You Snooze (on Applied Innovation), You Lose
Why You Want to Question Your Benchmark ETF-Portfolio
“The most dangerous assumption in investment management is the one that nothing changes,” Evelyne Pflugi, CEO The Singularity Group (TSG)
“Just because a company has been the biggest for years doesn’t mean that this will continue forever” — looking back in history, Evelyne notes that there have always been paradigm changes, most of them through rather unexpected players. There is often a point in time when the biggest companies have the cash to invest in new things, but do not get it right. Why? For long-term success, companies need to not only invest in fancy stuff, they need to make money. Longer term, share prices eventually adjust to earnings delivery. Analysts and strategies abound, little focus is given to applied innovation as a key driver of earnings growth. And as the major benchmarks grow heavier at the top, we ask a relevant question: are the heavy weights in the benchmarks also the owners of the next monetizable innovation?
In the 1980s and 90s, the top ten ranking of the largest companies by market capitalization was dominated by oil and car companies. Little did we know that companies like Microsoft and Apple were next in line to enter the world stage and would soon take over. Imagine your portfolio would have adapted to this elemental change as it happened? “Most people ask themselves the wrong questions. They either assume that big balance sheets guarantee constant growth or they try to predict innovation. At TSG, we don’t assume or predict, we measure and quantify innovation,” says Pflugi.
Because what made these companies the largest ones in the world — each in their era — was the convergence of innovations and the monetization of them by the few eventually making it to the top. How does that work? The Singularity Innovation Score (SI-Score) represents the percentage of company revenues that can be attributed to innovation. This classification builds the basis for the composition of the Singularity Index (SI), and it can be applied to any index and the according ETF.
How innovative is your ETF?
The SI-Score of the Singularity Index, by means of selecting for applied innovation companies, stands at 74%. Looking into traditional regional indices with an innovation lens, we note a significant discrepancy. By comparison, merely 26% of revenues within the allegedly innovation-heavy Nasdaq 100 can be attributed to innovation, the Swiss Performance Index (SPI) and the MSCI Europe on average only generate 11% of their revenues from innovation. Since its launch over six years ago, the SI has outperformed its benchmark index, the MSCI ACWI (SI score: 15), in terms of its exposure to innovation, reaching a difference of 59 percentage points in 2023.
This difference has materialized in substantially stronger revenue growth and pricing power — the hallmark properties of real, applied innovation and the real drivers of superior earnings. It’s no coincidence that the Singularity Strategy outperforms its reference index, the MSCI ACWI, by +33.8% since inception. In terms of market cap, country distribution, as well as position weighting, The SI’s composition is similar to the MSCI ACWI. By selecting for applied innovation, the SI doesn’t take country- or size bets, but merely concentrates on true secular growth potential.
Inside global equity indices
Taking a more granular look at traditional indices reveals which innovations are coming to fruition where (see Figure below). While the compared indices are most engaged in Big Data, the Singularity Index’s top sector is Compute Power. This is a reflection of the critical role semiconductors and their value chain play in the global digital economy. Runner up with increasing weight is Robotics, while Big Data ranks third with decreasing contribution over the past years. The Singularity Index’s relatively high and increasing exposure to Robotics allows the capturing of the immense value generated from innovations targeting Industry 4.0 factory automation and the shift toward more sustainable reindustrialization of Western economies.
The MSCI Japan stands out for its exposure to innovation revenues from Artificial Intelligence and Robotics. This landscape is evidence of the country’s strong competencies in advanced manufacturing technologies for automotives and electronics, which historically rely on robotics technology to drive efficiency and precision in production processes. With an aging population and shrinking workforce, Japan has long turned to robotics to address labor shortages and healthcare needs, further driving innovation and revenue in these sectors and securing its strong foothold as a global leader in these technologies. Aside from Japan’s traditionally recognized robotics players, our innovation screen picks up on the country’s underappreciated exposure to the semiconductor value chain, with front-end equipment makers such as Tokyo Electron Ltd. and test- and measurement equipment manufacturers including Advantest Corp.
Closer to home, the SPI reflects a bias toward Bioinformatics and Advanced Materials, evidence of Swiss companies’ ability to innovate in high-value sectors such as biotechnology (e.g. Lonza Group), specialty chemicals, and ingredients for traditional and novel food products (e.g., Givaudan). Notably, it is not the usual suspects such as Nestlé and Novartis that are driving the SPI’s innovation exposure.
Europe’s relatively lagging position in the digital technology sector, as reflected in its comparatively low exposure to AI, Big Data, Compute Power, and Networks & Connectivity, can be attributed to a variety of factors. The continent’s market is fragmented by diverse languages, regulations, and economic conditions, hindering the scalability of tech enterprises compared to more unified and competitive markets like the U.S. or China. Additionally, Europe’s stringent regulatory framework concerning privacy and data protection, though protective of consumer rights, has been a challenge for tech innovation and expansion. However, recent monetary incentives and a growing urgency to reindustrialize have brought renewed attention to the importance of innovation in key technological domains, potentially heralding a revival of European industrial innovation.
“When the largest companies in the world are not the main owners of the next wave of applied innovation, benchmarks are underweight secular growth and overweight cyclical growth. This is what keeps investors exposed to market cycles and tempted to time them. If you invest only in applied innovation, timing will be one less worry on your list.” Investors should be mindful of whether an ETF comprises genuine innovation, legacy business, or hyped themes — because ultimately, only revenues from innovation ensure above-average earnings growth longer term.
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 Reshoring(UBS AMC), the Singularity Small&Mid (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; see below) defines how much value listed companies are generating through applied innovation.
The Singularity Innovation Score (SI-Score): A company’s SI-Score represents the percentage of its revenues associated with innovation. It reflects a company’s ability to create innovation- versus commoditized -business and -cash flows, and its ability to participate in technological evolution. Changes in the SI-Score are just as important as the absolute value. A company’s SI-Score relative to its overall GICS sector can say a lot about the competitive standing and ability to gain and maintain market share. Regional SI-Scores can be used to evaluate the innovation power of markets as well as to gauge companies’ standing in different regions.
