ETF Expert Corner

Brandometry’s Larry Medin Explains Index Behind Brand Value ETF

April 24th, 2018 by ETF Store Staff

Larry Medin, Founder & CEO of Brandometry, spotlights the index behind the Brand Value ETF (BVAL) and explains the rationale for investing in undervalued company brands.



Transcript

You can listen to our interview with Larry Medin by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the Brand Value ETF, ticker symbol BVAL, and joining us via phone from New York to discuss the index behind this ETF is Larry Medin, Founder and CEO at Brandometry. Larry, welcome to ETF Prime.

Larry Medin: Well, thank you so much for having me on and looking forward to our conversation.

Nate Geraci: Larry, before we talk about the index itself, first, just tell us a little bit about Brandometry and where the idea for this index came from.

Larry Medin: Sure. Brandometry was started about three years ago. I used to be the CEO and one of the Co-Founders of Toroso Investments, which was a company that really focused in on the ETFs - products and building portfolios. And I started looking at what was going on with companies in the area of their market cap and how much of their market cap was attributed to intangible assets. And I saw that over the last 40 years, intangible assets have gone from what we used to call goodwill, maybe 15 to 20% of a company's market cap, to now well in excess of 85%. And I thought if there was a way that we could identify how that intangible value was reflected in companies and how we could identify when it was undervalued, that will give us an opportunity to create an interesting investment thesis.

Nate Geraci: Alright, so let's talk about the index, the BrandTransact50 Index. Again, this powers the Brand Value ETF, ticker symbol BVAL, which is offered by Exponential ETFs. Walk us through the index here. How is it constructed? How are constituents weighted? Anything else noteworthy?

Larry Medin: Sure. So the first thing we had to do is we had to find a way to measure the value of brand. And the financial services industry, for the most part, has really not looked at the measurement of brand in creating financial products or in analyzing companies, except when there's a merger or an acquisition. So the first thing we did was we found that there are about 10 to 12 consultancy firms around the world that for decades have been focusing in on evaluating the brand value of major companies. And we found one of those companies here based in New York, called Tenet Partners, and we were able to utilize their brand value power scores as a way to identify when a company has strong brands. And then we figured out a way to look when the company was undervalued as it relates to its current market cap. And so simplistically, they track about a thousand large cap companies in the United States. And we look at those thousand companies and look for correlation between their brand power score and their underlying market cap. And when there's a divergence from that, we think that that identifies an unrealized market value, and that's one of the first steps in creating the index.

Nate Geraci: And, obviously by the name of this index, there are 50 companies included - is that correct?

Larry Medin: That's right.

Nate Geraci: And how are they weighted?

Larry Medin: Rated from the standpoint of brand power score?

Nate Geraci: Yeah, weighted. How are the holdings weighted?

Larry Medin: Oh, it's an equally-weighted portfolio.

Nate Geraci: Now, how often are the companies in the index evaluated and potentially changed?

Larry Medin: So, the brand power scores are in a constant review. So there's a research process that goes on where each one of these companies is in an annual review and that information is sent out quarterly. And we take that information and then reconstitute the portfolio once a year.

Nate Geraci: Can you tell us anything more about how the brand power scores are compiled? You mentioned these are provided by Tenet Partners. Can you give us some detail as to exactly what goes into these scores?

Larry Medin: Sure. So I guess the first thing is - is brand is everything a person thinks they know or knows about a company. And what we wanted to do is we wanted to get a better understanding of how these brand power scores are meaningful in our context. And so what Tenet Partners does is they don't go to the end consumer. What they do is they interview in their research process the c-suite and executives and director-level individuals that either are doing business with these brands or have the capability of doing business with these brands. And in that research process, they ask them things about their familiarity with the company. What they feel the investment potential is in that company. Their perception of the leadership. The overall reputation of the company. And how do they view that company from a favorable standpoint? And this is all done at the corporate brand level.

Nate Geraci: So, Larry, if I were to restate how it's determined if brands are undervalued, effectively the index is using these brand power scores, scoring each company. If a company has a significant positive change in their brand power score, but their market cap doesn't change significantly, they would potentially then pop-up on the screen as an undervalued brand. Is that it if I were to put it layman's terms?

Larry Medin: That's very accurate. We call that space between the brand power score and the underlying market cap a delta. And that delta is generated on all one thousand of these companies that Tenet Partners looks at. And about 125 of the one thousand companies generate a sufficient delta, or gap, between power brand score and market cap to be considered for the index, and we pick the best 50 of those between 100 and 125 companies.

Nate Geraci: Our guest is Larry Medin, Founder and CEO at Brandometry. Larry, so what's the overall investment case here? Why might investing in undervalued brands be a better way to go than say classic value metrics or even other factors like quality or dividends?

Larry Medin: So, I think that the investment industry has done a lot of looking at traditional financial information in creating a variety of ways for people to invest based upon their preference in how they're looking at investing in companies. We thought that given how much intangibles and brands have become part of the market cap, we felt that it was important to look at that part of the company's asset base and see if we couldn't make decisions there. So what we think we've created through the index is the ability to identify really well-known companies, but knowing when to own those. And by doing that, we think we give people a little bit better of an opportunity to identify companies that they're comfortable with, but for one reason or another, they seem to be out of favor from a stock standpoint.

Nate Geraci: I'm curious, what do traditional valuation metrics look like on companies held in the BrandTransact50 Index compared to the broader market?

Larry Medin: Okay, so that's really a good question because one of the things that we do in looking at the index is sometimes it performs like a growth fund and sometimes it performs like a value fund. Currently, the index gives about a 15 to 17% discount on the overall PE of the portfolio compared to the S&P 500. But at the same time, it gives about a 50% increase in dividend and it gives a substantial discount in price-to-sale. It gives almost a 60% discount in price-to-sale. So we think that the portfolio is positioned very, very well as kind of a combination of a value and growth matrix, depending upon what's going on with the economy.

Jason Lank: Larry, this is Jason Lank. Really innovative index. You mentioned some of the metrics, growth versus value. What size of companies are we talking about? Do micro-cap or smaller companies make it in? Or are we talking about generally larger companies with brands that people have heard of?

Larry Medin: It's typically all companies that people have heard of and that's one of the screens in the process that Tenet goes through, is they have to be familiar. An example of that would be often we use a company like Oshkosh. And when we talk about Oshkosh and ask people, "What is that company?" Most often, people come back and say, "Well, that's a company that makes children's bib, overalls." And in fact, there is a company that does that, except it's owned by a private equity firm. Oshkosh, the company that's publicly traded on the New York Stock Exchange, is a heavy equipment manufacturer, primarily creating materials and equipment for the Department of Defense. So even though it's a substantial company that does well, it's not had the familiarity. So most of these companies are large cap companies that you would know and your clients would know. And there's a couple of mid-cap and one small cap.

Nate Geraci: Larry, we always like to take a full 360-degree view of any ETF we spotlight on the show and so I always like to try to think through maybe what some of the potential risks are. And one that comes to mind is in this day and age with a 24/7 news cycle and social media, it seems like companies’ brands can get dragged through the mud at just about any point in time and on very short notice. All it takes is one slip up or one bad customer experience. I think about the recent incident at Starbucks. We've seen gun makers in the news. Chipotle. Is that a risk here with this index? That focusing on brands could potentially create a situation where they could take a quick hit? These companies could take a quick hit as opposed to looking at traditional valuation metrics?

Larry Medin: Well, I think you're right in that one of the things that we look at in measuring brand is conduct, whether it's intended or unintended. And some of the companies that you mentioned are good examples of that. There are other companies that stood out more in the recent past, like Uber, when you have the conduct of one of the executives, had over a billion dollar market cap impact on the company. Facebook, the corporate conduct that was there, whether intended or unintended, you had a substantial impact, not only on Facebook, but most of the FANG stocks that were in the same category. So what we look at as it comes to these types of situations, we think that we don't try and trade the portfolio based on what we think are short-term elements associated with brands, Chipotle would be one, although that's never been in our portfolio. We think that if a brand is very strong, that the corporate leadership of that company will ultimately maintain that leadership and repair whatever the problem is there. If over the long-term it starts to decline, we don't argue with that. If that decline goes down and the stock goes down in a relative same amount, it would probably roll out of the portfolio.

Nate Geraci: Again, we're visiting with Larry Medin, Founder and CEO at Brandometry. We're spotlighting the index behind the Brand Value ETF. Larry, we have just a few minutes left here. I'm also curious, what's the trade-off between marketing spend and profitability? In other words, it seems like a company could just throw a bunch of money at their brand image, make a huge marketing spend and have a strong brand, but then not necessarily be making money. So what's the trade-off here?

Larry Medin: Well, we always think that a strong brand that has sustainability. And also, again, remember we're measuring this brand at an executive level, so we're looking for experienced people who are in an executive capacity measuring that brand. And one of the questions they are asked is, "Are you interested in investing personally in this company?" And we think that that is one of the filters that helps identify companies that aren't going to try and spend their way out of a bad PR campaign. It doesn't ultimately give benefit to the company's overall earnings. We think strong brand will ultimately result in strong earnings.

Jason Lank: Larry, we're down to just a few minutes, but I wanted to ask you a question. Whenever I see a creative idea, I try to think one step ahead. BVAL is based on finding undervalued brands. And, of course, two of the most storied factors in investing are value and momentum. Is there a momentum version of this brand concept coming forward? Is that on your bench?

Larry Medin: Well, there are about four or five variations on the theme, the investment theme, of utilizing a way to measures these intangibles. And momentum is one of the ones that we've looked at, along with a lot of others. We think that this is a whole category of unharvested opportunity in building products that look at that gigantic part of a company's market cap. I mean, when you go back - and brand is the biggest component of that - and if you go back to the founding of brand, I mean, the Egyptians started branding cattle back in 2700 BC. So it's almost five thousand years that brand has been around as a way to identify a product.

Nate Geraci: Larry, 30 seconds, where does a strategy like this fit in an investor's portfolio?

Larry Medin: Well, it's interesting. I've never tried to tell people where things fit. I've gone by what advisors are telling us. And they see this as either a companion to their large cap US holdings, or as a satellite to that, with the concept of if we can identify these really well-known companies and know when to own them, it's a way to provide a little excess return to that core large cap domestic holdings that you have.

Nate Geraci: Larry, excellent spotlight today. Thank you so much for joining us.

Larry Medin: I really appreciate it and thanks for having me on.

Nate Geraci: That was Larry Medin, Founder and CEO at Brandometry, and you can learn more about the BrandsTransact50 Index by visiting brandometry.net and you can learn more about the Brand Value ETF itself by visiting brandvalueetf.com.