Innovation Drives Value Creation and Evolution Across the Economy
Our philosophy is built on the belief that wealth creation is fundamentally driven by key innovations that power the evolution of technology, industries, and the economy as a whole. Everything evolves over time, and this progressive and sometimes discontinuous change can create multi-year growth and investment opportunities.
We live in an age where the pace of innovation, and thus evolution, is accelerating. We believe a focused research effort on leading companies developing important innovations, and benefiting from secular trends and evolutionary shifts, enables us to build high-quality, concentrated portfolios that are positioned to create long-term value for our clients.
Most investors intuitively sense the power and impact of innovation in their lives, but struggle to find appropriate ways to invest. Our objective is to provide an attractive pathway for investing in profound innovation and evolutionary shifts.
The evolution of a technology starts with its invention. And invention – from the light bulb to the airplane – can be traced back to the discovery of scientific or conceptual principles that provide an explanation of a phenomenon or effect. The light bulb, for example, takes advantage of the scientific concept of passing electricity through a filament to produce light. Humankind has progressively learned to harness various phenomena across our world, developing the basic science foundation that eventually spawns entire new industries.
Searching for Investable Innovation
Not all innovations or secular trends are investable or profitable. Some innovations never develop into mainstream offerings; in other cases competitors imitate the innovation, so no one firm is able to earn sustainable above-average profits or returns. As a result of this dynamic, we search for what we call investable innovations, where imitation is difficult and a standout industry leader can potentially capture the long-term revenue growth and profit potential as the industry grows over time.
We define investable innovations as those innovations that we believe are ready for mainstream adoption, cannot be easily replicated or imitated by competitors, and where the value being created can be captured by the innovator. Examples of innovations that we believe contribute to sustainable growth, often developed in combination, include technological innovation, product innovation, service or experience innovation, process or cost innovation, brand or marketing innovation, organizational innovation, and/or business model innovation.
It is important for companies developing innovations to create barriers to competition. Therefore, we look for leaders building what we call innovation moats, such as brands, patents, network effects, switching costs, and scale. Ultimately, we build innovation-focused, concentrated-growth portfolios around a select group of leading innovators that meet our investment criteria.
Our Core Beliefs
- Wealth creation is driven by important innovations that power the evolution of technology, products, services, business models, industries, the economy, and society as a whole. Our firm was founded to focus on these dynamics and identify the leading innovators developing and driving these important changes across the economy. This is our firm’s singular focus for adding value for our clients.
- Everything evolves, and in this evolutionary process lies investment opportunity. This progressive and sometimes disruptive evolution creates long-term investment opportunities under select conditions. We believe we have identified these conditions and built them into our investment strategy, criteria, and process.
- While innovation and industry trends are the drivers of evolution, and, ultimately, economic growth, not all innovations or trends are investable. In fact, most are incremental and copied by competitors or never get off the ground, having been hyped before they were ready for the mainstream. As a result, we search for what we believe are investable innovations and durable secular growth trends, looking for innovative companies that meet our stringent set of investment criteria.
- As industries grow and evolve over time, they develop along different structural paths, most ending up highly competitive, with fewer evolving along a less competitive path. We focus on the latter. Most industries develop into highly competitive ones where profits are competed to low levels, industries we strive to avoid. However, some industries with certain unique characteristics can evolve along a more attractive path, where the ultimate industry structure leads to one or a few companies capturing a significant portion of the value they create for consumers. We focus our research efforts on industries experiencing high levels of innovation and developing along an attractive evolutionary path. Given the rarity of these types of businesses, we prefer to be selective, owning a concentrated portfolio of our best ideas.