Innovation is about finding new ways to drive prices down for consumers or enhance the quality of a product or service, and products with those characteristics may be able to grow regardless of the wider economy, offering diversification for investors and clients.
The pandemic had an enormous impact on all facets of society, but amid the chaos that once-in-a-lifetime event was a catalyst for the rise in both client interest in the next generation of big ideas, and in the paceat which companiesare bringing those ideas to market.
Jonathan Curtis, senior vice president - director of portfolio management of Franklin Equity Group at Franklin Templeton, says as a result of Covid-19, companies, governments, consumers, and healthcare providers were forced to significantly increase their digital acumen and innovation cycles to navigate what was a difficult time.
Curtis adds: “We believe companies, governments, and healthcare providers are in the early days of learning how to use technology-based innovation to better understand their customers, business processes, and patients and then technology-based innovations to radically transform how their businesses, industries, and practices operate and provide care.
“Within this opportunity we are looking for new opportunities across artificial intelligence, cloud computing, fintech, digital media transformation, energy transformation, the Internet of Things, and the life sciences.”
So for those investing in innovation funds, what should their approach be in a higher rate environment and how important are valuations and liquidity?
Nicholas Hyett, investment analyst at Wealth Club opines, funds with innovation in the name usually fall into three broad categories: those backing small, often private businesses, private equity funds backing larger but fast-growing businesses, and mainstream funds backing larger growth businesses listed on the stock market.
The category could include mainstream stock market funds, specialist venture capital funds like venture capital trusts, and earlier-stage private equity funds.
While funds branded as innovation often specialise in a particular sector – with technology, healthcare and biotech being particularly popular.
Meanwhile, there are broader funds that try to avoid tying themselves to particular sectors.
According to Hyett, funds in this space typically back businesses whose products or technologies that are heavy on promise and lighter on profit -and so are at the riskier end of the spectrum.
He adds: “As part of a well-diversified portfolio, innovation funds have the potential to enhance returns. Tax efficient innovation funds, like VCTs and EIS funds, offer tax reliefs as well, helping to mitigate the risks and maximise potential upside.”
Many funds which are branded as innovative have only really existed in a world of low interest rates, finding a product that can also perform in a higehr rates world is likely to be a trickier prospect.
When trying to do this, Franklin Templeton's Curtis places a premium on finding funds run by people whose track-record is longer than just the past decade.
Sophie Westwood, associate director in the investment management team at Evelyn Partners says the technology investments which have performed best over the past year are those which are more mature, and so less susceptible to higher interest rates.
