Brand Value ETF Signals Dynamic Shift in Securities Valuation

July 20, 2018 1:49 pm

Ed Delia, President of Delia Associates had the opportunity to catch up with Tony Wenzel, President and Founder of Brandometry™, a firm that has pioneered a non-traditional index based on ‘brand.’ The EQM Brand Value Index (BVAL), combined qualitative brand signals with financial data to show the full picture of a company’s investment potential. An avid student of brands relative to financial performance, Tony was kind enough to share a few thoughts in the following discussion:

Q: Ed D – Briefly explain the origins of Brandometry and the establishment of the Brand Value ETF (BVAL).

A: Tony W – Brandometry created the first publicly-traded financial product using qualitative and financial data to trade securities. At our heart, we’re an index provider building an ETF complex that uses brand signals and financial data together to select securities.

Our mission with the Brand Value ETF is to help investors know when to hold strong brands.

Q: Ed D – What made a brand-data ETF possible and how does it work?

A: Tony W – In terms of definition, we take the holistic view that brand is a collection of perceptions about a company and its: assets, people, and conduct.

What made Brandometry possible was a massive shift in the way companies are valued. Traditionally, business value was measured via tangible assets, like: plant, property, equipment, and inventory. Remember in accounting class, every company would raise capital, build a factory, and sell widgets?  Today, companies are more likely to raise capital to hire talent and sell services.

The Brand Value Index, which the ETF tracks, uses brand strength data to help identify strong brands with disconnected share prices. So, it’s a value investment – we’re looking for bruised brands – but we seek to avoid the value trap by measuring critical and unique brand advantages.

 

When we calculate, the brand strength score is our numerator and stock price is our denominator. We normalize the rates-of-change between brand score and stock price to select the strongest large-cap US equities with the most disconnected stock prices for inclusion in the index. We hold the portfolio constituents in equal weight and rebalance annually. Historically, we’ve outperformed the S&P500 with similar volatility. 

Q: Ed D – What are some of the strongest brand-related drivers to a corporate brand’s stock performance?

A: Tony W – For Brandometry, a strong brand score requires extraordinarily high marks for:

  1. Familiarity
  2. Favorability of the leadership team, reputation, and investment potential of the company. 

Strong brand scores are a leading indicator of future performance. As we’ve shifted to an idea-based economy, brand is more important than everThe reason is, that intangible assets are valued more dearly than tangible assets. Consider that Uber doesn’t own cars, Airbnb doesn’t own hotels, and Apple doesn’t produce music. Financial statements don’t measure brand, so the financials for these companies are not telling the whole story.

Q: Ed D – What are some leading brand-related indicators that a corporate brand may be rising or falling in value?

A: Tony W – Brand is everything a customer or prospect knows or thinks they know about your company. So, when we see a strong brand’s perceptual equity scores in familiarity and favorability move, we know the velocity of the brand changed. We might then look at the stock price to determine whether it’s time to divest it from the index, because it’s fully valued, or include the company in the index, because it’s undervalued. Conduct is another factor. When behavior triggers negative headlines, as VW and Chipotle have discovered, it can hurt brand value. Though, how a brand navigates a crisis can be as important as why you got there. There’s a window for redemption.

Q: Ed D – Can you give me a real-world example?

A: Tony W – When Jeff Bezos last spoke to the street, the first thing he mentioned was Amazon’s scores on the American Customer Satisfaction Index (ACSI). In full disclosure, the ACSI ETF is run by our sister company, Exponential ETFs. Amazon is bananas about its customers and its entire company is built around its customer flywheel model. Every decision revolves around making customer experience and prices better. For them, aligning corporate objectives with customer objectives, across teams, in support of reputation, is everything. The Amazon brand identity is about customer benefit.

For other businesses, the brand identity may tout: convenience, reliability, durability, or some other value promise. The important thing is to understand what brand identity you’re building and how to support and measure that commitment.

Q: Ed D – What are some lessons or takeaways that small to mid-sized organizations may learn from observing larger corporate brands?

A: Tony W – I can think of three lessons every SMB should employ.

First, measure your brand. As Drucker said, “What you measure improves.” There is a broad continuum of brand measurement. Not every firm needs a comprehensive platform to understand how brand expenditure drives perceptual equity, how perceptual equity generates specific behaviors, and how specific behaviors affect: profit, growth, risk, and cost-of-capital. It’s overkill. Sometimes you just want to know what programs are working and whether prospects and customers think your conduct is aligned with your brand identity.

Second, create systems to improve decision-making. Baseline your brand performance and track your velocity. Determine the lag time between cause and effect when you make a brand pivot, so you can create cost-effective programs. Document how customers and prospects prioritize what’s important to them. Survey customers, prospects, and check your records to understand your brand awareness, marketing campaign effectiveness, customer satisfaction levels, support call wait times, and service level agreement performance. Make it easy to do business with you. And, easy to prove it.

Third, be crystal clear with your prospects about how your solutions: drive revenue, reduce cost, and improve quality and risk exposure because ultimately that is what your brand does. Companies of all sizes tend to get caught in the features and functions, forgetting to explain the value the brand delivers.

Strong brands have a clear value proposition that fits into executive decision-makers thinking buckets. Communicating how your company will affect: revenue, cost, quality and risk in an easy way makes buying from you easier.

If you have any additional branding questions, contact us below or simply give us a call at (908) 534-9044.