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Intangible assets: The leading source of moats

 

Intangible assets - Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company's products, or can allow the company to charge a significant price premium.

The term “economic moat” describes a company’s ability to maintain its competitive advantages and defend its long-term profitability. This moat investing education series explores the five primary sources of moat, according to Morningstar: 1) switching costs; 2) intangible assets; 3) network effect; 4) cost advantage; 5) efficient scale. Each week, we’ll write a new blog focused on each of these sources of moat.

Here we explore the concept of intangible assets.

Intangible assets help build strong, identifiable advantages

Patents are a legal barrier to entry that protect companies from unauthorised commercial usage of their products by competitors. Similarly, government licenses may raise the entry hurdles for new competitors. Additionally, brands equity can increase a customer’s willingness to pay for a product or service. These are examples of what Morningstar refers to as “intangible assets.”

Intangible assets: Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company's products, or can allow the company to charge a significant price premium.

Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key economic moat source. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies that help companies generate economic profits.

Intangible assets in action

Starbucks is the leading specialty coffee retailer in the US. According to Morningstar, Starbucks’ wide economic moat comes from its “brand intangible asset that commands premium pricing combined with meaningful scale advantages.” Morningstar adds, “With a widely recognised brand, Starbucks is among the few retail concepts to be successfully replicated across the globe.”

Eli Lilly and Co. is a pharmaceutical company that focuses on neuroscience, endocrinology, oncology and immunology. Patents are critical in preventing competitors from duplicating its drugs. Morningstar notes that “patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. Eli Lilly’s patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital.”

Published: 17 May 2021

IMPORTANT NOTICE

These securities have been used for illustrative purposes only to demonstrate the index holdings and not as an indication of performance or a recommendation.

VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck Vectors Morningstar Wide Moat ETF (MOAT) and VanEck Vectors Morningstar World ex Australia Wide Moat ETF (GOAT). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here.

An investment in MOAT and GOAT carries risks associated with: financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund.