Investors Greatly Underestimate Importance of Intangible Assets
NEW YORK; March 23, 2006 – Individual investors are enthusiastic about investing additional money in the stock market but lack the tools and information needed to measure companies’ true value and growth prospects, according to results of a recent study by Accenture.
The study of more than 500 individual investors each with $200,000 or more in invested assets reveals that a majority (57 percent) of individual investors are committed to spending additional money in the stock market in the coming year. However, two-thirds (67 percent) of respondents said it is still a major challenge to assess a company’s true value and its prospects for future growth. In addition, only one in four investors (24 percent) rated corporations’ ability to help them assess the companies’ future growth as either excellent or good.
“It is becoming increasingly critical for companies — especially those in new industry sectors, whose value is based heavily on intangible assets such as brand and proprietary knowledge — to communicate the growth prospects of their organizations,” said Dan London, managing partner of Accenture’s Finance & Performance Management service line. “Most investors don’t realize the full impact that ‘intangible assets’ — such as reputation, intellectual capital and other items often thought of as ‘goodwill’ — can have on a company’s stock price.”
Over the last three decades, intangible assets have ballooned to approximately 70 percent of the S&P 500’s value, up from 20 percent in 1980. However, the study found that investors believe that only 22 percent of a company’s value, on average, is tied up in intangible assets.
“There is a large gap between investors’ perceptions and reality,” said London. “Over the past 25 years, intangible assets have supplanted tangible assets as the key determinate of a company’s value, yet traditional accounting methods remain focused on the tangibles, so a significant portion of corporate assets are going undervalued and unreported to investors.”
Nonetheless, nearly two-thirds (65 percent) of investors still look to both tangible and intangible assets of a company as they make their decision to invest in a stock. In fact, nearly four out of 10 investors (38 percent) said that strong brand name recognition is equal to a company’s strong balance sheet. “Interestingly, ‘brand equity’ is nowhere to be found on today’s balance sheets – making it very difficult for any investor to understand the value of a company beyond its reported financials.”
Echoing this same concern, almost half (47 percent) of investors said that determining the value of “intangible assets” is a major challenge. In addition, 60 percent of those surveyed say they are in need of more information about a company’s performance against industry sector or peers, and 58 percent said they need better analysis and reporting against key drivers of growth and strategy.
“Investors clearly want access to more transparent information about how management is measuring the current value of both tangible and intangible assets, as well as whether or not management’s strategic initiatives are succeeding at increasing the value of those assets,” said Brian McCarthy, a senior executive in Accenture’s Finance & Performance Management service line. “They want clear benchmarks to determine if management’s strategy is working or not.”
To help companies capture, measure and communicate how management creates value (i.e., current profitability and future growth), Accenture and AssetEconomics recently teamed to create a new value measurement framework known as TRS (Total Return to Shareholders) Mapping. This patented methodology enables companies to help individuals better understand the linkage between accounting and value by defining drivers of current profitability and future growth in a comprehensive reporting framework.
Unlike other financial mapping systems, which are predictive, TRS Mapping is the first comprehensive financial planning and measurement framework that explains 100 percent of a company’s valuation. TRS Mapping captures what currently escapes traditional accounting and financial-reporting systems by providing a systematic explanation of current earnings and future growth expectations.
Building upon the TRS mapping methodology, Accenture also offers clients an Enhanced Business Reporting (EBR) framework, which is designed to supplement traditional disclosure requirements and provide facts on the key drivers of strategy and value creation of greatest interest to investors.
About the Study
The Web-based survey of more than 500 individual investors with $200,000 or more of invested assets was conducted in October 2005. Respondents polled currently own stock, are personally involved in deciding which stocks to purchase, and have the main responsibility for financial decisions made in their households.
Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 126,000 people in 48 countries, the company generated net revenues of US$15.55 billion for the fiscal year ended Aug. 31, 2005. Its home page is www.accenture.com.