Patents are an early indicator of innovation. In contrast to R&D expenditures, which only represents the cost side, patent values represent the value side – a more accurate indicator of indication because it also considers the outcome of R&D activities, not their cost.
The positive correlation between the value of a company’s patent portfolio, it’s development over time and the company’s success in the market, e.g. represented by the development of the patent holder's share price, has already been proven in individual studies.
STARTING SITUATION
The following examples are simulated backtesting with equal-weighted indices (portfolios), half yearly adjustment, degree of investment = 100%; no risk management; no fees; all stock prices are calculated in EUR; only stocks with a patent portfolio >= EUR 10 million and uninterrupted history of both prices and patent indicators are taken into account.In all cases that we and our customers have investigated so far, the IP stocks were leading to significant outperformance.
Our own calculations, e.g. using the MSCI World index as an example, show that stocks with a patent value > €10 million significantly outperform (blue line) the benchmark (grey line), and stocks with 0 < patent value <= €10 million significantly underperform the benchmark (red line)
PROCESS
We use the value of a company's self-invented patents as the primary indicator, as this has produced the most promising results in our backtests.
In addition, only stocks with a self-invented patent portfolio value >= EUR 10 million and an uninterrupted history of both closing prices and patent indicators are considered .
Based on the list of stocks in each index (benchmark), those stocks that matched the top 25% of the selection strategies described below were filtered out.
STRATEGY 1
FILTERING RESULTS USING STRATEGY 1
- The stocks are ranked by
self-invented patent value
- A portfolio is created from the shares with the 25% highest self-invented patent values.
CONCLUSION:
Using the self-invented patent value as sole selection criterion results in a robust positive annual outperformance for all markets and a positive alpha in almost all cases (except for the NYSE Composite and the Shanghai SE Composite index).
STRATEGY 2
FILTERING RESULTS USING STRATEGY 2
- The Stocks are ranked by the 25% highest
self-invented patent value / market cap
quotient.
- A portfolio is created from the shares with the 25% highest self-invented patent value / market cap values.
The self-invented patent value is thus related to the size of a stock - in this case the market cap. This gives us a relative self-invented patent value that shows the innovative strength of a stock in relation to its size making all stocks comparable
CONCLUSION:
The use of self-invented patent value/market capitalisation quotient results in a larger positive annual outperformance and a positive alpha compared to patent value for all markets. This relative patent indicator can be combined with proprietary fundamental strategies to achieve an even better performance.
CUSTOMIZED SOLUTIONS
Whether the improvement of an existing product, the implementation of a new fund idea or simply a test data set to try out for yourself, please contact us (info@ipr-strategies.com). We are happy to help
