Innovation Investing Using An Evolutionary Lens Approach

Innovation Investing Using An Evolutionary Lens Approach

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Our economic environment driven by accelerating rates of change across all industries is driving investors to explore innovation-focused investment strategies.

An innovation-focused investment manager explains how innovation investing is different from growth investing, and why it should be considered a “third style of investing” with a primary allocation within portfolios.

Innovation is the new value driver in the markets that fundamentally forces a structural change in industries or “evolutionary shifts” offering both opportunity and risk for investors.

How this evolutionary lens differs from other innovation-focused investment approaches.

Galeanu Mihai/iStock via Getty Images [Investors intuitively know we live in an economic environment driven by an accelerating rate of change. What they seek, though, is guidance on how to navigate to the opportunities-the leading innovators-while avoiding getting hurt by this structural change we see across so many industries. Investors increasingly seek to harness the power of innovation to compound their wealth over time within their investment portfolios. This growing interest in innovation investing is driven by the knowledge that innovative businesses have become the primary engine of wealth creation across the economy and the markets.

Perhaps innovation-focused strategies should be a primary allocation within portfolios. If so, the natural question is how do investors-and their investment advisors-gain access to innovation investing?

With all this mind, I was thrilled to be introduced to Tom Ricketts , CFA, President & CIO of Evolutionary Tree Capital Management , an investment manager that specializes in innovation-focused, risk-managed, and concentrated strategies of publicly traded innovators using a long-term approach. In short, this firm is a specialist in innovation investing with a strong track record, and thus a thought leader on this important topic. He has a strong pedigree, having spent 22 years at a leading concentrated growth public equity firm, Sands Capital.

Inspired by nature’s evolutionary process, his new firm uses this powerful metaphor of generational change for understanding how strategic shifts-what they call evolutionary shifts, driven by innovation-can create investment opportunity. By harnessing next-generation innovations through portfolios of quality innovators, they seek to “lean into the future, not the past.”]

Hortz: Let us learn more about the rising importance of innovation for investors. Why is innovation investing becoming more prominent in the industry?

Ricketts: To understand how innovation investing differs from traditional growth or value investing, it may be helpful to provide some history. The traditional growth and value investing styles were developed during the early and mid-part of the 20th century, with value initially becoming the dominant style starting in the 1920s and 1930s. Think Graham and Dodd style investing. After World War II, the emergence of large-brand growth companies drove greater interest and participation by investors in growth style investing.

Today, however, the economy is profoundly different than that era. We are living in the digital age-what I refer to as the innovation economy -and it has become increasingly apparent that investment styles developed nearly a century ago may no longer meet investors’ needs or be quite as effective. This makes sense when you consider that innovative businesses, often with tech-enabled business models, are very different in their economics from business models built in the prior era. So, the two dominant styles-value and growth-which were developed to analyze older business models, are in my opinion getting stale, if not outdated.

For example, the economy has seen a massive shift away from tangible assets as the foundation of value-think of assets such as land, buildings, and inventory-over to intangible assets in our more intellectual-capital based economy. Intangible assets, such as intellectual property and patents, research and development investments, and technology and organizational investments, are the new drivers of value. In fact, Ocean Tomo, an IP-focused consultant, conducted a study of the S&P 500 and found that in 1975 the value of intangible assets as a percent of the S&P 500 value was only 17%, while tangible assets made up 83%. With the shift to our innovation-based economy of today, this has flipped. Now those numbers have reversed, as intangibles make up over 84% of the value, while tangibles have reduced to 16%, as of 2015. The intangible tail is now wagging the tangible dog.

The focus on intellectual capital-based investments, such as R&D or technology investments, is the driver behind the accelerating pace of change, generating a constant stream of innovative next-generation products and services. This, in turn, is spurring a desire among investors to tap into and benefit from this type of innovation. We call this focus on […]

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