By: Tim Jones
Over recent years we have been tracking how companies identified as leading innovators subsequently perform in terms of growth in shareholder value. Linking innovation efficiency to out-performance against all major indices has proven the relationship that many across industry believe in and hope for: innovation pays. The latest round of analysis has just been completed and shows even greater performance than before.
Since 2012 we have been undertaking annual research on the financial returns gained from investing in stocks of the companies previously identified by the Innovation Leaders project. As shared previously, in a back-test undertaken in partnership with Bloomberg, a cross-sector portfolio of 20 major companies whose shares were held for two years after identification of their innovation prowess showed an annual return over the decade from April 2002 to 2012 with a CAGR of 14.5%. By comparison, taking just one leading market, over the same period average return for the S&P500 was 5%.
In the past 5 years, as we have piloted the analysis with actual investments, growth has been sustained. Over the full 15 years of this project, annual return has now continued to deliver with mean return still at 14.5% – well over double that of the S&P500. Put another way, this portfolio of shares in innovative companies has delivered a return of over 660% while over the same period the S&P return was 180%. Key figures such as standard deviation (18.74) and sharpe ratio (0.8) are equally strong. As the chart below highlights, effective innovation evidently pays – more and more.
Key to the success of this research is that it identifies company innovation prowess early, ahead of product launch and way up-front of the focus of traditional financial analytics. It then allows for profitable investment in the related companies as this innovation efficiency has impact down the line in terms of more successful new products and services and subsequent revenue, margin and hence share-price growth.
Not surprisingly this research has been of interest to major companies and investors alike.
- For companies seeking to gain from improved innovation, the analysis has supported the rationale of investing in making innovation both more productive and more significant as part of the corporate strategy. Moreover, by identifying which companies are the most effective in each sector, it has allowed senior management to learn from others outside their traditional peers and understand more about the techniques and approached that can be adapted and adopted to have impact.
- For investors used to complex analytics and considering multiple trends, the fact that this holistic view of a company’s innovation engine generated such significant returns is very attractive. As some of the world shifts away from short termism and high frequency trading, the beneficial results of a long-term investment philosophy driven by a belief that good innovation matters most is a ray of light. Especially for long term investors such as family offices and pension funds, this approach has much to offer.
Having previously shared the results of the analysis, we are now moving ahead with more rigorous research and the development of potentially automated versions of the algorithms used to date. In partnership with leading business schools, we will be supporting the fine-tuning of the analysis to identify even greater financial returns and will be exploring in more depth the insights from the key ratios of innovation output / input that underpin the core research.
If you would like to join in and support this collaborative research, and so gain early access to the outcomes, do let us know.
About the author
Dr. Tim Jones is a recognised expert in innovation, growth and futures. He is the author / editor of eight books and a regular speaker on innovation leadership, growth platforms and future trends. For over twenty-five years he has worked with many leading multinationals, governments and universities identifying emerging opportunities: A leader in collaborative programmes, Tim has made his name in helping organsiations to see the world through a different lens and so reveal new areas for potential growth. Tim is Programme Director of the Future Agenda – the world’s largest open foresight programme; leads the annual Innovation Leaders analysis that profiles the companies making the most of their innovation investments and is also co-founder of a global advisory network, The Growth Agenda.