Outperform the link between innovation leadership and sustained stock price growth 06 10 14 -...

WWW.INNOVATIONLEADERS.ORG 1

OUTPERFORM: The Link Between Innova1on Leadership and Sustained Stock Price Growth

Dr. Tim Jones | Innova1on Leaders ISPIM Montreal | 6 October 2014

WWW.INNOVATIONLEADERS.ORG

Today we will show how innova7on leadership has now been directly linked to sustained stock price growth

Background Context: Measuring Innovation

The Innovation Leaders Analysis

Modeling and Innovation Leaders Fund

Actual Fund Performance

Key Insights and Implications

2


1 Background Context: Measuring Innova7on


Back in 1999, exploring growth strategies in pharma, we wanted to know who were the most effec7ve innovators?

1.   “If we are going to gain more more from organic growth then which companies that are delivering sustained growth are the most effec7ve innovators to learn from?”

2.   “How best should we measure innova7on performance?”

4

Company Innova7on Capabili7es

Innova7on Input Innova7on Output

e.g. $ R&D Spend e.g. # Patents


But if we want to know who is the most effec7ve innovator then we have to understand key ra7os of output to input

5

Company Innova7on Capabili7es

Innova7on Input Innova7on Output

Innova7on Input

Innova7on Output


2 The Innova7on Leaders Analysis


For the past decade we have been iden7fying and profiling the worlds most innova7ve companies across 25 sectors

7

This published analysis has consistently iden2fied organisa2ons that subsequently deliver higher organic growth


Most now recognize that innova7on can both take many different forms and result in a wide range of varied impacts

Product Innovation

Technological Innovation

Service Innovation

Process Innovation

Business Model Innovation

8

Many are looking for a correlation between effective innovation capability and sustained corporate growth

Increased Sales

Higher Margins

Enhanced Brand Value

Attractive Culture for Talent

New Ways of Working

Tangible

Intangible

Tradi2onal

Emerging

Types of Innova7on Example Innova7on Impacts


The underlying dynamics for sustained innova7on-‐driven growth clearly vary significantly from sector to sector

Sector

•  Airlines

•  Consumer Electronics

•  Energy

•  Fashion Retail

•  Hotels and Leisure

•  General Retail

•  Pharmaceu7cals

•  Telecom Operators

Example Innova2on Value Drivers

•  Increasing average revenue per seat and per journey

•  Producing compelling integrated product solu7ons

•  Op7mizing E&P efficiency to maximize reserves access

•  Rapid delivery of on-‐trend product with minimal sale stock

•  Crea7ng guest experiences that raise revenue per room

•  Decoupling margin growth from size of retail space

•  Reducing failure rates for access to new molecules

•  Increasing average margins from data use per connec7on

9

While there are many common elements, recognizing the different nature of innovation per sector is vital


Our model analyses the 1500 largest companies in these sectors and systema7cally selects the top innovators

25 Innova1on Leaders

Single company for each sector

75 Companies

25 Sectors 1500 Companies

Largest companies across 25 sectors

25 most innova1on-‐focused sectors

Top 3 companies per sector

10

Quan1ta1ve Analysis Throughout Process


The annual Innova7on Leaders results since 2002 have been published in books and via the innova7on leaders website

Sector 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Aerospace Rolls Royce Rolls Royce Rolls Royce Rolls Royce Boeing Rolls Royce Rolls Royce Honeywell Rolls Royce EADS Honeywell

Airlines LuXhansa Air New Zealand Air New Zealand Virgin Atlan1c Virgin Atlan1c Virgin Atlan1c Virgin Atlan1c Virgin Atlan1c Singapore Airlines Singapore Airlines Singapore Airlines

Automo1ve BMW BMW Renault Tata Motors BMW Toyota Toyota Toyota Honda Honda Honda

Chemicals BASF BASF BASF BASF BASF Dow DSM DSM BASF Dow Dow

Consumer Electronics Apple Apple Apple Apple Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Sony

Energy Chevron Shell Chevron Statoil Shell Shell BP BP BP BP BP

Fashion Retail Inditex Inditex Inditex Inditex HandM H&M H&M H&M H&M H&M Inditex

Food and Drink Nestle Nestle Nestle Nestle PepsiCo Nestle PepsiCo PepsiCo Danone Nestle Nestle

General Retail Amazon Amazon Amazon Amazon WalMart Tesco IKEA Tesco Tesco Tesco Tesco

Hotels and Leisure Starwood Starwood Starwood Starwood Starwood Starwood Starwood Starwood Starwood Starwood Starwood

Household Goods Reckib Benckiser Reckib Benckiser Reckib Benckiser Reckib Benckiser Reckib Benckiser Reckib Benckiser Reckib Benckiser Reckib Benckiser P&G Kimberley Clark P&G

Insurance Humana AON Humana Humana Aviva Allianz Allianz Allianz AEGON Pruden1al Pruden1al

IT Hardware ARM ARM ARM ARM Apple Apple Apple Logitech Apple AMD AMD

IT Services IBM Infosys IBM IBM Infosys IBM Wipro Infosys IBM Infosys IBM

Logis1cs UPS UPS UPS UPS UPS UPS UPS UPS Federal Express Federal Express Federal Express

Media and Entertainment Google Disney Disney Disney Google Google Google Time Warner Disney Disney Disney

Medical Devices Medtronic Stryker Stryker St Jude Medical Medtronic Medtronic Medtronic Medtronic Medtronic Medtronic Becton Dickenson

Office Products Canon Canon Canon Canon Canon Hewleb Packard Canon Canon Hewleb Packard Canon Canon

Pharmaceu1cals Roche Novo Nordisk Novo Nordisk Novo Nordisk Lilly Novar1s Novar1s Novo Nordisk Novo Nordisk Novo Nordisk Merck

Retail Banking ICICI Bank Santander Santander Santander Handelsbanken Handelsbanken Santander RBS HSBC Bank of America Bank of America

SoXware MicrosoX Google Google Google MicrosoX MicrosoX MicrosoX MicrosoX Adobe Adobe Adobe

Sports Goods Nike Nike Nike Nike Adidas Adidas Adidas Adidas Nike Nike Nike

Telecom Equipment Qualcomm Juniper Qualcomm Qualcomm Nokia Nokia Nokia Nokia Qualcomm Qualcomm Qualcomm

Telecom Operators Bhar1 Airtel Bhar1 Airtel Bhar1 Airtel Bhar1 Airtel Telefonica NTT DoCoMo Vodafone NTT DoCoMo NTT DoCoMo NTT DoCoMo Vodafone

Toys and Games LEGO LEGO LEGO LEGO LEGO Nintendo Nintendo Nintendo Nintendo Nintendo Nintendo

11


3 Modeling An Innova7on Leaders Fund


Over the years many have proposed links between innova7on, organic growth and increased market value

13

Organic Growth

Sustained Innova1on

Inorganic Growth

Market Value


Interest from investors in the Innova7on Leaders analysis raised several ques7ons around a poreolio investment

Ques7ons raised by companies, investors and fund managers included:

•  If companies outperform peers on innova7on, how does this impact value?

•  Can you prove the claimed link between innova7on and organic growth?

•  If one had invested in these companies what would have been overall returns?

•  How would these investment have performed throughout economic cycles?

•  How would this performance compare to sector and cross sector indexes?

•  What companies / sectors would make the greatest contribu7on?

•  Could this analysis be the basis of a growth investment fund?

•  If so what would have been the key performance results of such a fund?

14


We have modeled how ten years of an Innova7on Leaders poreolio would have performed as an investment fund

Models have been created that show the performance of a fund based on:

•  Inves7ng in the most innova7ve company per sector each year

•  Holding these stocks for 2 years before rebalancing the poreolio

•  Reinves7ng all capital and profits at then end of each 2 year hold period

Key assump7ons made in the modeling include:

•  Ini7ally equal value investments in all companies to limit exposure to any one high or low performing stock or sector

•  Independent of current price and short-‐term market fluctua7ons

15

We used only the published results of the innovation leaders analysis for stock selection


We assume an average two year innova7on to impact period so are looking upstream of most assessments

Time to Market (TTM) varies across different sectors:

e.g. Fashion / Somware: 1 year

Consumer electronics / Food and Drink / Household Goods: 18 months

Telecoms / Office Equipment: 2 to 3 years

Aerospace / Automo7ve / Energy / Pharmaceu7cals 5 years

On a con7nuous basis many see that 2 years TTM is an average across all 25 sectors:

We use this as the basis for the fund models as best average 7me to stock impact

Innova7on Ac7vity

Time to Market Innova7on

Impact on Business

This model is therefore focused on activity within companies 2 years ahead of many other analysis


A back-‐test of the Innova7on Leaders Fund against S&P 500 shows a clear outperformance over the past ten years

A value of 315 indicates that the porfolio has reached 415% of its ini1al value.

17

Compound Annual Growth Rate: 14%, Std Dev: 20%, Alpha: 12, Beta: 0.74


Thru the previous 1, 3 and 10 years an Innova7on Leaders Fund would have consistently out-‐performed major indices

Year ILF MSCI Global S&P500 TR NASDAQ FTSE

2002 (15%) (20%) (22%) (28%) (25%)

2003 37% 34% 29% 50% 14%

2004 31% 15% 11% 9% 8%

2005 15% 10% 5% 1% 17%

2006 26% 21% 16% 10% 11%

2007 25% 10% 5% 10% 4%

2008 (40%) (40%) (37%) (41%) (31%)

2009 54% 31% 26% 44% 22%

2010 31% 12% 15% 17% 9%

2011 1% (5%) 2% (2%) (6%)

2012 21% 6% 9% 13% 0%

10 Yr Average 17% 9% 8% 11% 5%

3 Yr Average 19% 5% 9% 9% 1%

18


On a quarterly basis over the past decade the performance of the modeled fund also has well above average returns

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Annual Total

2002 (9%) (13%) 7% (15%)

2003 (2%) 13% 11% 12% 37%

2004 7% 4% 4% 13% 31%

2005 0% (2%) 10% 7% 15%

2006 6% 0% 6% 12% 26%

2007 3% 10% 8% 3% 25%

2008 (8%) (5%) (15%) (19%) (40%)

2009 (7%) 25% 17% 13% 54%

2010 7% (10%) 24% 11% 31%

2011 6% 4% (16%) 9% 1%

2012 15% (7%) 9% 21%

Average 2% 2% 4% 7% 14%

19


The analysis also shows that the average 7me to impact of innova7on of 2 years is indeed an op7mal stock hold period

We have tested our 2-‐year hold period against other periods, and shown that it delivers the best results

0.00#

0.50#

1.00#

1.50#

2.00#

2.50#

3.00#

3.50#

4.00#

4.50#

1)Ap

r)02#

1)Au

g)02#

1)De

c)02#

1)Ap

r)03#

1)Au

g)03#

1)De

c)03#

1)Ap

r)04#

1)Au

g)04#

1)De

c)04#

1)Ap

r)05#

1)Au

g)05#

1)De

c)05#

1)Ap

r)06#

1)Au

g)06#

1)De

c)06#

1)Ap

r)07#

1)Au

g)07#

1)De

c)07#

1)Ap

r)08#

1)Au

g)08#

1)De

c)08#

1)Ap

r)09#

1)Au

g)09#

1)De

c)09#

1)Ap

r)10#

1)Au

g)10#

1)De

c)10#

1)Ap

r)11#

1)Au

g)11#

1)De

c)11#

1)Ap

r)12#

Factor'of'Ini,a

l'ILF'Value

'

Performance'and'Holding'Periods'

1)Year#

2)Year#

3)Year#

4)Year#

Holding#Periods#


Actual Fund Performance

21


While a back-‐test is impressive, for many real performance mapers -‐ in 04/2013 we created an actual investment fund

First 12 months growth: Innova7on Leaders Fund 22.4% S&P 500 19.7% MSCI Global Index 14.8%

22


Key Insights and Implica7ons

23


From this research programme to date we can see key insights and implica7ons for two core communi7es

For fund managers:

•  The results show out-‐performance against not only the main indices of the S&P 500 etc. -‐ but also against comparable global standards such as MSCI;

•  This is a very simple approach based on a single annual investment cycle that can be undertaken very efficiently from an administra7on perspec7ve;

•  The poreolio is suitably diversified across 20 different sectors and so reduces risk of over-‐dependency on one par7cular industry;

•  As all the stocks are in large, publically listed companied they are highly liquid;

•  Dis7nct from other major approaches, it is using informa7on that is 1 to 2 years upstream of tradi7onal financial data sets.

24


From this research programme to date we can see key insights and implica7ons for two core communi7es

For the innovaEon community:

•  Shown how a ra7o of innova7on output to input can be used to compare innova7on effec7veness between companies in the same sector;

•  Clearly demonstrated the link between innova7on leadership and sustained stock price growth;

•  Confirmed that innova7on leaders outperform their peers in terms of growth and value crea7on within an industry;

•  Shown this over 20 different sectors, it has proven that this is a widespread link and not one restricted to just a few select industries; and

•  Provides strong evidence in support of the argument for investment in building effec7ve innova7on capability.

25


For more informa7on:

Dr. Tim Jones Innova1on Leaders [email protected] +44 780 1755 054

26

Date post:	05-Dec-2014
Category:	Economy & Finance
Upload:	tim-jones
View:	436 times
Download:	2 times

Outperform the link between innovation leadership and sustained stock price growth 06 10 14 -...

Economy & Finance