Intangibles as a Quality Attribute

Factor investing provides investors with a low-cost path to participate in long-term stock returns. The quality factor is among the most well-established equity factors with important empirical and practical implications. However, compared with other factors, the quality factor is less well defined. This article demonstrates that the intangible asset intensity (IAI) is a viable quality attribute that complements other commonly used quality characteristics. Our analysis shows that 1) IAI interacts and enhances other commonly used quality metrics, 2) IAI is not fully priced by analysts and existing commonly used risk factors, 3) the IAI premium is not specific to a particular sector and cannot be explained away by sector exposure, and 4) the IAI premium is not confined to a particular time period or a specific size bucket. Putting together, by aggregating IAI with other commonly used quality attributes, such as gross profitability, equity capital dilution, and change of net operating capital, our findings suggest that the quality factor would be enhanced by the inclusion of companies with a high level of intangible capital investment