innovation

A new index suggests that innovation is a valid measure of portfolio formation just like size, value, growth, and price, says Gerard Tellis. “Polls suffer from the tyranny of hype. Names that get early recognition get greater visibility in the press, which accentuates their popularity, leading to a positive cascade in their favor. A crucial aspect of this index is the link between innovation measured and current and future financial performance.” Credit: Courtesy, iStockphoto

USC (US)—Portfolios of top companies on a new index of innovative firms appear to perform better than the S&P 500—in up markets—and almost as well when markets are down. What’s more, the superior performance comes without excessive risk.

“The results suggest that innovation is a valid criterion of portfolio formation, just as the current criteria of size, value, growth, and price,” says Gerard Tellis, professor and director of the Marshall Center for Global Innovation at USC.

Tellis and Andreas Eisingerich, assistant professor at Imperial College, London, developed the index using a sample drawn from Fortune’s list of the 300 largest U.S. firms and Business Week’s list of the 100 most innovative firms, between 2004 and 2008.

The innovation index is based on five metrics that use objective market data as opposed to polling. All data are collected from public market sources by two independent research assistants under supervision of a statistician.

“Polls suffer from the tyranny of hype” says Tellis, “Names that get early recognition get greater visibility in the press, which accentuates their popularity, leading to a positive cascade in their favor.”

“A crucial aspect of this index is the link between innovation measured on this index and current and future financial performance,” says Tellis.

The superior performance holds not only in current year performance but also in one-year-ahead performance. “The ultimate test of an index is whether it can predict stock market performance a year ahead,” says Eisingerich.

For example:

  • In the five years between 2004 and 2008, an annual paper investment of $10,000 in a portfolio of top 20 firms in the Index yields a cumulative return that is 46 percent higher than the S&P 500 for concurrent years
  • For one-year-ahead performance the increase in returns is 23 percent for the top 20 portfolio over the S&P 500

The authors are updating the study to include 2009 and 2010 data and plan to test the performance of the index on real investments.

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