How Innovative are Global Equity Indices?
We assessed the overall Singularity Score of the MSCI All Country World, the S&P 500, the Nasdaq Composite, and other equity indices and benchmarked them against the Singularity Strategy.
Capturing innovation requires — innovation. Traditional concepts of measuring innovation only take metrics such as R&D or patent spend, keywords in company reports, or media exposure into account. Keywords and reports are manipulable, R&D efforts and patents alone don’t guarantee success. That’s why these concepts don’t reflect engagement in applied innovation accurately. The Singularity Group (TSG) has established an innovation scoring system that determines listed companies’ true exposure to innovation since 2017. The Singularity Score represents the percentage of a company’s revenue associated with innovation.
The higher the score, the more a company participates in technological evolution and shapes progress. By assessing global equities’ Singularity Scores, we separate the Apples from the Nokias, the Blockbuster Videos from the Netflixes, and the Netscapes from the Googles. To define the relevant areas of innovation, we leverage the brainpower of our Singularity Think Tank, a group of renowned international technology experts. They help us navigate the innovation landscape and identify where money is being spent and where money is being made — the latter being of most crucial interest for investors.
Whereas it’s standard to benchmark performance, for the first time, TSG benchmarks common equity indices’ exposure to innovation — and compares it to the Singularity Index. What stands out: The degree of innovation has increased for all indices. This means that innovation is becoming more and more impactful for companies — and for investors. While the Singularity Strategy’s Singularity Score totals to currently 76%, the Nasdaq Composite comes second with 39%, followed by the S&P 500 with 31% and the MSCI All Country World with a score of 24%.
“Our strategy covers a global equity universe across industries and market caps — it selects for innovation cash flows and with that results in highly profitable portfolios”, says TSG CEO Evelyne Pflugi. “Compared to the global equity benchmark, the MSCI ACWI, its exposure to innovation differs by 52 percentage points. It’s no coincidence that the Singularity Strategy outperforms its benchmark by 53% since inception.” Stock selection matters: 92% of the companies or 276 titles in the Singularity Index are constituents of the MSCI ACWI which comprises 2700 positions. Given they are filtered with an innovation screen, this selection ultimately defines the progressive 10% of the market. “Tech is often seen as the risk-on bet in equity markets. From a survivability standpoint, this bucket however is likely the safest place to be”, adds Pflugi.
“If one fails to invest in the few crucial companies that generate extraordinary return contributions, investing in stocks will not be a pleasant long-term experience”, explains TSG CIO Gregory Hung citing a paper by Bessembinder et al. (2019). “And when it comes to stock selection, innovation scoring is at the core of our process. Only companies with proven revenue in relevant areas of innovation make it into the portfolio.”
A more granular snapshot
Whereas all companies in the Singularity Strategy naturally carry an innovation score, between 31% (Nasdaq Composite) and 59% (MSCI Asia ex Japan) of the companies in other indices show a Singularity Score of zero, i.e. are not active in innovation areas we find relevant, leading to relatively lower scores for these indices. What does this mean? Not everything that screams tech is innovation. While most listed companies will report innovation strategies, not all are able to implement and maintain them.
A revenue-based innovation score tells an important story, namely where which technologies truly come to fruition: For the Singularity Strategy, MSCI ACWI, Nasdaq Composite, and S&P 500, the largest two Singularity Sectors are Artificial Intelligence and Big Data. This positions these two technologies as the most advanced and most value creating in global/US centered markets for the time being. Asia ex Japan has a bias towards Big Data and Virtual/Augmented Reality, while Europe is tilted towards New Energy, Big Data and Bioinformatics. Politics and culture clearly play a role in the establishment of technologies within systems and companies. A look at our home base Switzerland shows no surprise: Bioinformatics, Neuroscience and Advanced Materials are the key areas of value creation in this market.
The weighted Singularity Score for the Singularity Strategy has generally trended higher over the last 3 years as companies capitalized on applied innovation, starting at 49%, bottoming out at 42% at the end of 2018, and reaching a high of 76% at the end of Q3 2021, averaging at 55%. This compares to the historical average of 15% for the MSCI ACWI over the last 3 years. But the market didn’t sleep, and mostly, innovators outperformed the rest: creating a steady improvement over time from a 10% score to now 24%.
With our bi-yearly rebalancing in progress, we continuously evaluate global companies’ ability to innovate and by that — to shape the world we live in. Impact investing comes in various forms, and we at TSG believe that if investors want to invest in sustainable change, they shouldn’t miss out on innovation.
