Anthony Cross

Anthony Cross manages Liontrust Intellectual Capital Trust, a fund which invests in smaller companies using precepts which evolved from 'The Cross Report'. The Cross Report argued that intellectual capital and employee equity participation are of paramount importance in successful companies.

The investment attractions of intellectual capital

Introduction

If asked to list a company's assets, most people would probably give the accountants list of plant and equipment, property, raw materials, stocks, finished goods and cash. Whilst these assets are important, they are rarely unique and they represent a declining proportion of the value of companies. Research by Deutsche Bank shows that over the last ten years , the value of intangible assets has become a much greater proportion of total enterprise value. Fixed assets now comprise only 16% of the enterprise value of an average company compared with 42% in 1989.

So what are these intangible assets that enable companies to add value to their products and services and thereby retain pricing power? The answer is intellectual capital : it is frequently difficult to replicate, and its successful exploitation lies at the heart of today's growth companies.

1. Finding good investments should not be easy .

   The world is becoming more competitive. More competition means that there are fewer good investments.

2. Look for intellectual capital assets, such as customer relationships and intellectual property.

   They are the most important assets in companies. Competitors find it difficult to replicate these intangible assets.

3. Make sure directors and employees own shares.

   Intellectual capital assets are created and exploited by employees. Equity ownership helps retain employees and aligns their interests with those of outside shareholders.

4. Target companies with proven organic growth.

   Organic growth is the clearest evidence of success. Be wary of those who need to acquire growth.

5. Beware of companies that claim to be an exception to the rule.

   Companies rarely miss out on wider negative industry trends.

6. Declining margins during a time of economic stability are a sell signal.

   Companies that are difficult to replicate should earn superior returns but they will also attract competition.

7. Sell when directors make material equity sales.

   Ignore their stated optimism for the company.

8. Protect the downside.

   Think about what could go wrong as well as right and limit the size of your bet accordingly .

9. Spread your bets.

   Investing is about protecting wealth as well as adding to it. Companies are valued on a multiple of optimism. When optimism turns to pessimism share prices collapse. Today's winner could be tomorrow's loser.

10. Be patient.

    A good bet might take a couple of years to attract the attention of the broader market.

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