[Investing in innovation — the ongoing execution of new ideas that create client value — is a tricky pursuit and an enormous opportunity. There is no question that innovation driving change is inevitable and is a powerful force that disrupts the status quo and propels us into new actions and behaviors. Just the evolving internet-of-things (IOT) revolution of digital connectivity — which we are starting to see today leading to “intelligent” products and services — will create trillions of dollars of new value for consumers that do not exist today.
Unfortunately, there are substantially more “clever” inventions created that never go anywhere than true innovations that, by definition, actually get adopted and are extensively used to further evolve industries and markets. To pick the wheat from the chaff, there are many varied approaches at different stages of innovation development that attempt to isolate and capture this growth potential, including angel investors, venture capitalists, corporate accelerators and asset managers which apply different investment approaches and methodologies.
To explore this important investment area, the Institute was recently introduced to Kim D. Arthur, James W. Concidine, and J. Richard Fredericks, the portfolio managers of the Thematic Innovation Rotation investment strategy at Main Management — an independent, San Francisco-based advisory firm that was an early pioneer in managing all-ETF portfolios. We wanted to understand their perspective on investing in innovation and dig into their investment approach.]
Bill Hortz: With a successful history of more broadly based investment portfolio strategies, why did your firm decide to launch an innovation themed investment strategy?
Kim D. Arthur: The Partners are invested right along with our investors in our broader strategies. However much of their interest and other investments have been in these other sectors of high growth and innovation. With the advent of more ETF options in these “Innovation” sectors we found it easier to create our own strategy around it and roll it out to clients.
There is a famous story about the invention of chess in ancient India: the king, pleased with the invention, asked the inventor what he would like as a reward. The inventor humbly asked for one grain of rice to be placed on the first square, two on the second square, four on the third square, doubling on and on with each square, until the 64th. The king immediately agreed, only to discover that by the time he reached the chessboard’s back half, it was more grain than the kingdom possessed. This exponential growth is much like Moore's law, which describes growth in computing power. What started off as massive, clunky machines has morphed into the indispensable, super-charged computers that sit in our pockets. We are there now − at the back half of the chessboard, with all kinds of technologies accelerating exponentially and changing our lives. Main Management's Thematic Innovation Rotation strategy aims to capture these accelerations.
Hortz: What is your investment approach to this theme of innovation?
Arthur: The strategy seeks to invest in 5-10 long-term, secular growth themes – themes like innovation, automation, productivity, and human development. The strategy is aggressive global growth and seeks to provide diversification in the innovation space and exposure to where we think the “puck is going”.
We identify and invest in themes and sectors which appear to be disruptive technologies and present a significant market opportunity with catalysts for long-term adoption.
Hortz: Tell us more about your innovation themes and what are you focusing on now?
Arthur: We have 10 themes that comprise the strategy: Genomics, Fintech, E-commerce, Robotics & AI, Cyber Security, Clean Energy, Cloud Computing, Autonomous Tech, Gaming and E-Sports, and Pet Care. We have chosen these themes because they represent potentially disruptive technologies with large, addressable market share and the potential for widespread adoption in the coming years.
For example, Clean Energy is largely solar for the time being, which is a proven technology but has yet to hit widespread adoption. Yet, potentially everyone who lives or works somewhere that has a roof has the ability to install solar panels. The addressable market is enormous and has hardly started to be tapped. An increased focus from governments on reducing carbon emissions and fossil fuel reliance, as well as the desire to be self-sufficient when it comes to power are two powerful catalysts that can drive adoption in the coming years.
Currently, the Tech, Healthcare and Consumer Cyclicals sectors make up 70% of the strategy’s sector tilt.