A Portfolio of Japanese Equities Weighted by YKS Patent Values

Abstract

Recently, the value of intangible assets has become increasingly important in estimating the value of an enterprise. In the practical business of asset management, however, compared to the analysis of financial statements, relatively few opportunities exist to quantify intangible assets and thus estimate the value of enterprises. In addition, few passive managers rely on value-weighted intangible assets. In this study, we propose an equities portfolio management method of weighting by patent values, which are calculated by the YKS method developed by Kudo and Associates. Importantly, the method presented here does not use market information or financial statements. The annualized excess return of the YK value-weighted portfolio is 6.1%, which significantly outperforms the market capitalization-weighted portfolio, and there is no extended period of negative underperformance in the periods examined in this study. Most investors are unaware that industries with overweight YK value-weighted portfolios have valuable patents, and that the market capitalization of these sectors may not include the value of these patents’. Our study shows that the annualized average growth rate of the weighted recurring profit of the YKP is higher than the growth rates of the market capitalization-weighted portfolio and a composite of the financial value-weighted portfolio.

Keywords: indexation, patent valuation, portfolio management

JEL Classification: G11