Knowledge Leaders Are Outperforming YTD

In our white paper “The Knowledge Effect: Excess Returns Of Highly Innovative Companies”, we identified a stock market pricing anomaly in highly innovative companies.  The tendency of stocks of highly innovative companies to experience excess returns can be traced back to two main factors:

  1. A surge in the pace of knowledge produced catalyzed by the release of the first commercially available semiconductor in 1971. Due to the cumulative nature of knowledge, this acceleration has resulted in an exponential increase in humankind’s total knowledge.
  2. A mandate by the US Financial Accounting Standards Board in 1974 which ruled that companies must expense knowledge investments in the period incurred. This deprived investors of relevant financial information on corporate knowledge spending at the dawn of this massive surge in pace of knowledge production.
Based on 20 years of academic research, we have captured the Knowledge Effect by using a proprietary process designed to overcome the informational shortcoming of traditional financial statements. As regular readers know, we view the world through an “intangible-adjusted” lens. We have created two indexes, that are priced daily, to track the performance of Knowledge Leaders. One index tracks Knowledge Leaders in the Developed Markets and the other tracks Knowledge Leaders in the Emerging Markets. In the first chart below, we plot our Gavekal Knowledge Leaders Developed World Price Index (red line) against the MSCI World Index (green line).  It has outperformed the MSCI World Index by a little over 3% YTD. In the second chart below, we plot our Gavekal Knowledge Leaders Emerging Market Price Index (red line) against the MSCI Emerging Market Index (green line). So far our Gavekal Knowledge Leaders Emerging Market Index has outperformed the MSCI World Index by a little over 2% YTD.

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Another way we can look at performance is by splitting up the global equity universe into companies that follow a strategic innovation strategy (Knowledge Leaders) and companies that follow a strategic mimicking strategy (Knowlegde Followers). Developed Market Knowledge Leaders have returned on average about 9.2% YTD while Developed Market Knowledge Followers have returned on average about 6.9%. In the emerging markets, Knowledge Leaders have returned about 9.1% YTD while Knowledge Followers have returned about 8.6% on average YTD.

Developed Market Knowledge Leaders Performance By Sector
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Developed Market Knowledge Followers Performance By Sector
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Emerging Market Knowledge Leaders Performance By Sector
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Emerging Market Knowledge Followers Performance By Sector
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