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Strategic Allocation To Innovation: A Comparison To Emerging Markets



  • We believe a strategic allocation to innovation probably will evolve into a sub-asset class.
  • ARK has identified five major innovation platforms and 14 transformative technologies that are likely to provide significant growth and diversification benefits.
  • An allocation to innovation has the potential to increase risk-adjusted returns in global equity portfolios in the long term.

By Renato Leggi, CFA, CAIA, Client Portfolio Manager

We believe a strategic allocation to innovation probably will evolve into a sub-asset class, as did the "niche" strategy of the 1980s - emerging markets. In the late 1980s and early 1990s, investors had little, if any, exposure to what has evolved into 13% of the global equity market capitalization and 60% of global gross domestic product (GDP) on a purchasing power parity basis.[1] In 1981, while proposing a global public equity fund for developing countries, Antoine van Agtmael of the International Finance Corporation (IFC) coined the term "emerging markets". The IFC began tracking total return data for 10 developing markets and discovered "attractive results…making a good case for increased investment."

Initially, many investors resisted exposure to developing markets based on the volatility associated with geopolitical uncertainties, corporate governance, and liquidity. With time, however, they observed low correlations between and among the stock returns of the various developing nations, as well as growth rates that far surpassed those in the developed world. Investors concluded that broad-based exposure to developing markets offered enough diversification to minimize idiosyncratic risks and lower volatility, resulting in higher risk-adjusted return.

Launched in 1988, the MSCI Emerging Markets Index marked the beginning of a new investable sub-asset class for public equity portfolios. The index included only 10 developing nations but enabled allocators to track the local equity markets of rapidly growing emerging nations.

During the late eighties and early nineties, allocators that made a strategic decision to reallocate some of their global equity portfolio from developed markets to emerging markets enjoyed the benefits of increased relative returns. As shown in Figure 1 below, emerging markets stocks, represented by the MSCI Emerging Markets Index outperformed developed markets stocks, represented by MSCI World Index:

Source: ARK Investment Management LLC, 2020 | Data Source: Bloomberg

This article was written by

ARK Invest holds a precision lens on thematic investing. We focus on disruptive innovation and identify themes that will enhance productivity and create wealth. ARK seeks to research and invest in technologically enabled innovation that cuts across economic sectors and changes the way our world works. Our current themes include: Industrial Innovation, Web x.0, and the Genomic Revolution. Innovation is inevitable, and ultimately wins out in an equity market. Our research is made available on our website and we invite everyone to participate in our discussions around thematic investing in innovation. For more information please visit: http://ark-invest.com

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Comments (4)

Having followed ARK's trends for about a year, I continue to feel that a higher portion of their stock portfolio should somehow include:
- concepts like which are the innovating companies that have an embedded annuity revenue stream in their business model. I feel this criteria will help investors who like to have recurring revenue/profit/dividend stream companies within their ETF selections;
- also, innovational technology "enabler" companies, esp. in 5G, computer storage/memory should be included, as the pure play innovators cannot keep going without these companies also 'being on their same boat'.
ProfessorSmatt profile picture
I didn’t check all the ETFs Ir stocks but I would be careful of Chinese stocks. The SEC roundtable is coming up on how to handle Chinese stocks and their accounting ect. Plus the transparency bill in the house is on Pelosi desk.

Was there anything above that include Chinese stocks? I’ll double check
The Snowball Effect profile picture
Invest in innovation in emerging markets for the double win 😀
Interesting ideas. I see SQ and TWTR made your list. I tire of the Dorsey bashers on this website. I will research some of the companies mention that I'm not real familiar with. Thanks!
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