Only 36 Companies within the Nasdaq 100 are Truly Innovative
While many people associate the Nasdaq 100 (NDX) with innovation, investors in this index, along with being exposed to innovation leaders, are in fact equally exposed to less innovative — and less profitable — companies. By applying our unique innovation scoring approach to the NDX, Singularity US Innovation Leaders (NASDLK) offers a more concentrated portfolio of only the most innovative constituents within it — a portfolio that actively moves along with the changes in the innovation landscape and delivers attractive outperformance.
The Actively Managed Certificate (AMC) NASDLK selects companies out of the NDX with a Singularity Innovation Score (SI-Score) of 10 or higher. By choosing and overweighting the innovative part of the NDX (see Figure 1) and by not being exposed to the rest of the index (companies with an SI-Score < 10), NASDLK consistently beat its benchmark in all calendar years since launch. An exception was 2022 — a year in which investors disproportionately punished growth equities, amongst which Applied Innovation companies reside, and flocked to defensive names. The subsequent strong recovery in 2023 and forward, proved long term innovation investors right and emotional market participants wrong. Since inception of the Singularity Strategies, our selection of Applied Innovation companies within the NDX returned 295.9% against 140.2% for the rest of the index.
As Figure 2 shows, this outperformance in return reflects the NASDLK’s consistent ability to capture and overweight companies generating above average earnings growth. Notably, whereas Applied Innovation companies within the NDX delivered normalized Earnings Per Share (EPS) growth of 293.2% since inception of the Singularity Strategies, the rest of the companies within the NDX delivered a mere 4.3%
Separating the Wheat from the Chaff
Currently, companies within the NDX jointly generate revenues totalling USD 4.0tn., out of which USD 630bn. qualify as Applied Innovation revenues. Selecting those companies that account for innovation revenues in the benchmark pays off, yet separating the wheat from the chaff is no easy feat, especially given that innovation is in constant flux (see Figure 3). Whereas in 2017, about two-thirds of NDX weight qualified as innovative, by number of companies only one-third fell into this category. The period between 2018 and 2021 saw an increase in the proportion of innovative companies to over one-half of the names in the NDX. More recently, the number declined again. Since the launch of the Singularity Strategy, H1 2023 marked the first time that Applied Innovation companies comprised less total weight than other companies, making selection all the more important. At present, 36 companies representing 49% of the weight of the NDX qualify as innovative based on TSG’s unique expert-led innovation screening methodology.
Aside from exits due to the NDX’s own recomposition, changes in weight allocation reflect TSG’s active selection of innovations as they move along the trajectory from future opportunities, to current value creators that are selected for the Singularity Strategies, and finally, commoditized or otherwise standardized applications that fall out of our selection.
Examples of major moves accounting for shifts in weight allocation include the exponential application and subsequent commoditization of recommender systems that enable digital platform users to find interest-based content effectively. This technology played a key role in the functionality and rapid growth of social media and streaming media platforms. Companies monetizing this key innovation grew to become the largest in the world and contributed immensely to portfolio performance. However, over time, these systems became an industry standard and lost their role as a value differentiator, saturating penetration in the post-pandemic era. As a result, recommender systems moved out of focus from our innovation timeline in 2022, leading to the exclusion of Netflix and Meta Platforms from our scored universe, along with score reductions for Amazon (SI-Score: 16) and Alphabet (SI-Score: 11).
Other innovations to have moved out of focus include electric vehicle manufacturing, leading to Tesla’s exit early 2022, electronic payment systems early 2023, leading to the exclusion of PayPal, and more recently, simple wearable devices such as smart watches, rings, and wristbands, leading to the exclusion of Apple.
Dynamics in weight allocation were also driven by the growth of portfolio companies, among which those active in the design of data center chips (e.g., Nvidia, SI-Score: 100) and companies in the Cloud services and infrastructure space (e.g., Microsoft, SI-Score: 67; Oracle, SI-Score: 93), all of which have seen a boost in demand during the recent AI boom. Sebastian Guenther, Singularity Think Tank expert for Big Data and Innovation Strategist at Accenture, observes that
“AI has significant potential to provide valuable insights for businesses and to drive innovation and efficiency, particularly in finance, supply chain management, and pharma. However, many companies still rely heavily on on-premise IT solutions, and thus have to transform their core data infrastructure before they can start implementing and reaping the benefits from new technologies. The challenge lies in making these infrastructures trustworthy and secure, which is a key differentiator for big Cloud providers.”
The inclusion of new companies accounts for further dynamics, in particular in the semiconductor value chain, which entered and then grew within the portfolio during the Singularity Strategy’s lifetime. Examples of selected Applied Innovations include the entry of Electronic Design Automation (EDA) software producers including Synopsis (SI-Score: 72), front-end equipment manufacturers such as LAM Research (SI-Score: 100), and world-leading photolithography machine producer ASML (SI-Score: 100). Differentiating the NDX and the NASDLK in the semiconductor value chain is the latter’s lower exposure to memory semiconductor manufacturing and an overweight on advanced chip design for AI workloads and edge computing.
Viewing the current portfolio by Singularity Sector (see Figure 4), the reallocation of weight from the non-innovative part of the NDX to its innovative companies roughly doubles exposure in each of the Singularity Sectors. Doing so allocates the majority of portfolio weight to Big Data (41.9%), Compute Power (31.8%), and Artificial Intelligence (12.1%). This reflects that among the NDX’s currently most innovative players are companies dominating the value chain for Applied Innovations in Cloud infrastructure and tools, advanced semiconductors, and productivity-enhancing AI end-applications.
Selecting Applied Innovation Companies Matters Across Market Caps
Selectivity matters across market caps. Historically, Mega Caps in the NDXhave, by and large, all qualified as Applied Innovation companies, reflecting the diversified nature of Mega Cap companies (see Figure 5). More recently, however, the number of Mega Cap companies within the NDX that do not qualify as Applied Innovation companies has increased, showing the growing importance of selectivity in this market cap range.
Similarly, picking the right names within the Mid- and Large Cap ranges of the NDX has become increasingly important if one seeks exposure to smaller, budding innovative companies. Among the Large Cap companies, only 15 out of 49 names currently qualify as Applied Innovation companies. In the Mid Cap range, 14 out of 40 names are innovative.
About The Singularity Group
The Singularity Group (TSG) quantifies Applied Innovation for investors in listed equities. TSG is the initiator of the Singularity Index™ (Bloomberg ticker: NQ2045), a global, all-sector benchmark and gold standard for Applied Innovation. The Singularity Strategies include The Singularity Fund (UCITS Lux), Singularity US Innovation Leaders (AMC), Singularity Small&Mid (UBS AMC), Singularity Reindustrialization (UBS AMC), and LUKB Smart Farming (AMC). The Swiss investment advisory boutique works closely with the Singularity Think Tank, a network of entrepreneurs and academics with deep insights into innovation value chains. Their input forms the foundation of TSG’s proprietary innovation scoring system that quantifies the engagement of companies within a set of curated Singularity Sectors worldwide across all market capitalizations and industries. The Singularity Innovation Score (SI-Score) defines how much value listed companies are generating through Applied Innovation.
More: singularity-group.com
