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Outperform the link between innovation leadership and sustained stock price growth 06 10 14 - ispim montreal lr

A talk given in Montreal in 2014 sharing research that proves the link between successful sustained innovation performance and stock price growth. Includes details of both the core Innovation Leaders analysis and also the modelling of a fund based on portfolio of the identified companies that delivers 14.5% CAGR over a decade.

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Outperform the link between innovation leadership and sustained stock price growth 06 10 14 - ispim montreal lr

  1. 1. 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      
  2. 2. 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  
  3. 3. WWW.INNOVATIONLEADERS.ORG 1  Background  Context:  Measuring  Innova7on  
  4. 4. WWW.INNOVATIONLEADERS.ORG 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  
  5. 5. WWW.INNOVATIONLEADERS.ORG 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  
  6. 6. WWW.INNOVATIONLEADERS.ORG 2  The  Innova7on  Leaders  Analysis  
  7. 7. WWW.INNOVATIONLEADERS.ORG 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  
  8. 8. WWW.INNOVATIONLEADERS.ORG 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  
  9. 9. WWW.INNOVATIONLEADERS.ORG 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
  10. 10. WWW.INNOVATIONLEADERS.ORG 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  
  11. 11. WWW.INNOVATIONLEADERS.ORG 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  
  12. 12. WWW.INNOVATIONLEADERS.ORG 3  Modeling  An  Innova7on  Leaders  Fund  
  13. 13. WWW.INNOVATIONLEADERS.ORG Over  the  years  many  have  proposed  links  between   innova7on,  organic  growth  and  increased  market  value   13   Organic   Growth   Sustained   Innova1on   Inorganic   Growth   Market   Value  
  14. 14. WWW.INNOVATIONLEADERS.ORG 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  
  15. 15. WWW.INNOVATIONLEADERS.ORG 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
  16. 16. WWW.INNOVATIONLEADERS.ORG 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
  17. 17. WWW.INNOVATIONLEADERS.ORG 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  
  18. 18. WWW.INNOVATIONLEADERS.ORG 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  
  19. 19. WWW.INNOVATIONLEADERS.ORG 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  
  20. 20. WWW.INNOVATIONLEADERS.ORG 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)Apr)02# 1)Aug)02# 1)Dec)02# 1)Apr)03# 1)Aug)03# 1)Dec)03# 1)Apr)04# 1)Aug)04# 1)Dec)04# 1)Apr)05# 1)Aug)05# 1)Dec)05# 1)Apr)06# 1)Aug)06# 1)Dec)06# 1)Apr)07# 1)Aug)07# 1)Dec)07# 1)Apr)08# 1)Aug)08# 1)Dec)08# 1)Apr)09# 1)Aug)09# 1)Dec)09# 1)Apr)10# 1)Aug)10# 1)Dec)10# 1)Apr)11# 1)Aug)11# 1)Dec)11# 1)Apr)12# Factor'of'Ini,al'ILF'Value' Performance'and'Holding'Periods' 1)Year# 2)Year# 3)Year# 4)Year# Holding# Periods#
  21. 21. WWW.INNOVATIONLEADERS.ORG Actual  Fund  Performance   21  
  22. 22. WWW.INNOVATIONLEADERS.ORG 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  
  23. 23. WWW.INNOVATIONLEADERS.ORG Key  Insights  and  Implica7ons   23  
  24. 24. WWW.INNOVATIONLEADERS.ORG 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  
  25. 25. WWW.INNOVATIONLEADERS.ORG 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  
  26. 26. WWW.INNOVATIONLEADERS.ORG For  more  informa7on:   Dr.  Tim  Jones     Innova1on  Leaders   +44  780  1755  054   26