Scientific Beta

Top 1000 Funds: "Index providers question whether book-to-price provides a suitable definition of the value factor. They argue that intangible assets such as brand capital and technological know-how play an increasing role, but are not recognised in reported book values. Many providers prefer to combine several accounting ratios to define value. They argue that a composite of valuation measures using earnings, sales or cash flows will be better able to capture the true value of a stock."

Top 1000 Funds 04/08/2020

Article by Felix Goltz, research director, and Ben Luyten, quantitative research analyst, at Scientific Beta.

"(...) Index providers question whether book-to-price provides a suitable definition of the value factor. They argue that intangible assets such as brand capital and technological know-how play an increasing role, but are not recognised in reported book values. Many providers prefer to combine several accounting ratios to define value. They argue that a composite of valuation measures using earnings, sales or cash flows will be better able to capture the true value of a stock. Such comments reflect the idea that value indices should mimic the traditional investment practice of active managers, who search for securities that are under-priced relative to their true value. But it would be naïve to think that a combination of accounting ratios could capture the true value of a stock. (...)"