In focus

What features of companies do markets value?

The world of finance and business is continually evolving. Of today’s top 100 companies, only two thirds were in the list in 2001. The weight of technology companies in global markets has gone from 14% to 22%; the weight of financial companies has fallen from 20% to 14%.

Within equity markets, the rise of passive investments, of ESG investing, and more recently, of the retail trader, have all transformed the investment landscape. Yet too often, investors fall back on received wisdom as though nothing has changed since American cars were king, Britannia ruled the waves and Graham and Dodd (1934) was the last word on security analysis.

In this note we use a novel technique to ask a simple question: what features of companies do markets value?

By studying how the answer to this question has changed over the past 21 years, we can build a picture of the 21st century so far.

We show that traditional accounting concepts such as book value have become less and less relevant to market valuation over this period. Expenditures on research and development (R&D) and sales and administration (SG&A) have become more important.

In the past two years, there is clear evidence that, for the first time, ESG features may be reflected in corporate valuation.

In short, what markets price is dynamic. Any active management strategy, be it discretionary or quantitative, must also be dynamic if it is to thrive in today’s changing world.

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What features of companies do markets value? 6 pages | 509 kb