Benefiting From Innovation Related Opportunities

Innovation is about imagining the future and filling the gaps. World over, companies are dealing with cutting-edge innovations and making things better. As an investor, you have an opportunity to tap the potential of innovation and grow your portfolio by siding up with enterprises that adopt innovative strategies. To do this, you do not need to be a venture capital investor or a wealthy individual. The humble mutual fund route offers you the same opportunity for a low ticket size, thus again democratising wealth creation opportunities.

Eye on Innovation — Conventional thinking usually equates innovation with technology alone. But, truth be told innovation can be as simple and yet profound as discovering zero, inventing the wheel and as complex as sending tourists to space or rearranging DNA to weed out potential diseases. It is undoubtedly a wide scope, but the impact is telling nonetheless. From slow-moving locomotives to high-speed Vande Bharat trains—this is innovation right in front of our eyes. The steam engine, internal combustion engine, telephone, automobile, electricity, computers, internet, artificial intelligence, energy storage, robotics and blockchain are the milestones of innovation in just the last 300 years alone.

Innovation can be broadly divided into three buckets: One, radical innovation that replaces an existing product with a new and better one such as smart phone replacing the camera. Two, disruptive innovation brings new affordable products and services such as fridges, washing machines and air-conditioners to a large set of customers. Three, incremental innovation where an existing product or service, etc. is upgraded, as for instance, looking at the evolution of TVs from CRT to LED.

Survival of the Most Innovative — Innovating companies outperform the non-innovating players as the former fare better in terms of organic growth. This provides better opportunities for wealth creation. The median age of S and P 500 top 10 firms in 2,000 was 85 years, but the same in 2018 came down to 33 years and is estimated to go down to 12 years by 2027. Unicorn start-ups today have an average age of just six years, and because innovation is the bulwark, wealth creation happens at a fast pace. For instance, the five-year valuation growth in post-IPO unicorns is 8.7 times, an attractive opportunity for those who participated in the journey. 

The desire to be innovative is no longer a choice. It’s a necessity. The undercurrents such as a pandemic, geopolitics and inflation favour innovation. The importance of supply chain management was best realised during the pandemic, leading to good scope for innovation. Uncertainties around the RussiaUkraine war and US-China tensions have nudged countries to look for better options to reduce dependencies. As a result, innovation today is happening in power, speciality agrochemicals, pharmaceuticals and healthcare, FMCG, automotive, telecom, industrial automation and financial services, to name a few.

For instance, low-cost tickets, punctual timings, decent space in seats, no-frills and better connectivity led to major upheaval in airlines. Affordable SUVs, fuel efficiency, latest accessories and value for money revolutionised the passenger automotive space. Retailing has never looked back on when conventional supply chain management evolved into modern supply chain management. The chemical industry made tectonic shifts when inputs were reduced at each step using innovation, leading to an exponential rise in production yield.

Ways to Capitalise — Given the scope and massive potential of innovation, it is important to select the right vehicle to play this theme. Here, one of the leading mutual funds in the country has an interesting offering in this space. Following a bottom-up approach, the scheme will take exposure to companies involved in products, services and solution-related innovation. It is market-cap agnostic, which opens the door to numerous possibilities. The portfolio may have a tilt towards a quality or growth investment style, which does not overlook great businesses just because they trade at premium valuations due to their innovation.

As globally and domestically, central banks seem to approach the fag end of the interest rate hike cycle, growth stocks may perform well, thus benefitting the scheme. The focus on above-average growth, low debt, asset-light business models and higher margins maintains a culture of innovation. The offering’s lo-glo (local-global) approach ensures tapping some themes or opportunities of the future which may not much available in domestic markets currently through international securities. Given the long history of the fund house identifying the next big theme, this definitely is an interesting theme to watch out for over the years. 

The writer is Mutual Fund Distributor ■ Email : rajajian@rediffmail.com