Do Innovative Companies Outperform?
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GlobalData’s Innovation Indices generated annualized alpha of 3-8%
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Innovative companies have structurally superior future earnings potential
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GlobalData AI Innovation Index generated annualized alpha of 8.5%
Do Innovative Companies Outperform?
Disruption accelerates innovation, but investors under-appreciate its importance
No matter where we look, we find evidence of disruption-led innovation trends accelerating over the last decade. Consider the following:
Patent applications has accelerated at a rapid pace over the last decade, at 10% compounded growth per annum - 1.5x times higher compared to past.
Company filing documents highlights ‘innovation’ as an important strategic focus area of corporate, with 14% compounded annual growth in ‘innovation’ as a focus area over last 5 years.
Companies also walking-the-talk on innovation, as measured by patent filings. On an average, during any given month, more than 50% of S&P 500 companies have a patent granted against their name.
Amid the wildly disruptive business landscape, companies are innovating for a more durable source of competitive advantage. As per industry reports, 84% of S&P 500 market capitalization is composed of intangible assets with intellectual property forming a major chunk.
And yet, there is no meaningful or reliable reporting mechanism under GAAP (Generally Accepted Accounting Principles) to capture the significant chunk of companies’ value tied in intangibles.
Innovation Insights Enables Profitable Investing Opportunities
The natural question is to then ask is “are traditional methods of analyzing companies using financial statements alone, enough?” We think ignoring innovation potential of companies fails to ascertain its true value which means lots of missed investing opportunities.
GlobalData, a leading data and analytics company, uses patents dataset to uncover innovative potential of companies to build portfolio of most innovative companies which handily beats the benchmark.
Tangible Benefits of Using Innovation to Build Investment Portfolios
First, GlobalData’s Innovation Indices generates 3% to 8% Annualized Alpha over the S&P 500 over the last 6 years, with superior Sharpe and Information ratios.
Second, GD innovation indices also beats specialist third-party US-based Innovation Indexes like 1) NYSE R&D Innovation Index and 2) M-CAM Innovation α® US Index
Compared to M-CAM Innovation α® US Index, GlobalData’s innovation indexes ‘Top’ portfolio’s (Top half of innovative companies) out-perform by 4% to 13%. And compared to NYSE R&D Innovation Index, GlobalData’s innovation indexes ‘Top’ portfolios out-perform by 1% to 2.5%.
Third, the outperformance seen above has a fundamental driver. GlobalData’s innovation indexes provide access to companies which generate structurally higher future earnings predicated on innovation potential, ie., they are fundamentally well set-up to beat the benchmark.
Innovative companies have 2.2x higher future earning potential as innovation not only differentiates, but provides competitive edge to companies’ products and services, driving higher their future earnings potential whereas companies which don’t innovate witness sluggish future earnings growth.
Fourth, Innovative companies achieve sustainable and consistent out-performance over longer time periods. Investing in any 1, 3 or 5-year period in the last 6 years in GD innovation indexes resulted in out-performance more than 95% of the time.
Finally, thematic tagging of GlobalData’s patents data allows thematic investors to bet on most innovative companies in particular themes like Artificial Intelligence, Electric Vehicle etc.
For example, GlobalData Artificial Intelligence (AI) Innovation Index, a selection of companies from the S&P 500 at the forefront of innovation in AI, generates 8.5% annualized alpha over the S&P 500. Such indices are available for 50+ technology themes.
GlobalData enables Thematic Innovation Indexes for 50+ technology themes to cater to varied investors interests.
In summary, GlobalData’s industry leading patents dataset should be of value to investors in analyzing companies’ intellectual capital and innovation to assess its potential in not just navigating the complex maze of technology-led disruptions but to profit from it.
Adarsh Jain, CFA
Director, Financial Markets
GlobalData Plc
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