Considering our focus on investing in the most intangible-rich companies in the world, it is no surprise that we follow investments in intellectual property very closely. Unsurprisingly, corporations in developed countries invest more in R&D, advertising, and firm-specific resources than their emerging market counterparts. That is not to say, however, that companies in emerging markets are not interested in creating a productive capital stock of innovation. In fact, we find that they are investing up to 4% of sales in R&D activities and, in some cases, more than 5% of sales in advertising and firm-specific competencies:
The result? Intellectual property represents an average of 5% of assets on these emerging market companies' balance sheets (the average for developed markets is about 8.7%).
On a sector level, we find that Health Care, Information Technology, and Consumer Staples are, in similar fashion to developed market trends, the largest investors in intangibles:
The focus on intellectual property development results in companies with quality rankings that often surpass those that come from developed markets. In fact, when screened by the same process we use for finding knowledge leaders in the MSCI World Index (all developed), emerging market companies have a pass rate of about 20% (compared to ~35% for developed companies). Not bad for a group with an average market cap that is about 1/5th of the average for its developed market peers. If trends persist (see yesterday's post on EM outperformance so far this year), the emerging market counter-cyclicals (Health Care, Consumer Staples) mentioned here could be an interesting group to consider: