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:
- 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.
- 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.
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
Developed Market Knowledge Followers Performance By Sector
Emerging Market Knowledge Leaders Performance By Sector
Emerging Market Knowledge Followers Performance By Sector