An Innovation Leaders Fund

AN
INNOVATION LEADERS FUND

Modeling the Link Between Innova3on Leadership and Sustained Stock Price Growth 5 February 2013
WWW.INNOVATIONLEADERS.ORG
Copyright Innovation Leaders
This document details the modeling of a fund of companies idenGed as InnovaGon Leaders over the past ten years
Five key areas are addressed:
1. ExecuGve Summary 2. The InnovaGon Leaders Analysis
3. Modeling an InnovaGon Leaders Fund 4. Case Studies of Sample Companies 5. Conclusions and Investment Opportunity
ExecuGve Summary
Ten years analysis of 1500 companies shows a clear link between innovaGon leadership and sustained stock growth
Since 2002, the InnovaGon Leaders analysis has idenGed the worlds most innovaGve companies across 25 sectors We have developed a sector-specic model that looks at a raGo of innovaGon impact to the resources being deployed We have shown a direct correlaGon between eecGve innovaGon capability and sustained stock growth We have modeled how an InnovaGon Leaders porWolio would have performed as an investment fund over the past ten years, and found that it would have consistently outperformed major indices If the InnovaGon Leaders porWolio had been a fund, it would provide a compelling mix of outperformance, high liquidity and low risk
The InnovaGon Leaders Analysis
For the past decade we have been idenGfying and proling the worlds most innovaGve companies across 25 sectors
Our published analysis supports the well-established view that eec3ve innova3on delivers higher organic growth
There has also been increased aZenGon within the nance and investment community on innovaGon-driven growth
Growing Range of Analysis: Business Week / BCG Most InnovaGve Companies analysis since 2006 Forbes The Worlds Most InnovaGve Companies since 2011 Thompson Reuters Top 100 Global Innovators since 2011
Plus Some InnovaGon Focused Funds: IQ Intangible Assets Indexes including innovaGon leadership Rose Park Advisors investments focused on disrupGve innovaGon
7
Most now recognize that innovaGon can both take many dierent forms and result in a wide range of impacts
Tradi3onal Types of InnovaGon
Product Innovation
Example InnovaGon Impacts

Increased Sales
Tangible
Technological Innovation
Higher Margins
Service Innovation
Enhanced Brand Value
Process Innovation
Attractive Culture for Talent
Business Model Innovation
New Ways of Working
Emerging
Intangible
We are looking for a direct correlation between effective innovation capability and sustained corporate growth
The underlying dynamics for sustained innovaGon-driven growth vary signicantly from sector to sector
Sector Airlines Energy Fashion Retail Hotels and Leisure General Retail PharmaceuGcals Telecom Operators Example Innova3on Value Drivers Increasing average revenue per seat and per journey OpGmizing E&P eciency to maximize reserves access Rapid delivery of on-trend product with minimal sale stock CreaGng guest experiences that raise revenue per room Decoupling margin growth from size of retail space Reducing failure rates for access to new molecules Increasing average margins from data use per connecGon
Consumer Electronics Producing compelling integrated product soluGons
While there are many common elements, recognizing the different nature of innovation per sector is vital
At the core of our analysis, for each sector, we look at a raGo of innovaGon impact to the resources being deployed
InnovaGon Input Company InnovaGon CapabiliGes InnovaGon Output
Each assessment is based on a core raGo: InnovaGon Output InnovaGon Input We use a proprietary model based on dierent sector weighGngs and raGos of a number of key publicly available data including: R&D Intensity Revenue / employee OperaGng margins per customer 5yr patent trends
Plus sector-specic data such as Gme to market, successful product launches etc.
This provides what we believe to be the most accurate assessment of current innovation impact 10
We assess 25 sectors where innovaGon has demonstrated impact and detail key successes in the dierent industries
The 25 Included Sectors
Aerospace Airlines AutomoGve (Automobiles and Parts) Chemicals Consumer Electronics (Electronics and Electrical) Energy (Oil and Gas) Fashion Retail (Retailers) Food and Drink (Food and Beverages) General Retail (Retailers) Hotels and Leisure (Travel and Leisure) Household Goods (Leisure and Personal Goods) Insurance IT Hardware (Tech Hardware) IT Services (Tech Sohware and Services) LogisGcs (Industrial TransportaGon) Media and Entertainment (Media) Medical Equipment (Healthcare Equipment) Oce Products PharmaceuGcals Retail Banking (Banks) Sohware Sports Goods (Household Leisure and Personal) Telecom Equipment (Tech Hardware) Telecom Operators (TelecommunicaGons) Toys and Games (Household Leisure and Personal)
Excluded
Basic Resources ConstrucGon and Materials Financial General Industrial Engineering Industrial General Mining Real Estate Tobacco UGliGes
Growth in sectors such as mining, utilities and construction is driven more by economic demand than innovation
11
Our model analyses the 1500 largest companies in these sectors and systemaGcally selects the top innovators
25 Sectors
1500 Companies
75 Companies
25 Innova2on Leaders
25 most innova2on- focused sectors
Largest companies across 25 sectors
Top 3 companies per sector
Single company for each sector
Quan2ta2ve Analysis Throughout Process
12
The idenGed InnovaGon Leaders in 2012 include a mix of established household names and emerging companies
Aerospace Airlines AutomoGve Chemicals Consumer Electronics
Apple
Energy
Fashion Retail
Inditex
Food and Drink

Nestle
General Retail
Amazon
Hotels and Household Insurance Leisure Goods

Starwood ReckiU Benckiser Humana
Rolls Royce
LuKhansa
BMW
BASF
Chevron
IT Media and Medical IT Services LogisGcs Hardware Entertain. Devices ARM IBM UPS Google Medtronic
Oce Products Canon
Pharma Roche
Retail Banking
Sohware
Sports Goods Nike
Telecom Telecom Toys and Equipment Operators Games Qualcomm Bhar2 Airtel LEGO
ICICI Bank MicrosoK
13
The annual InnovaGon Leaders results since 2002 have been published in books and via the innovaGon leaders website
Sector
Aerospace Airlines Automo2ve Chemicals Consumer Electronics Energy Fashion Retail Food and Drink General Retail Hotels and Leisure Household Goods Insurance IT Hardware IT Services Logis2cs Media and Entertainment Medical Devices Oce Products Pharmaceu2cals Retail Banking SoKware Sports Goods Telecom Equipment Telecom Operators Toys and Games
2012
Rolls Royce LuKhansa BMW BASF Apple Chevron Inditex Nestle Amazon Starwood ReckiU Benckiser Humana ARM IBM UPS Google Medtronic Canon Roche ICICI Bank MicrosoK Nike Qualcomm Bhar2 Airtel LEGO
2011
Rolls Royce Air New Zealand BMW BASF Apple Shell Inditex Nestle Amazon Starwood ReckiU Benckiser AON ARM Infosys UPS Disney Stryker Canon Novo Nordisk Santander Google Nike Juniper Bhar2 Airtel LEGO
2010
Rolls Royce Air New Zealand Renault BASF Apple Chevron Inditex Nestle Amazon Starwood ReckiU Benckiser Humana ARM IBM UPS Disney Stryker Canon Novo Nordisk Santander Google Nike Qualcomm Bhar2 Airtel LEGO
2009
Rolls Royce Virgin Atlan2c Tata Motors BASF Apple Statoil Inditex Nestle Amazon Starwood ReckiU Benckiser Humana ARM IBM UPS Disney St Jude Medical Canon Novo Nordisk Santander Google Nike Qualcomm Bhar2 Airtel LEGO
2008
Boeing Virgin Atlan2c BMW BASF
2007
Rolls Royce Virgin Atlan2c Toyota Dow
2006
Rolls Royce Virgin Atlan2c Toyota DSM
2005
Honeywell Virgin Atlan2c Toyota DSM
2004
Rolls Royce Singapore Airlines Honda BASF
2003
EADS Singapore Airlines Honda Dow
2002
Honeywell Singapore Airlines Honda Dow
Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Samsung Electronics Sony Shell H&M PepsiCo WalMart Starwood ReckiU Benckiser Aviva Apple Infosys UPS Google Medtronic Canon Lilly Handelsbanken MicrosoK Adidas Nokia Telefonica LEGO Shell H&M Nestle Tesco Starwood ReckiU Benckiser Allianz Apple IBM UPS Google Medtronic HewleU Packard Novar2s Handelsbanken MicrosoK Adidas Nokia NTT DoCoMo Nintendo BP H&M PepsiCo IKEA Starwood ReckiU Benckiser Allianz Apple Wipro UPS Google Medtronic Canon Novar2s Santander MicrosoK Adidas Nokia Vodafone Nintendo BP H&M PepsiCo Tesco Starwood ReckiU Benckiser Allianz Logitech Infosys UPS Time Warner Medtronic Canon Novo Nordisk RBS MicrosoK Adidas Nokia NTT DoCoMo Nintendo BP H&M Danone Tesco Starwood P&G AEGON Apple IBM Federal Express Disney Medtronic HewleU Packard Novo Nordisk HSBC Adobe Nike Qualcomm NTT DoCoMo Nintendo BP H&M Nestle Tesco Starwood Kimberley Clark Pruden2al AMD Infosys Federal Express Disney Medtronic Canon Novo Nordisk Bank of America Adobe Nike Qualcomm NTT DoCoMo Nintendo BP Inditex Nestle Tesco Starwood P&G Pruden2al AMD IBM Federal Express Disney Becton Dickenson Canon Merck Bank of America Adobe Nike Qualcomm Vodafone Nintendo
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Modeling an InnovaGon Leaders Fund
15
Interest from investors in the InnovaGon Leaders analysis raised several quesGons about a potenGal fund model
QuesGons raised by companies, investors and fund managers included: If companies outperform peers on innovaGon, how does this impact value? Can you prove the claimed link between innovaGon and organic growth? If one had invested in these companies what would have been overall returns? How would these investment have performed throughout economic cycles? How would this performance compare to sector and cross-sector indices? What companies / sectors would account for the greatest contribuGon? Could this analysis be the basis of a growth investment fund? If so what would have been the key performance results of such a fund?
The following pages detail the approach taken to model this and the results of the analysis
16
We have modeled how ten years of an InnovaGon Leaders porWolio would have performed as an investment fund
Models have been created that show the performance of a fund based on: InvesGng in the most innovaGve company per sector each year Holding these stocks for 2 years before rebalancing the porWolio ReinvesGng all capital and prots at then end of each 2-year hold period Key assumpGons made in the modeling include: Equal value investments made iniGally in all companies in order to limit exposure to any one high or low performing stock or sector Analysis is independent of current stock prices and short-term market uctuaGons
We have used only the published results of the innovation leaders analysis for stock selection
17
We assume an average two year innovaGon-to-impact period so are looking upstream of most assessments
Time to Market InnovaGon AcGvity
Time to Market (TTM) varies across dierent sectors: e.g. Fashion / Sohware Consumer electronics / Food and Drink / Household Goods Telecoms / Oce Equipment Aerospace / AutomoGve / Energy / PharmaceuGcals 1 year 18 Months 2-3 years 5 years
InnovaGon Impact on Business
Many experts consulted see that 2 years TTM is an average across all 25 sectors; for simplicity, we use this as the average Gme for innovaGon to lead to stock price impact
This model is therefore focused on activity within companies 2 years ahead of most other analysis 18
A back-test of the InnovaGon Leaders Fund against S&P 500 shows a clear outperformance over the past ten years
Compound Annual Growth Rate: 14.5%, Std Dev: 19.7%, Alpha: 12.1%, Beta: 0.7
A value of 315 indicates that the pordolio has reached 415% of its ini2al value.
19
Throughout the past decade an InnovaGon Leaders Fund would have consistently outperformed major indices
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10 Yr Average 3 Yr Average ILF (15%) 37% 31% 15% 26% 25% (40%) 54% 31% 1% 21% 17% 19% MSCI Global (20%) 34% 15% 10% 21% 10% (40%) 31% 12% (5%) 6% 9% 5% S&P500 TR (22%) 29% 11% 5% 16% 5% (37%) 26% 15% 2% 9% 8% 9% NASDAQ (28%) 50% 9% 1% 10% 10% (41%) 44% 17% (2%) 13% 11% 9% FTSE (25%) 14% 8% 17% 11% 4% (31%) 22% 9% (6%) 0% 5% 1%
20
On a quarterly basis over the past decade, the modeled fund would have shown well above-average returns
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average (2%) 7% 0% 6% 3% (8%) (7%) 7% 6% 15%
2%
Quarter 1
Quarter 2 (9%) 13% 4% (2%) 0% 10% (5%) 25% (10%) 4% (7%)

2%
Quarter 3 (13%) 11% 4% 10% 6% 8% (15%) 17% 24% (16%) 9%

4%
Quarter 4 7% 12% 13% 7% 12% 3% (19%) 13% 11% 9%
Annual Total (15%) 37% 31% 15% 26% 25% (40%) 54% 31% 1% 21%
7%
14%
21
The analysis also shows that the average hold period of two years is indeed opGmal
4.50# 4.00# 3.50#
Performance'and'Holding'Periods'
Factor'of'Ini,al'ILF'Value'
3.00# 2.50# 2.00# 1.50# 1.00# 0.50# 0.00#
Holding# Periods#
1)Year# 2)Year# 3)Year# 4)Year#
1)Apr)05#
1)Apr)07#
1)Apr)08#
1)Apr)09#
1)Aug)02#
1)Aug)03#
1)Aug)04#
1)Aug)05#
1)Aug)06#
1)Aug)07#
1)Aug)08#
1)Aug)09#
1)Aug)10#
1)Apr)11#
1)Aug)11#
1)Dec)02#
1)Dec)03#
1)Dec)04#
1)Dec)05#
1)Dec)06#
1)Dec)07#
1)Dec)08#
1)Dec)09#
1)Dec)10#
1)Dec)11#
1)Apr)02#
1)Apr)03#
1)Apr)04#
1)Apr)06#
1)Apr)10#
We have tested our 2-year hold period against other periods, and shown that it delivers the best results
1)Apr)12#
22
The major porWolio contribuGon comes from some well- known brands as well as a number of emerging innovators
Top 5 sectors for contribuGon Consumer Electronics IT Hardware Fashion Retail Aerospace Automo2ve Most-picked stocks since 2002 Starwood Canon Apple ReckiU Benckiser UPS
% of total contribuGon 13.5 9.9 7.1 6.4 6.0 # Gmes picked 11 9 8 8 8
Top 5 stocks for contribuGon Apple ARM Starwood Novo Nordisk Nintendo Top returns from 2012 stocks ARM Inditex LuKhansa Amazon ICICI Bank
% of total contribuGon 11.4 7.6 5.2 5.0 4.9 % return 57.1 43.9 38.8 31.8 31.5
23
Returns to date on ILF 2012 stock picks, purchased on April 1 2012
Other published assessments of innovaGon performance do not provide comparable fund results
2.50
2.00
1.50 ILF Business Week 'index' 0.50
1.00
1-Oct-06
1-Oct-07
1-Oct-08
1-Oct-09
1-Oct-10
1-Jan-11
1-Apr-11
1-Apr-06
1-Apr-07
1-Apr-08
1-Apr-09
1-Jan-07
1-Jan-08
1-Jan-09
1-Jan-10
1-Apr-10
1-Oct-11
1-Jul-11
The BCG / Business Week Most InnovaGve Companies Rankings has also highlighted the most innovaGve companies, based on peer opinion surveys Using a similar 2-year holding period for the top 25 of these companies from its start in 2006, a Business Week index under-performs against the ILF
1-Jan-12
1-Jul-06
1-Jul-07
1-Jul-08
1-Jul-09
1-Jul-10
0.00
24
Case Studies of Sample Companies
25
The InnovaGon Leaders analysis and the fund model show how dierent companies exploit their innovaGon prowess
Here we prole nine of the companies that have developed unique innovaGon competences and used these to deliver sustained growth in market value
These and other companies are explored in detail in our recent book Growth Champions
26
Amazon is very much a technology-focused company using and sharing capabiliGes well beyond its core retail business
Major focus on business methods IP Expertly exploiGng customer data Uniquely adaptable and resilient Leveraging assets well beyond retail First proled in April 2009 Since April 2009:
Stock price growth: 263% (CAGR 41%) Alpha (vs. sector): 3.9%
Shaded area: Stock in ILF portfolio
27
ARM is the hidden ingredient in many mobile devices and earns growing revenues from technology licensing deals
Design once license many Gmes model First proled in April 2009 Dominant across smart phones Intellectual property powerhouse Over 400 strategic partnerships Since April 2009:
Stock price growth: 814% (CAGR 74%) Alpha: 16.4%
28
ICICIs growth is being driven by delivering compeGGve retail products across a highly ecient network
Indias second largest bank Leveraging technology very well CreaGng new plaWorms for its burgeoning customer base First proled in April 2012 Since April 2012:
29
Inditex and its Zara brand is opening 10 new stores a week as the supply-chain-driven customer experience wins out
Global leader in Fast Fashion Fast decision making culture Flexible store logisGcs First proled in April 2002 Since April 2009:
30
With new lounges, new seats, new routes and new planes, Europes largest airline is ying ahead of the compeGGon
Leading on premium air travel Maximizing revenue per plane ExploiGng network eciencies Now setng the global standards First proled in April 2012 Since April 2012:
31
Having reposiGoned its porWolio, Nestle is focused on innovaGon across its brands and emerging market growth
Leading on nutriGon and health 17 well focused global R&D centers Strong emerging market porWolios Reinvented coee consumpGon First proled in April 2002 Since April 2007:
32
Novo Nordisk is reinvenGng the approach to chronic healthcare innovaGng on therapies and delivery systems
Pre-eminent in diabetes arena Leaders in improving drug delivery Tackling a major global challenge Employing a diversied set of tools First proled in April 2003 Since April 2009:
33
ReckiZ Benckisers 13th year of constant growth is driven by fast incremental innovaGon and power-brand expansion
Outpaces P&G, Unilever and Colgate Culture of incessant innovaGon Double digit stock price growth Scaling fast and expanding porWolio First proled in April 2005 Since April 2005:
34
Rolls Royces technology leadership and Total Care business model makes it the preferred partner for many airlines
Leader in service business model Long term technology collaboraGon ExecuGng 5, 10 and 20 year visions First proled in April 2004 Since April 2004:
35
Conclusions and Investment Opportunity
36
An InnovaGon Leaders Fund would have outperformed all major indices, even including exchange rate costs
Innova2on Leaders Fund (ILF) Back-test using Bloomberg data, based on previously published stock picks. Compound Annual Growth Rate: 14.5%, Std Dev: 19.7%, Alpha: 12.1%, Beta: 0.7
Not accoun2ng for transac2on fees
37
We have shown a direct correlaGon between eecGve innovaGon capability and sustained corporate growth
The InnovaGon Leaders analysis proles the most eecGve growth companies Looking across 25 sectors, it covers a wide range of innovaGon strategies It has a longer track record than any comparable analysis The modeled fund is based on two year hold of stock of idenGed companies It shows outperformance against both the market and other major indices EecGve innovators are best at delivering sustained organic growth These growth companies have also been shown to be growth stocks Long-term sustained growth is evidently linked to eecGve innovaGon capacity
38
If the InnovaGon Leaders analysis had been a fund, many investors consulted would have found it very compelling
A published ten year track record of idenGed innovaGon leaders A simple, transparent, fundamentals-based approach Proven long-only outperformance against key benchmark indices A fresh approach that looks upstream of the majority for insight Large highly liquid stocks held across a diversied sector porWolio Key Data: Compound Annual Growth Rate: 14.5% Standard DeviaGon: 19.7% Alpha: 12.1% Beta: 0.7
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Our core team has deep experience in innovaGon processes across mulGple business sectors, and strong academic Ges
Tim Jones, PhD Stephen D. Johnston, MBA MaZ Laponte Founder, InnovaEon Leaders Co-Founder, InnovaEon Leaders Fund Analyst, InnovaEon Leaders Fund Co-Founder, InnovaEon Leaders Fund Stephen is the founder of innova2on MaU has a BA in Philosophy and Tim leads the annual research of the consultancy Fordcastle and of Economics from Brown University. Innova2on Leaders. He is co-founder of the Aging2.0, a global business network He lives in New York, NY. Growth Agenda and Future Agenda - the for the 50+ market. He is co-author of world's rst open foresight program. He is Growth Champions a book about the the author of 8 books on innova2on, growth sources of sustainable growth (Wiley and emerging trends and regularly delivers 2012). He lives in New York, NY. talks on these topics. He lives in London, UK. Extensive i nnova2on consul2ng experience with leading mul2na2onals Academic background
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AN INNOVATION LEADERS FUND

Modeling the Link Between Innova3on Leadership and Sustained Stock Price Growth 5 February 2013 Tim Jones, PhD (Gmjones@innovaGonleaders.org)

An Innovation Leaders Fund - Modeling The Link To Growth

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An Innovation Leaders Fund - Modeling The Link To Growth

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INNOVATION LEADERS FUND

Copyright Innovation Leaders

1. ExecuGve Summary 2. The InnovaGon Leaders Analysis

The InnovaGon Leaders Analysis

Example InnovaGon Impacts

Enhanced Brand Value

Attractive Culture for Talent

Business Model Innovation

New Ways of Working

Consumer Electronics Producing compelling integrated product soluGons

25 most innova2on- focused sectors

Largest companies across 25 sectors

Top 3 companies per sector

Single company for each sector

Quan2ta2ve Analysis Throughout Process

Food and Drink

Hotels and Household Insurance Leisure Goods

Oce Products Canon

Sports Goods Nike

ICICI Bank MicrosoK

Modeling an InnovaGon Leaders Fund

InnovaGon Impact on Business

Quarter 2 (9%) 13% 4% (2%) 0% 10% (5%) 25% (10%) 4% (7%)

Quarter 3 (13%) 11% 4% 10% 6% 8% (15%) 17% 24% (16%) 9%

Quarter 4 7% 12% 13% 7% 12% 3% (19%) 13% 11% 9%

3.00# 2.50# 2.00# 1.50# 1.00# 0.50# 0.00#

1)Year# 2)Year# 3)Year# 4)Year#

% of total contribuGon 13.5 9.9 7.1 6.4 6.0 # Gmes picked 11 9 8 8 8

Returns to date on ILF 2012 stock picks, purchased on April 1 2012

1.50 ILF Business Week 'index' 0.50

Case Studies of Sample Companies

Conclusions and Investment Opportunity

Not accoun2ng for transac2on fees

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