Key Takeaways
- • Innovation can be measured systematically as a firm characteristic and offers a differentiated source of long-term equity alpha when implemented with appropriate risk controls, distinct from traditional growth metrics that favor already-expensive, rapidly-growing companies.
- • The valuation gap between growth and broader markets is substantial: the MSCI World Growth Index trades at 35x earnings and 8.5x book value versus 24x earnings and 4x book value for the MSCI World Index as of end-2025, creating opportunity for early-stage innovation recognition.
- • Strong innovators with underappreciated R&D and technological capabilities—such as Roche, Schneider Electric, Assa Abloy, and Baker Hughes—may trade at valuations far below growth premiums, enabling investors to capture alpha before market recognition of innovation-driven earnings acceleration.
- • Baker Hughes exemplifies the opportunity: it scores at the 89th percentile on innovation capability but only the 12th percentile on growth, suggesting the market has yet to price in the company's R&D and organizational capabilities.
- • Innovation manifests across multiple dimensions including formal R&D and intellectual property, digital transformation, operational excellence, business-model innovation, and organizational capability—requiring multifaceted measurement frameworks rather than single-metric assessments.
Summary
Traditional growth investing focuses on companies already displaying rapid sales or earnings expansion, often at premium valuations. This approach leaves investors paying steep multiples for growth already reflected in stock prices. Innovation-focused strategies operate on a different premise: identifying companies with underappreciated research and development, technological capabilities, and organizational strengths that can drive future earnings before the market recognizes and reprices that potential.
The valuation arbitrage between these approaches is substantial. As of end-2025, the MSCI World Growth Index traded at 35 times earnings and 8.5 times book equity, compared with 24 times earnings and 4 times book equity for the broader MSCI World Index. This premium reflects investor consensus on current growth trajectories. Innovation strategies seek to exploit the gap between current valuations and future earnings power by identifying companies investing in capabilities the market has yet to fully appreciate.
The research demonstrates that strong innovators need not command growth valuations. Roche, Schneider Electric, Assa Abloy, and Baker Hughes all ranked near the top of the MSCI World Index universe on innovation scores, yet trade at multiples well below the growth benchmark. Baker Hughes provides the clearest illustration: the company scores at the 89th percentile on innovation capability but only the 12th percentile on growth metrics, suggesting substantial opportunity for alpha capture as the market eventually recognizes innovation-driven earnings acceleration.
Innovation itself takes diverse forms beyond traditional R&D spending. Companies innovate through digital transformation, operational excellence, business-model reinvention, and organizational capability development. This multifaceted nature of innovation requires measurement frameworks that extend beyond headline research spending or patent counts. When measured correctly and implemented with appropriate risk management, innovation-driven strategies can provide measurable, differentiated sources of long-term equity returns distinct from traditional growth exposure.
The valuation arbitrage between these approaches is substantial. As of end-2025, the MSCI World Growth Index traded at 35 times earnings and 8.5 times book equity, compared with 24 times earnings and 4 times book equity for the broader MSCI World Index. This premium reflects investor consensus on current growth trajectories. Innovation strategies seek to exploit the gap between current valuations and future earnings power by identifying companies investing in capabilities the market has yet to fully appreciate.
The research demonstrates that strong innovators need not command growth valuations. Roche, Schneider Electric, Assa Abloy, and Baker Hughes all ranked near the top of the MSCI World Index universe on innovation scores, yet trade at multiples well below the growth benchmark. Baker Hughes provides the clearest illustration: the company scores at the 89th percentile on innovation capability but only the 12th percentile on growth metrics, suggesting substantial opportunity for alpha capture as the market eventually recognizes innovation-driven earnings acceleration.
Innovation itself takes diverse forms beyond traditional R&D spending. Companies innovate through digital transformation, operational excellence, business-model reinvention, and organizational capability development. This multifaceted nature of innovation requires measurement frameworks that extend beyond headline research spending or patent counts. When measured correctly and implemented with appropriate risk management, innovation-driven strategies can provide measurable, differentiated sources of long-term equity returns distinct from traditional growth exposure.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.