The Alpha of Applied Innovation
Following our analysis of the benefits of selecting a diversified approach to innovation investing in our Annual Report, it is worth turning to The Singularity Group’s (TSG) original hypothesis with the question: “Why does selecting for innovation revenues make sense for investors?”
TSG was founded on the logic that in the fierce competition between companies, applied innovation is a key factor for long-term success and sustainability. The ability to successfully apply innovation, meaning to move innovation efforts and cash outflows (Capex and R&D) into innovation revenues (cash inflows), increases a company’s ability to grow profitably and generate long-term value for investors. Additionally, it breeds resilience in the face of market changes. Leaders in applied innovation attract the best talent, stay ahead of the competition, create new markets and business opportunities, and capture superior pricing power.
Not all innovators are created equal
Identifying applied innovation is critical because not all innovations are created equal. Some innovations have a high growth potential and can completely transform multiple sectors in various ways, while others are marginal improvements that have little impact on a company’s competitiveness. Then there are numerous innovations that eat up R&D investments only to remain shelved for a lack of customer demand, technological maturity, or financial viability.
This is where our unique innovation screening approach comes into play. Using expert input from the Singularity Think Tank, we identify the applied innovations and technologies that enter the market, grow revenues, and shape the world today. Companies spearheading these products and services receive a Singularity Innovation (SI) Score representing the actual innovation-associated revenue, which then serves as the basis for constructing our portfolios. Delivering actual revenues from innovation is the true validation that differentiates the Singularity Group approach from the crowd of investment strategies that seek innovation, but focus too early, too late, or in overly peripheral areas to achieve the consistent earnings out-performance of TSG’s approach.
There are two categories: applied innovation leaders — and others
Based on TSG’s ongoing innovation screening, the investment universe can be divided into two categories: applied innovation leaders — those deriving at least 10% of their revenues from innovative products and services (SI-Score over 10) — and others. With this classification and our five-year track record, we can answer a simple but critical question: Is there an Alpha for applied innovation?
The answer is a resounding yes. Since the launch of the Singularity IndexTM in December 2017, the growth in earnings per share of companies with an SI-Score over 10 in major global and regional indices significantly exceeded that of “non-innovative” companies versus any major benchmark one chooses (see Figure 1). This resulted in a net outperformance which can be viewed as the Applied Innovation Alpha (Figure 2).
As may be expected, the stronger the earnings growth, the stronger the performance. More surprisingly, however, is that for indices that are generally thought of as having a strong innovation focus, such as the Nasdaq, our innovation screening delivers the highest alpha. Looking at earnings growth, the “non-innovative” portion of the Nasdaq is notably negative.
This picture shows that for investors looking to benefit from innovation, it is crucial to ensure that innovation efforts ultimately materialize in higher revenues and profits. Not all innovations are created equal.
Looking ahead, in a less multiple-expansive market environment, investors are increasingly focused on earnings. A score for realized, applied innovation may be the key factor missing in their screen.
About The Singularity Group
The Singularity Group (TSG) makes applied innovation investable 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 Reshoring (UBS AMC), and the Singularity Small&Mid (UBS AMC). The Swiss investment 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 Score defines how much value listed companies are generating through applied innovation.
