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.

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. 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. WWW.INNOVATIONLEADERS.ORG
1
Background
Context:
Measuring
Innova7on

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. 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. WWW.INNOVATIONLEADERS.ORG
2
The
Innova7on
Leaders
Analysis

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. 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. 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. 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. 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. WWW.INNOVATIONLEADERS.ORG
3
Modeling
An
Innova7on
Leaders
Fund

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. 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. 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. 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. 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. 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. 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. 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. WWW.INNOVATIONLEADERS.ORG
Actual
Fund
Performance
21

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. WWW.INNOVATIONLEADERS.ORG
Key
Insights
and
Implica7ons
23

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. 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. WWW.INNOVATIONLEADERS.ORG
For
more
informa7on:
Dr.
Tim
Jones
Innova1on
Leaders
1mjones@innova1onleaders.org
+44
780
1755
054
26