren; well-known consumer brands such as Audi, Land Rover, Dove, Ikea and Nestlé; and financial and business-to-business brands such as Shinhan, Fujitsu and Allstate.
The findings led to Brand Finance teaming up with Solactive, an index provider based in Frankfurt, to launch both the Solactive BrandFinance European Leaders Select 30 Index and the Solactive BrandFinance European Leaders Low Risk 30 Index. Using the BV/EV ratio model as a basis, the Solactive BrandFinance indices feature 30 select brands and, according to the announcement of the launch, “serve as platforms for investors seeking to invest in companies with strong, valuable brands, high dividend yield and low volatility”.
The message to investors is that, with brands associated with pricing premiums, greater customer loyalty and market share, more valuable brands can be expected to generate higher profits. For Solactive, the move adds a unique index to its family of products. For Brand Finance, it also makes business sense, highlighting the need for companies to take brand valuation seriously (the press release announcing the indices stating: “Without knowing the full value of their brands, companies are at a disadvantage as they will not be aware of the hidden strength that lies there and investors will be equally blind. Disclosure of intangible assets should lead to companies obtaining an additional competitive edge, since the disclosure of both intangible and tangible assets allows for proper strategic management.”)
However, the launch of such indices could also have a wider benefit for trademark counsel if it gives the profile of brand valuation a boost amongst senior management. At last year’s Managing the Trademark Asset Lifecycle conference in New York, Shelley Jones, senior legal counsel, trademarks and brand enforcement at BlackBerry, noted that the brand valuation data can be a powerful tool for counsel seeking to demonstrate the importance of the trademark function’s work. However, few counsel have the resources required to green-light a full-scale brand valuation on the basis that it would help senior management and internal colleagues understand the importance of their daily toil. Should senior management now be motivated to commission valuations on the basis that the disclosure of intangible assets offers the prospect of a more tangible payback, this is information that can then be usefully wielded by corporate counsel.
Haigh will be a speaker at the next Managing the Trademark Asset Lifecycle event, held in New York on October 20, which boasts a session focused on practical approaches to brand valuation and how the results can be used in trademark practice (and those wishing to attend this year’s event can save $200 on the regular delegate price if registered by midnight on Friday 29 July and using the promo code MTALBLOG)
While brand valuation is yet to become mainstream business practice, it is rising up the corporate agenda. Therefore, developments that illustrate how valuation results can be utilised to encourage increased investment are to be welcomed.