Gavekal Capital: Obfuscated Intangibles

Monday, March 9, 2015

Obfuscated Intangibles

Recently, we have taken a closer look at the effect that our process of capitalizing intangibles has on individual companies' balance sheets (see When $75 Billion In Intangible Capital Goes Unnoticed as well as How Advertising Creates an Economic Asset).  As these specific examples illustrate, there is a great deal of investment that is under-appreciated by the current accounting regime.  In fact, for the constituents of the entire MSCI All Country World Index (~2500 companies, both developed and emerging), there are literally trillions of dollars in unrecognized, intangible capital spending.

By economic sector, Consumer Discretionary and Information Technology exhibit the greatest discrepancy in intangible-adjusted versus actual assets.  The Health Care sector is not far behind, with more than $520 billion in intangible investment-driven assets that we do not see when using conventional accounting standards:


When we drill down further, however, we find that the sub-industry with the highest level of unrecognized (intangible) assets is the Pharmaceutical group. Collectively, these companies have nearly $400 billion MORE in assets when various forms of intellectual property are correctly accounted for:


Among the top 20 companies, those with the most under-reported assets are mostly domiciled in North America (~$370 billion) and Europe (~$215 billion), while those from the Asia Pacific region are 'missing' somewhere in the neighborhood of $160 billion in assets as a result of accounting standards that do not recognize intangible investment: