Ocean Tomo Catches the Wave in Valuing Intellectual Property

By Alan Sipress
Washington Post Staff Writer
Sunday, May 6, 2007

Some of the manufacturing jobs that built American industrial might have left for foreign shores. Services, too, are taking wing. American capital now crosses the border with the ease of a mouse click.

What remain at the core of today's U.S. economy are innovative ideas -- intellectual capital.

But even as economists and corporate executives acknowledge this new reality, they've found it difficult to accurately measure the worth of ideas to companies and the economy.

That's where Keith Cardoza came in. An asset manager at Ocean Tomo, a Chicago financial services firm specializing in intellectual property, Cardoza concluded the marketplace was failing to keep pace with the economy's seismic shift over the last generation. His research showed that knowledge had displaced traditional assets as the lifeblood of the U.S. economy.

Cardoza set out last year to create a stock index that, in his view, reflects the role invention plays in fueling economic growth. The result was the Ocean Tomo 300 patent index, which uses a novel technique for valuing patents held by companies to assemble what he says is a roster of many of the country's most innovative enterprises.

By contrast, leading stock indexes such as the Standard & Poor's 500-stock index and Dow Jones industrial average try to capture activity in the broader economy by listing a cross-section of large companies. The Ocean Tomo 300 has only been live for seven months, too short a time to judge its long-term prospects; for now, it is outperforming the S&P 500 by slightly less than half a percent.

Cardoza's index is not an investment, but after it was established, a separate exchange-traded fund based on the index and called the Claymore/Ocean Tomo Patent ETF debuted on the American Stock Exchange. That fund, issued by Claymore Securities, now has $16.2 million in assets and closed Friday at $27.17.

"I realized that we are in a time in our economy when we have outsourced manufacturing to China and outsourced services to India. What we have left in this country is knowledge," Cardoza said.

Some analysts are intrigued by the approach for pricing patents, which give companies a valuable, limited monopoly on new inventions, but have questions about whether patents should serve as the basis of a stock index. Skeptics say patent value may prove too narrow a measure of corporate prospects.

"It's not clear that intellectual property equates to superior performance over the long term," said Jeff Tjornehoj, a senior research analyst at Lipper. He noted that many of the most successful stocks of the last decade, including Berkshire Hathaway and Countrywide Financial, are missing from the Ocean Tomo index.

Cardoza said his patent index is as well suited to the current era as the Dow was to the industrial age, taking into account factors that the Dow and other indexes don't.

Cardoza said his research showed that tangible assets, like plants, equipment and inventory, represented four-fifths of the market value of U.S. companies 30 years ago. The other fifth came from intangible assets like brand name, reputation and other factors. Now, he said, the ratio has flipped, and intangibles, which he valued by subtracting tangible assets from a company's total market value, make up four-fifths of the pie, with the largest slice made up of patents, copyrighted material and other forms of intellectual property.

Ocean Tomo is not the only company that's tried to measure the value of patents. The Patent Board, a Chicago research firm, publishes a scorecard ranking companies based on the number and quality of their patents across 17 different industries.

The notion that patents are tied to growth is not entirely new. A study published last year by the Federal Reserve Bank of Cleveland found that the single best predictor of how a state's income will grow is the number of patents in the state per capita. Education ranked second.

Ocean Tomo's valuation system for rating patents was developed by California patent lawyer Jonathan Barney, who now works for the firm. Barney's key insight was that companies, which are required to pay the U.S. Patent Office every four years to maintain their patents, would only do so if the patented technology was proving to be valuable. Barney identified 53 factors in a patent document that indicated whether a patent was likely to be renewed -- that is, whether it was valuable.

For its index, Ocean Tomo evaluated the patents issued by the patent office according to these factors and then assigned each one a value relative to the others. Finally, using this rating system, Ocean Tomo selected 300 publicly traded companies that own what were found to be the most valuable patents relative to the company's book value.

"Now, knowledge is transformed into intangible forces of power," Cardoza said.

Staff researcher Richard Drezen contributed to this report.

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