A key competitive advantage some companies have over others is the level of innovation they bring to their products and services that make life easier for large segments of the population globally.
Across sectors and industries, innovation can take the form of a new technology, an offbeat production process, a disruptive product, changes in operational procedures or even a transformational role played by a firm in the market. And investors in innovative companies have managed to gain enormous value and wealth over the years.
Nippon Life has rolled out a new ‘innovation fund’ to gain from this opportunity. The new fund offer (NFO) will be open till August 23.
Here’s more on what constitutes innovation and whether the fund makes investment sense in the current environment.
Why innovative companies are special
In a broad sense, innovation is classified into three types.
- Product or service innovation, which involves developing completely new and disruptive ones — examples include the no-cost EMI, small-ticket and instant loans given by banks, non-banking financial companies (NBFCs), or fintechs using deep analytics and technology platforms.
- Process innovation — for example, a speciality chemical company using research to develop more useful products, improve productivity, generate cost-efficiency, and more.
- A business that is innovative — for instance, a restaurant review platform that transformed into an online food services platform.
Innovation can span many industries such as power, pharma, FMCG, auto, technology services, telecom, industrial automation and financial services, among others. These could be using the latest in AI, robotics, 3D printing, big data, blockchain and so on.
Typically, innovative companies are likely to have higher revenue growth that outstrips the industry they operate in, a huge market share, superior gross margins, and easy access to technology and capital.
An analysis by BCG shows that innovation advantage fetches companies 17 per cent higher return potential (BCG Most Innovative Companies top 50 vs MSCI World Index) and 20 per cent higher valuation. Around 56 per cent of industry leading companies fell back in the last decade and there has been a 50 per cent decrease in the age of new disrupters — decrease in the average age of S&P500 companies today, compared with 1989 (19 vs 37 years old).
What is the NFO about?
Nippon Life Innovation Fund will invest in companies across market caps that have a lower leverage and higher profitability, with the bias towards growth firms. The fund will have concentrated exposures. Focus will be on fintech, speciality chemicals and pharma, auto and auto ancillaries, internet-based businesses, MNCs, and the like.
It will be benchmarked to the Nifty 500 TRI. With quality as a key criterion, the stocks that make it to the portfolio aren’t likely to be inexpensive.
What should investors do?
Currently there are three global innovation ‘fund of funds’ offered by Axis, DSP and Kotak. All three have a one-year track record and returns of 8.5-18.5 per cent.
ICICI Prudential Innovation Fund was rolled out only a few months ago and is more domestic-focused.
For the Nippon Life Innovation Fund, given the innovation and technology angle, we would have liked to add a bit of overseas flavour with exposure to companies in cutting-edge spaces in the US. But the restrictions on investing in global funds and adverse tax treatment poses a difficulty.
As the theme itself is nascent, with not too many options around, investors with a high-risk appetite can consider the Nippon Life Innovation Fund for small SIPs (systematic investment plan) as part of diversifying their satellite portfolio.