Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 105
Global Innovation team’s investment process
The Global Innovation team believes innovation is a major driver of
stock returns, as has been demonstrated by academic evidence and
reflected in the team’s own extensive experience.
The team invests in innovative companies with strong growth and
barriers to competition. It seeks innovation that creates significant
value for customers by driving down the prices or driving up the
quality of products. Innovative companies that achieve this can
create strong customer demand and a competitive advantage,
driving strong stock returns.
The team selects innovative companies through the following fourstage process:
STAGE 1: The team sets its investible universe to only those companies
that are listed, liquid (with a market capitalisation above $1billion at
the time of purchase) and have the resources to innovate (based on
metrics of financial strength).
STAGE 2: The team manages the Global Innovation 200 watchlist,
a list of the most innovative companies around the world across all
sectors and regions.
Every company that makes it onto the list has four attributes:
1. Innovation: Creates value for customers by driving down the
prices or driving up the quality of products.
2. Barrier: Has strong barriers to competition to capture value for
shareholders.
3. Management: Has good management with the right incentives to
execute.
4. Return on invested capital: Can convert its investments in
innovation into cash.
The team adds approximately 10-20 new companies to the Global
Innovation 200 watchlist each year and removes approximately
10-20 laggards.
STAGE 4: The team manages the funds based on the following
principles:
• Stock weights are determined by each stock’s current valuation
upside, risk and contribution to the diversification of the portfolio.
• Portfolio fundamentals are monitored through management
meetings, company earnings results and other communication
and industry research. Risks are monitored and managed using
statistical risk models.
• The team’s typical intended holding period is three to five years.
Stocks are sold for three reasons: they hit their target price,
a better opportunity is identified on the watchlist or there is a
breakdown in fundamentals.
The team invests across the innovation life-cycle of companies. It
invests in ‘innovative leaders’ – best-in-class companies continually
innovating to stay ahead, generating income and capital growth for
shareholders – for income and capital growth.
This approach to investing for income differs from the traditional
approach of investing in companies with high dividend yields.
The team believes many such companies today face considerable
structural challenges due to the pace of innovation and change in
the economy and, whilst their high yields are otherwise attractive,
present significant risk to investors. The team’s approach invests in
lower-risk companies delivering both income and capital growth.
The team invests in ‘innovative disruptors’ – innovative companies
with significant growth opportunities – for high long-term capital
growth. This approach to growth investing differs from that of general
growth investing, which groups innovation alongside other sources
of growth. The team believes innovation can create more robust
growth with higher long-term profitability, as evidenced by higher
returns on invested capital for investments in innovation, enabling
strong long-term stock returns.
The team believes the technology sector is the most innovative sector
in the economy and can achieve particularly high returns applying
its philosophy investing in this sector. It believes the best technologies
dramatically drive down costs for companies and the prices of
products for consumers, growing the market, creating a competitive
advantage and driving strong stock returns.
The team takes an evidence-based approach to investing and is
guided by a robust academic literature studying the positive effect of
innovation on company fundamentals and stock returns.
STAGE 3: The team identifies the price it is willing to pay for a
company using a 10-year discounted cash flow model. The hurdle
to invest is an anticipated 15% annual compound return. As part of
valuation the team conducts a risk assessment, including ESG factors.
Responsible Capitalism Report 2023 - 105