Innovation
Investing and Equity
Allocations
Mehdi Alighanbari, Ketaki Garg, Ashish Lodh,
Saurabh Katiyar
October 2022
msci.com`Contents

INNOVATION INVESTING AND EQUITY ALLOCATIONS | OCTOBER 2022

Introduction

3

Capturing innovation through themes

4

Assessing thematic exposure

4

Challenges

4

Economic linkage between a company and a theme

5

Putting themes to work

7

Designing innovation portfolios

8

Characteristics of broad multi-thematic approaches

9Innovation in investment allocations

14

Value investing and innovation allocations

15

Conclusion

16

References

17

Appendix 1

18

Appendix 2

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Introduction
Innovation investing, which refers to a focus on companies that offer innovative solutions
while creating new markets, increasing market share or enlarging an existing market, hasgained momentum over the past few years. Innovation is not limited to products andservices, as companies can be innovative in their business model, marketing approach or
financing.
This growing investor appetite for innovation has led to the creation of investment
vehicles that focus on both innovation-driven 1 themes and innovative companies.
Innovation investing can encompass a variety of investment approaches. In this paper we
focus on systematically investing in companies that seek to capitalize on opportunities
created by megatrends and innovation-driven themes. Themes that are structural,transformative and often disruptive in nature, rather than short-term shifts or fads. Thus,
we use the terms innovation investing and thematic investing almost interchangeably inthis report.
Innovation investing is gradually becoming part of the institutional investor toolkit after
primarily being popular among retail investors. As the potential for innovation in shaping
the future equity market becomes clearer and more accepted, some asset owners are
considering innovation investing in earlier stages of asset allocation. Taking a page outof the Yale Model by David Swensen and Dean Takahashi, 2 asset owners can allocate toinnovation across their core and satellite allocations.
But limitations and challenges exist, such as the number of companies that havemeaningful economic linkage to any single theme is often small. This restricts thethematic-investment universe and can result in both a restrained investment capacity andhigh tracking error, which may potentially be undesirable for large allocations. In thispaper, we aim to address these challenges by answering the following questions:•••

Where does innovation investing fit in the asset allocation process?
How can portfolios be constructed to capture innovation-driven themes whileproviding a suitable level of capacity and liquidity?
How might a traditional allocation framework, such as sector, country and stylefactor, be adjusted to incorporate an innovation allocation?

1 For our definition of innovation-driven themes and the list of MSCI innovation-driven themes please see

Appendix 2.
2 The Yale Model broadly consists of dividing a portfolio into five or six roughly equal parts and investing each ina different asset class.

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Capturing innovation through themes
What defines an innovative company, and how can we identify these companies? We
initially identify key innovative themes and measure companies’ exposure to these
themes. This mirrors our approach when calculating stock exposure to style factors,
where we first identify factors and then measure the exposure of individual stocks tothese factors.
Themes are typically derived from megatrends, which we define as long-term structural
trends that are transforming global economies and daily life, as well as impacting
businesses. We have identified four broad megatrends, which are also the basis for
MSCI’s thematic indexes.
Exhibit 1: MSCI megatrend categories

The themes underlying these megatrends tend to be long-term in nature, and they
typically span across sectors and may evolve quickly as the underlying trends haveeconomic impact. Once we identify megatrend categories and their underlying themes,
the next step is to find companies that have exposure to these themes.

Assessing thematic exposure
Challenges
While factor investing can draw on a long history of academic research, data and theory,thematic investing is predicated on the emergence of new business models,
technological advancements and changing consumer behavior. Such information is notcomprehensively reflected in companies’ financial data. Key evidence may need to befound in a company’s discussion of early-stage corporate activities, capital expenditure© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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or growth plans. It may also be difficult to identify companies that are buried deep in thevalue chain of a theme, and those that may have less of a direct linkage to the theme.

Economic linkage between a company and a theme
Thematic exposure gauges the economic linkage between a company and a theme. We
call this metric a company’s “relevance score” for a theme, which ranges from 0% to
100%. These scores are encapsulated through the MSCI Thematic Exposure Standard(TES) and can be used to systematically measure, monitor and report on the thematic
exposure of indexes, portfolios and funds, as well as provide company-level thematic
exposures for a broad universe of equities.
The relevance score is designed to help assess the importance of a theme to thecompany’s business activities and may reflect both “upstream” activities such as capital
expenditure and merger and acquisition plans, product development and competitive
agenda, as well as established revenue or earnings streams disclosed at the businessline level.
The first step in calculating the relevance score is to break down the theme’s scope into
high-level concepts such as products, services and technologies in the value chain. We
then use natural language processing (NLP) techniques to gather synonyms and otherrelated concepts to expand the high-level ideas into a more granular pool of words andphrases. The use of NLP techniques accelerates the research phase of theme
development and allows themes to be modelled in a scalable and cost-effective manner.
The next step is to compare companies’ self-declared business-line information andpublicly-sourced business description information with this resulting large pool of words
and phrases. We do this to find evidence of the company’s association with those
products, services or technologies that are pertinent to the theme. This association isquantified in the relevance score by estimating revenue attributable to the theme as aproportion of the total revenue of the company.
In addition to being used as a screening metric to construct thematic indexes, therelevance score may also enable investors to better understand how themes impact theirportfolio’s profile, complementing more traditional country, industry and style factor
lenses for analysis.
Exhibit 2 shows the thematic exposure profile of the MSCI ACWI Investable Market Index(IMI) and MSCI ACWI IMI Information Technology Index. Low thematic exposures ofthese indexes to certain themes, such as Efficient Energy, Digital Health, Genomic
Innovation, highlights that simple sector or market allocations may not adequately
provide exposure to themes.

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Exhibit 2: Market or sector allocations do not capture exposure to themes well enough

Data as of April 29, 2022.

Exhibit 3 details the thematic exposure profile of the MSCI ACWI Growth Index, which hassignificantly greater exposure to the Transformative Technology category than themes
focused on healthcare or the environment. This also illustrates that thematic investing
can provide exposure to themes that are complementary to those of traditional growthinvesting.
Exhibit 3: Traditional growth allocation is different from the ‘growth exposure capturedby thematic investing

Latest available data as of April 29, 2022.

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Putting themes to work
Many active funds, index-tracking funds and an increasing number of ETFs are alignedwith a growing demand for financial products that target innovation-driven themes.
Exhibit 4 displays some important characteristics of selected MSCI indexes on whichsome of these financial products may be built. These indexes are designed to provide
high exposure to a specific theme, and could be concentrated with constituents ranging
from less than a hundred to several hundred. The more concentrated indexes could
generate greater-than-market volatility with high relative tracking error (> 10%).
Exhibit 4: Characteristics of selected MSCI thematic indexes

Gross returns annualized in USD. Nov. 30, 2016, to May 31, 2022.

As some asset owners consider larger allocations to innovation, investment strategies
need to offer higher-capacity and low tracking-error. It is important to keep in mind thatmost indexes capturing a single theme might be too concentrated and narrow to be thebasis for large allocations.
As an example, the dot-com bubble included unrealistic growth expectations that got
ahead of underlying business models viability and scalability. Speculative, fad-based
investing without focusing on company’s financial health was among the primary causesof this equity-market bubble. Additionally, large flows of capital into a small subset ofinternet-related companies (with limited capacity and free float) exacerbated the
problem.
A portfolio designed for a large-scale allocation to innovation would need to actively
reflect controls on its capacity and concentration characteristics during portfolio
construction. To capture innovation more holistically, a diversification of the themes isalso natural and often necessary. We believe these two objectives go hand in hand. We
also see multi-theme diversification reducing the need for active decision-making andthis could support its widespread adoption.

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Designing innovation portfolios
There are different approaches to broadly invest in innovation that may fit the capacity
and investability requirements for the basis of a significant (core) allocation by
institutional asset owners. These broad approaches could also be relevant for investors
who want to target innovation but do not have a preference for one theme over another.
In advance of all these approaches, we first measure innovation holistically and define an“innovation score” that not only captures a broad range of innovation-driven themes but
also represents the aforementioned megatrends. We identified 14 innovation-driven
themes across the four megatrends (Appendix 1), tallying a company’s innovation scoreby aggregating the four megatrend category scores. 3
Exhibit 5 details three ways to construct broad innovation portfolios. The approaches aim
to be broad and diversified, both in terms of the number of innovation-driven themes they
cover and the number of portfolio constituents. The differences in the approaches tocombine innovation-driven themes results in some variance in how broad these portfolios
are, how much they deviate from the benchmark market-cap index (MSCI ACWI IMI) andother characteristics.
Exhibit 5: Approaches to construct broad innovation portfolios

3 The megatrend category score (ranging 0-1) is the highest theme relevance score the company exhibits
across all the themes mapped to that megatrend category. The innovation score (ranging 0-4) could be used toaid security selection or weighting when constructing broad innovation targeting portfolios. Please see
Appendix 1 for more details.

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The names of the portfolios represent concepts and do not correspond to MSCI indexes or real
portfolios.

1. The Innovation Universal approach allows to create the broadest and most diversified
portfolio among the three approaches. This approach intends to include all of theconstituents of the broad market-cap index to inherit the high-capacity characteristics
and shifts allocations from less-innovative companies to the most innovative. This gives
the resulting portfolio a tilt towards innovation, as measured by aggregate exposure to
the targeted themes.4
2. The Innovation Leaders approach aims to achieve exposure to innovation by selecting
the most innovative companies within each sector in the benchmark, as sectors areimportant aspects of current asset allocation models for some investors. To avoid large
and unintended sectorial biases, the approach targets companies with the highest
innovation score within each sector (represents 50% of sector market capitalization).
Compared to Innovation Universal, the Innovation Leaders approach tended to achieve
higher exposure to innovation (as reflected in the higher MSCI TES scores related to
specific themes) and resulted in lower market coverage (about 50% of index). 5

3. The Innovation Mix approach is a top-down approach that combines single-theme
portfolios to create a broad multi-theme portfolio6. Like the other two approaches, theuse of multiple themes provides a level of diversification, both in terms of themes andnumber of stocks in the portfolio. The top-down nature of this methodology creates anadditional level of transparency and flexibility. It enables investors to dynamically
implement their views as the themes and their macroeconomic views evolve, and it also
provides a simple performance-attribution breakdown across individual themes. 7

Characteristics of broad multi-thematic approaches
To better understand the trade-offs between the three approaches, we compare their
historical behavior using simulated backtesting, from Nov. 30, 2016, to May 31, 2022.
Exhibit 6 demonstrates the trade-off between the exposure to innovation and active risk
relative to the broad market-cap index. Innovation exposure is defined as the average of
4 The Innovation Universal approach reweights all the constituents of ACWI IMI in the proportion of their free
float adjusted market cap and a tilt factor. The tilt factor is determined by stock’s innovation score, and it
ranges from 1 (for innovation scores 0.00 – 0.25) to 5 (for innovation scores 3.00 – 4.00). Please see Appendix
1 for more details on portfolio construction.
5 The Innovation Leaders approach selects, within each sector, stocks with the highest innovation score until
50% of sector market cap is reached. Stocks with innovation score of < 0.25 are ineligible. Please see Appendix
1 for more details on portfolio construction.
6 Here single-theme portfolios are based on MSCI thematic indexes.
7 The Innovation Mix approach combines, in equal weight and at a quarterly frequency, 10 single theme MSCI

thematic indexes targeting the following innovation themes (spanning across the four categories): Efficient
Energy, Smart Cities, Digital Health, Disruptive Technology, Genomic Innovation, Food Revolution, Next Gen
Internet Innovation, Fintech Innovation, Autonomous Technology Innovation, and Future Mobility. The 10
themes represent a parsimonious subset of all innovation-driven themes, to minimizes overlap in scope andconstituents. Please see Appendix 1 for more details on portfolio construction.

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the four category scores (ranging 0-1), and it allows us to quantify the aggregate
exposure to the innovation-driven themes across the four megatrend categories.
Exhibit 6: Trade-off between tracking error, innovation exposure and market coverage

Gross returns annualized in USD. Nov. 30, 2016, to May 31, 2022. Bubble size represents the ACWIIMI coverage.

Compared to the market-cap index, all three portfolios show higher exposure to
innovation. The Innovation Universal resulted in a 7% increase in innovation exposurecompared to the MSCI ACWI IMI (from 10.3% to 17.3%). This improvement was achieved
while holding all of the constituents of the ACWI IMI index and producing a tracking errorof only 2.3%. The Innovation Leaders and Innovation Mix achieved higher innovation
exposure by allowing the portfolio to select the subset of the MSCI ACWI IMI, which
resulted in higher tracking error of 5.2% and 6.4% respectively. 8
The Innovation Universal and Innovation Leaders approaches resulted in an improvementin performance over the MSCI ACWI IMI by 2.0% and 3.8%, respectively (Exhibit 7).
Although both approaches exhibited marginally higher volatilities, they provided
enhanced risk-adjusted returns relative to the MSCI ACWI IMI. The Innovation Mix had thehighest return and volatility.

8 Optimized portfolios targeting innovation could also be constructed if the objective is the optimal trade-off

between tracking error and innovation score. While the optimization approach could provide better control on
tracking error, it might also be more complex than the ones we have considered in this paper.

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Exhibit 7: Risk-adjusted returns of the approaches

Gross returns annualized in USD. Number of stocks as of May 2022. Nov 30, 2016, to May 31, 2022.
Bubble size represents the number of stocks

Exhibit 8 shows the active sector allocations for these approaches relative to MSCI ACWIIMI. The Innovation Universal approach’s tilt-based weighting resulted in modest active
sector allocations. And while the Innovation Leaders approach was designed to include
the most innovative companies within each sector, some sectors like information
technology and health care had higher innovation exposure and were overweighted in thisapproach. The Innovation Mix approach does not apply any control on sectors and active
exposure to sectors can be significant.
Exhibit 8: Active sector exposures relative to the MSCI ACWI IMIEnergyMaterials
Industrials
Consumer discretionary
Consumer staples
Health careFinancials
IT
Comm. serv.
Utilities
Real estateInnovation Universal

-1.5
-1.2
-0.6
-0.4
-2.7
2.7
-5.7
9.8
1.6
-0.5
-1.5

Innovation Leaders

-2.8
-2.4
1.1
1.4
-6.1
9.0
-13.0
12.1
4.5
-0.2
-3.5

Innovation Mix

-3.6
2.2
0.3
-2.6
-5.7
13.2
-14.1
17.4
-2.9
-0.2
-3.8

Monthly averages. Nov. 30, 2016, to May 31, 2022.

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While all three approaches showed higher innovation exposure to targeted innovationdriven themes, it is important to see how different themes contributed to overallinnovation exposure. Exhibits 9 and 10 present the active exposure of each portfolio tothe four megatrend categories and the 14 underlying innovation-driven themes.
All three approaches showed positive active exposures to the megatrends and theirunderlying innovation-driven themes, with the Innovation Leaders and Innovation Mix
providing higher exposures than Innovation Universal. These exposures stand in contrast
to those of the MSCI ACWI Growth and MSCI Information Technology Indexes (Exhibits 2
and 3), which are characterized by a bias towards certain themes and a lack of exposure
to others.
The level of exposure to megatrends and individual themes broadly depended on themagnitude of the portfolio’s active share stemming from its design, as higher active
share could lead to higher exposure. Though, the underlying themes also had an impact.
For themes that have large number of companies operating in their value chain, such as
the digital economy or a disruptive technology, it may be easier to achieve higher
exposure compared to narrower themes without a deep value chain.
Exhibit 9: Active thematic category exposures (%) with respect to MSCI ACWI IMI index

As of May 31, 2022.

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Exhibit 10: Active thematic exposures (%) with respect to MSCI ACWI IMI index

As of May 31, 2022.

Capacity is an important portfolio characteristic, especially when considered for large
allocations. Exhibit 11 shows two proxies often used to demonstrate the level of portfolio
capacity, namely the average-weight multiplier9 and 95th percentile of market-cap
ownership.10 The graphic shows a comparison of the three portfolios with the MSCIACWI IMI, presented as a baseline with high capacity.
Exhibit 3: Capacity proxies in detailMonthly averages. Top market-cap ownership is the maximum ownership of free-float-adjusted
market cap of a security for a $10bn portfolio.

The Innovation Universal approach had a capacity in line with the MSCI ACWI IMI, basedon an average and maximum weight multiplier. The Innovation Leaders had lower
9 The weight multiplier for each stock is the ratio of its weight in the portfolio over its weight in the benchmark.
The average weight multiplier is the average of this multipliers over all the constituents of the portfolio.
10 Given a specific portfolio size, the ownership % for each stock shows what % of its market cap the portfolio
holds. The 95th percentile is across all the constituents of portfolio.

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capacity than the Innovation Universal, but the average weight multiplier was a relatively
modest 3.6x. The capacity of the Innovation Mix was lower than the other two
approaches, which is due to its top-down approach and the direct impact of the capacityof underlying single-theme indexes.
It should be noted that for simplicity, we combined the MSCI thematic indexes and gavethem equal weights to construct the Innovation Mix. Some of the underlying themes are
relatively narrow and the indexes are concentrated, which impacted the overall capacityof the Innovation Mix. To improve capacity, a high-capacity weighting approach can also
be applied.

Innovation in investment allocations
Historically, many asset owners have tended to split their allocations into core andsatellite buckets. Within equity, the core allocations have constituted diversified equity
with the aim of capturing broader-market returns. Satellite allocations usually included
investments that seek to earn excess returns within the allotted risk budget.
We explored three approaches to allocate to the innovative megatrends among these twobuckets:
1. Supplement core market allocations with an innovation allocation. In the previous
section, we showed that a combination of innovation-driven themes exhibited low
tracking error and high capacity. Exhibit 12 shows how funding a broad innovation
allocation from a traditional market allocation changed the risk-return profile of the core
allocation.
Exhibit 4: Efficient frontier using market and multi-theme allocations

Bubble size = Innovation Exposure. Nov 30, 2016, to May 31, 2022.

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Different combinations of market and broad-innovation allocations 11 provided a wide
range of risk levels and innovation-exposure. Predictably, a higher allocation to
Innovation Leaders would have provided a higher innovation exposure, risk and return.
Interestingly, diversification benefits were in play through the higher exposure to
innovative firms which meant a 50-50 combination of the MSCI ACWI IMI and theInnovation Leaders provided higher innovation exposure and higher historical riskadjusted returns.
2. Deploy innovation portfolios in satellite allocations. We recognize that the innovation
allocation comes with its own set of distinct characteristics. Single theme portfolios
might be less diversified and have capacity challenges for large allocations, while
producing high tracking error to market allocations. As such, they have historically beenused in satellite allocations.12 While single theme portfolios may provide flexibility forthematic rotation, broad innovation portfolios can also be used in the satellite allocation
as they provide diversity among themes and may be attractive when investors don’t havestrong conviction on specific theme.
3. Combine innovation allocations with low-volatility allocations. We noted earlier thatthe outperformance of innovation investing has been generated with higher risk. In aprevious MSCI blog, we explored how innovation could have been added to equity
programs by combining it with low-volatility allocations. The research highlighted how
this combination helped balance the trade-offs between higher levels of innovation andrisk.

Value investing and innovation allocations
When it comes to value versus growth investing, innovative companies are often grouped
into the growth bucket, since they might experience higher growth rates than average as
they acquire market share from the incumbents. What about value investors andinnovation investing? To answer this question, we look at the MSCI Value and MSCI
Growth Indexes to detail their innovation exposure.
When combined, the MSCI Value and MSCI Growth Indexes cover the full investible
equities universe. While there could be different approaches to consider innovation withinvalue and growth investing, we apply the intuitive approach of overlaying the Innovation
Universal approach to portfolios tracking the MSCI ACWI IMI Value and MSCI ACWI IMI
Growth Indexes. The resulting portfolios include all existing constituents, albeit at a tilted
allocation based on their innovation exposure score.
As shown in Exhibit 13, the Innovation Universal overlay helped improve historical riskadjusted returns without sacrificing value or growth exposures. In fact, the overall

11 The combination of the MSCI ACWI IMI and the Innovation Leaders portfolio approach is rebalanced
quarterly.
12 According to the report, “Morningstar Global Thematic Funds Landscape 2022.” As of Dec. 2021, theMorningstar database consisted of 1952 thematic funds globally with a combined AUM of 806 billion $. The
thematic funds represented 2.7% of all assets in equity funds, up from 0.8% 10 years ago.

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innovation exposure was significantly higher for both value and growth indexes after
overlaying the Innovation Universal approach.
Exhibit 5: Universal overlay for value and growth

Total returns (%)
Total risk
Value exposure
Growth exposure
Innovation exposure

ACWI IMI Value
Index
8.4
15.7
0.40
-0.33
5.8

Value Innovation
Universal
8.8
15.4
0.36
-0.33
10.9

ACWI IMI Growth
Index
13.0
16.3
-0.39
0.32
15.6

Growth Innovation
Universal
15.0
17.2
-0.42
0.41
20.9

Gross returns annualized in USD. Nov. 30, 2016, to May 31, 2022.

Conclusion
Companies with new and disruptive technologies or products have often taken market
share from incumbents, and this evolution has driven changes in equity indexes overtime.
Allocations to innovation might have previously played a role in the investment process
through fundamental stock selection. But due to challenges around identifying secular
megatrends and portfolio capacity for large allocations, allocations to innovation haveusually been restricted.
In this paper, we presented a framework for asset allocators to seek higher exposure to
innovation in their core allocations. We showed that multi-theme portfolios provided an
opportunity to capture innovation with high capacity and low tracking error.
While not a focus of this paper, it should be highlighted that for “pure plays” on themes,
the more focused and narrow thematic indexes remain important tools. These indexes,
where stocks with significant exposure to the targeted themes are selected from thebroad equity universe, can help investors create financial products they can use to
implement their higher conviction views on specific themes. Some of these indexes may
not offer the capacity required for large allocations (due to high concentration andextensive use of small cap universe), but they may provide the pure small-cap play thatinvestor seek.

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References
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Schumpeter, Joseph A. Capitalism, Socialism and Democracy. Harper Perennial, 1942.
Aghion, Phillippe, Antonin, Céline, Bunel, Simon, and Cohen-Tanugi, Jodie. The Power ofCreative Destruction: Economic Upheaval and the Wealth of Nations: Belknap Press, 2021.
Aghion, Phillippe, Akcigit, Ufak, and Howitt, Peter. 2015. “The Schumpeterian Growth
Paradigm.” Annual Review of Economics, 7:557–575.
Daepp, Madeleine I. G., Hamilton, Marcus J., West, Geoffrey B., and Bettencourt, Luís M.
A. 2015. “The mortality of companies.” The Royal Society.
Baslandze, Salomé 2021. “Barriers to Creative Destruction: Large Firms and NonProductive Strategies.” SSRN Electronic Journal.
Kumar N., Doole, S., Garg, K., Bhalodia, V. and Ghate, D (2019). Indexing Change:
Understanding MSCI Thematic Indexes. MSCI Research Insights.
Doole, S., Neeraj, K., and Bhalodia, V (2020). A Thematic Lens for Portfolios. MSCI Blogs.
Doole, S., Rao, A (2021). The Pace of Fast Change: Growth vs. Thematic Investing. MSCI
Blogs.
Rao, A and Subramanian, R (2021). Innovation Remix: Adding Thematics to Equity
Programs. MSCI Blogs.
Foster et al (2021). Positioning thematic funds in portfolios. Blackrock.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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Appendix 1
The table summarizes the categories and the underlying innovation-driven themes.
Megatrend categories

Innovation-driven themes

Transformative
Technologies

Autonomous Technology Innovation, Cybersecurity, Digital
Economy, Disruptive Technology, Fintech Innovation, Future
Mobility, Next Gen. Internet Innovation, Robotics

Environment &Resources

Efficient Energy

Health & Healthcare

Digital Health, Genomic innovation

Society & Lifestyle

Smart Cities, Food Revolution, Future Education

Megatrend Category Score (CSi) = max (theme relevance score)
Innovation Score = CS1 + CS2 + CS3 + CS4
Innovation Score is used in the construction of Universal and Leaders portfolios
Innovation Exposure = (CS1 + CS2 + CS3 + CS4)/4
Innovation Exposure is a proxy to measure the holistic exposure to innovation-driven
themes
The table summarizes portfolio methodologies:
Innovation Universal

Innovation LeadersInnovation Mix

ACWI IMI

Max (Category score)> 0.25

Relevance score >0.25

Selection

All stocks

Stocks with thehighest innovation
score until 50% ofsector market cap isreachedAll eligible stocks

WeightingMarket cap x
Tilt score

Market cap

Market cap x
Relevance score

Capping

5%

5%

5%

Aggregation--

10 MSCI indexes
combined in equal
proportion

Eligible
universe© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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Rebalancing

Semi-annualSemi-annualSemi-annual

The table maps, for the Universal approach, stock tilt scores to innovation scores.
Innovation score

Tilt score0.00 – 0.25

1

0.25 – 1.00

2

1.00 – 2.00

3

2.00 – 3.00

4

3.00 – 4.00

5

Appendix 2
We have identified a subset of themes from our megatrend suite as innovation-driven
themes for use in designing broad-innovation portfolios. This subset is based on ourassessment and research and some investors may have a different assessment
leading to a different subset. Here we explain the framework utilized for identifying
this subset.
We first need to make the distinction between "innovative companies" and"innovation-driven themes," and while these are not mutually exclusive, they dorepresent different aspects. For instance, themes can be predominantly noninnovation-driven and still include some innovative companies. More importantly, atheme’s drivers are less ambiguous and easier to identify (we have also relied on
MSCI’s external theme experts’ views for this) unlike the definition of what makes acompany innovative. Hence, we have leveraged the former approach. In this regard,
we find the following definitions useful:
Innovation-driven themes. The structural, long-term drivers of these themes are
predominantly technological (information technology/medical/other) advancements
or innovations.
Non-innovation driven themes. The structural, long-term drivers of these themes are
predominantly demographic, behavioral or regulatory.
The table maps each of the themes in our megatrend suite to one of thesedefinitions.

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INNOVATION INVESTING AND EQUITY ALLOCATIONS | OCTOBER 2022

Categories, themes and drivers
Megatrend Category
Society & Lifestyle

Health & Healthcare

Transformative
Technologies

Environment &Resources

Theme

Theme Drivers

Ageing Society
Opportunities

Demographic and Behavioral

Millennials

Demographic and Behavioral

Future Education

Behavioral, Technologicalinnovation

Food Revolution

Technological innovation,
Sustainability Conscious
Consumer

Smart Cities

Urbanization, Technologicalinnovation

Genomic Innovation

Technological innovation

Digital HealthTechnological innovation

Cybersecurity

Technological innovation

Robotics

Technological innovation

Digital Economy

Technological innovation

Disruptive Technology

Technological innovation

Future Mobility

Technological innovation

Fintech Innovation

Technological innovation

NextGen Internet
Innovation

Technological innovation

Autonomous Tech andIndustrial Innovation

Technological innovation

Space Exploration

Technological innovation

Blockchain Economy

Technological innovation

Efficient Energy

Climate Change,
Technological innovation© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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INNOVATION INVESTING AND EQUITY ALLOCATIONS | OCTOBER 2022

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