How Do You Generate Alpha in the Intangible Economy?

As of December 2020, the world’s four largest companies by market capitalization are Apple, Microsoft, Amazon and Alphabet.[1] They are representative of the intangible economy, where the majority of a company’s value is created by intangible assets such as intellectual property, quality management and network effects. This is a significant shift from 30 years ago when companies like AT&T and GE, that mainly produced physical assets, were dominant players in the economy. Today, more than 90% of the market value of S&P 500 companies is estimated to be intangible assets.[2]

Why do intangibles matter?

While financial analysis has traditionally focused on the role of physical capital and tangible assets, there is an increasing recognition of the importance of intangible assets as a key contributor to productivity and growth. The advent of the knowledge-based economy has led to the appreciation of intangible assets as the main drivers of long-term growth. Intangibles include investment in R&D, innovation and technology, customer and supplier networks, and human capital. A company’s culture can also be categorized as an intangible asset. In addition, many ESG-oriented factors are intangibles.

Challenges with intangibles

Although the importance of intangibles has grown significantly, current accounting rules do not adequately value them. They require capitalization of investment in tangible assets, like factories, and intangible assets acquired via M&A (e.g., goodwill). However, internally generated intangibles such as software or IT are not capitalized. These outdated rules explain why new knowledge-based technology companies are usually valued at a premium compared to their replacement value, as intangibles are not properly captured in financial statements. Current accounting rules are backward-looking and therefore fail to reflect the realities of business, resulting in poor forecasting of companies’ future growth prospects and competitiveness in the market. As you can see from the chart below [3], in looking at a traditional book to price value factor versus one adjusted to include intangibles, the intangible adjusted value factor has resulted in greater performance in the new economy.

How to generate alpha in the intangible economy

Much of traditional quantitative factor investing has been reliant on accounting information. In today’s economy, investors need to be skilled in quantifying the value of companies’ intangible assets. Non-financial attributes generated from intangibles are important sources of alpha, as they provide forward-looking indicators for future performance and growth.

With technological advancements and increasing data availability in recent years, modeling and measuring intangibles is possible if you possess technical proficiency in combining new data and technology.

PanAgora’s Approach to Generating Alpha using Intangibles

At PanAgora, we have developed multiple proprietary alpha factors that measure intangible assets which, we believe, are effective in forecasting future fundamentals. While often overlooked by investors due to information barriers or difficulties processing large amounts of complex data, we find these intangible asset-related factors to be an important differentiating alpha source. Below are a few examples of intangibles that we believe impact a company’s ability to generate alpha:

  1. Corporate Culture. This is a system of shared values and norms that define appropriate attitudes and behaviors for organizational members. Academic research shows that firms with a strong corporate culture are associated with greater operational efficiency, less earnings management, and higher firm value.[4] While corporate culture is important for future performance, it is difficult to measure and quantify its impact. We developed a novel method that seeks to detect cultural values based on analyzing management discussions from earnings calls. Our analysis seeks to reveal the kinds of cultural values held by the top executives of these companies and identify robust corporate cultures.

  2. Management Quality. This has been widely noted as an important indicator for business success. When we evaluate management, we measure diversity, including gender as well as demographic make-ups, and the centrality and connections of board members within the business network. We also look at the degree to which the structure of the management is aligned with the long-term goals of the shareholders. Moreover, we measure the integrity of management by analyzing what type of words are used during earnings call Q&A. Leveraging findings from social psychology, we identify linguistic queues that appear when executives are trying to hide or withhold information.

  3. Human Capital. Talent is the engine for company innovation and continued progress. Numerous studies show that happy employees equate to a workforce that is more productive, more creative and exhibits lower turnover. Using data from social media on employees’ ratings of companies, our research finds that positive employee sentiment creates a positive feedback loop and can be a leading indicator of the firm’s future performance. Additionally, companies that offer training programs and competitive benefits packages often attract and retain talented employees. Empirically, these companies show outperformance and better future ROE.

  4. Competitiveness. In our globalized business world, companies’ supply chains, competitors, joint ventures, and partnerships can be crucial information for assessing the competitiveness of a company. We model company relationships using computerized models to measure the centrality of a company in their ecosystem: more central firms tend to have a competitive edge over others, as they diversify and better manage their customer-supplier relationships.


We believe intangible assets are an increasingly important portion of a company’s market value. However, intangibles remain more complicated to measure and value than tangibles. The combination of inadequate accounting rules and backward-looking financial statements suggests that managers with the skill and technology to gather and interpret new sources of data will have an edge in generating alpha from signals derived from intangible assets.


1. Bloomberg, PanAgora Asset Management, Inc.
2. Ocean Tomo, LLC. Intangible Asset Market Value Study, 2020
3. Traditional value is using B2P factor and Intangible Adjusted Value is using B2P factor with intangibles adjusted for book value, within PanAgora US Large Cap investment universe excluding financials/real estate/utility sectors. The performance has been estimated using long-short baskets (top vs. bottom factor decile, monthly rebalancing). Returns are computed in USD, include gross dividend reinvestments and exclude transaction and other trading related costs. Past performance does not guarantee future results.
4. Ferrell, Liang, and Renneboog, 2016, Socially responsible firms. Journal of Financial Economics. 122, (3), 585-606

About Jaime Lee, Ph.d.

Jaime Lee is Managing Director, Head of Dynamic Equity, at PanAgora Asset Management. Her primary responsibilities include oversight and management of the team, conducting research to uncover new alpha sources, building quantitative stock selection models, and managing portfolios within the Dynamic Equity strategies. Lee is a key contributor to the innovative equity research used in the development of PanAgora’s Dynamic Equity models. She is a member of the firm’s Operating, Risk, and Directors’ Committees. Prior to joining PanAgora, Lee was a Managing Director of the Scientific Active Equity team at BlackRock, Inc. She joined Barclays Global Investors in 2007, which merged with BlackRock in 2009. While at BGI/BlackRock, she managed the Emerging Markets strategies and led the Emerging Markets portfolio management team, overseeing $15Bn AUM across long-only, 130/30 and market neutral strategies. Her prior experience includes a role as a Senior Portfolio Manager at Barclays Global Investors as well as Research and Portfolio Management roles at Quantal Asset Management, managing International equity strategies. Lee holds a doctorate in Economics from the University of California, Berkeley.

This material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, PanAgora Asset Management, Inc. ("PanAgora") does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward‐looking statements speak only as of the date they are made, and PanAgora assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward‐looking statements. This material is directed exclusively at investment professionals. Any investments to which this material relates are available only to or will be engaged in only with investment professionals. There is no guarantee that any investment strategy will achieve its investment objective or avoid incurring substantial losses. Past performance is not a guarantee of future results.

PanAgora Asset Management is an Associate member of TEXPERS. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of TEXPERS. Views are subject to change over time. Follow TEXPERS on FacebookTwitter, and LinkedIn for the latest news about the public pension industry in Texas.


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