Old Mutual Wealth

How innovation leads to sustainable growth

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In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow.

Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities discusses how innovation leads to sustainable growth.

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Old Mutual  00:02

 

Investing your wealth is a journey that demands skill, in depth knowledge, experience, and conviction from the investment manager. From you, the investor, it demands time, patience, and trust in your investment manager's ability. While investing is certainly rewarding, it can be complex. You will have questions along the way, and we're here to help you find the answers. In this series, our Old Mutual Wealth Investment Managers answer some hard questions and demonstrate how they do the hard thinking and work so that you don't have to. Their answers are based on an in-depth understanding of the local and global economy, financial markets, and the driving forces that will shape tomorrow. 

 

Ian Fraser  00:46

 

Welcome to the podcast, it's great to be with you. And today, we are talking innovation. Wow, that word is everywhere at the moment, and we'll open it up and expand it a little bit more here. Let's welcome Andrew Dittberner, the Chief Investment Officer at Old Mutual Wealth Private Client Securities. Hey, Andrew, good to have you on the podcast. Welcome.

 

Andrew Dittberner  01:06

 

Good morning. Thanks Ian, thanks for having me.

 

Ian Fraser  01:08

 

Let's talk innovation. It's all around us. We have not been able to escape its big grip in all sorts of areas of our lives. I'd first like to contextualize when we say innovation. What is it that we're actually talking about? Because there's so many facets to this subject. 

 

Andrew Dittberner  01:27

 

Ja, so innovation, I mean, particularly over the last, I suppose, couple of years, no, more than a couple of years now, it's been very much a buzzword when we think about innovation. But innovation has actually been around for many decades, centuries, we've been innovating century over century, and when you just break it down, I suppose, into your first principles, simply put, one can just think of innovation as changing technology, technological change over time. And when you think about well, what is technology? Well, technology is just the use of scientific knowledge, to take some sort of material, labour, money, and produce something that's worth more or of a higher value than what it is in its original form. So, innovation is just improving that technology over time. So, you know, simply put. 

 

Ian Fraser  02:16

 

Okay, so really, to reiterate, innovation leads to growth, and growth means more money for us when it comes to investment. Is that the basic way that we can look at it?

 

Andrew Dittberner  02:27

 

Ja, you know, I think that's a good way to put it, you know, if you think... if we're talking about growth, and you can think of growth at a very high level. If you think macro-economic growth, you know, where does growth come from? It comes from only two places, essentially. It's either population growth or productivity growth. So, if you think of population growth, that's more people on the planet, demanding more goods and making more goods. 

 

Alternatively, productivity growth. Where does productivity growth come from? Well, being more productive with your time, innovation plays into that. If you come from a micro level, you know, I think in other companies, you've got - where does growth come from, if you're looking at bottom line earnings growth, it's going to come from either revenue growth. Well, it's going to also come from improved efficiencies, and efficiencies can be improved about due to productivity, which again, comes back to innovation. And from a revenue perspective, maybe it's newer goods, improved goods, and if you're innovating around what goods or experiences or services you're producing, that can lead to revenue growth, which ultimately can drive your bottom line earnings.

 

Ian Fraser  03:31

 

I want to point back, because very much while we’re talking here, I'm thinking innovation means today, and in the future, what's happening right now, but innovation is not a new thing. I mean, it's not a new phenomenon at all, we go back hundreds, if not 1000s of years to the beginning of time, really, and the invention of the wheel. That was innovation. You know, I mean, it really has been going on for centuries, hasn't it?

 

Andrew Dittberner  03:52

 

No, exactly. So, as I mentioned earlier, it's the buzzword at the moment or has been, you know, particularly disruptive innovation, which we can chat about - what disruptive innovation is versus sustaining innovation. But if you go back, you mentioned the wheel, we can go back to the 1700s, we saw Arkwright's water powered mill, which resulted in the industrial revolution. And then as the industrial revolution took place, you had more and more goods being produced. 

 

And what happens when more goods are being produced? Well, they need to be transported, and that led to - at the time, there were definitely no aeroplanes around. The steam engine wasn't around. So, how did they transport goods? That lead to the canals been built in the UK, and that was the innovation of their time. You've got Ford, the Model Ts coming out in the early 1900s, that led to mass production, that was innovation. 

 

So, when you think about innovation, often we think today, technology, the type of tech that when we talk technology, we think of like our iPhones, our laptops, that sort of stuff, but technology as I mentioned earlier, goes way, way back, as does innovation.

 

Ian Fraser  04:58

 

How does this innovation now drive growth in companies? I mean this is really the meaty stuff that we want to get into, and looking around, you know, are innovative companies the ones that we should be looking out for, in terms of, of this context of what we're talking about. Really, how does innovation drive growth in these companies?

 

Andrew Dittberner  05:19

 

So, coming back to the growth story that I mentioned earlier. A company is able to grow by either growing its revenue, alternatively it can improve its margins. And to improve its margins, it needs to be more efficient, so producing the same goods effectively at a lower cost. And to do that, they might come up with a new process. So, when you talk about disruptive innovation, that's coming up with something new. Alternatively, sustaining innovation is when you improve upon an existing good, process, service, whatever it might be. 

 

So, thinking about widening your margins, you might be innovative, sustaining innovation by improving your process. And as I say, producing the same goods at a low cost. Alternatively, you might come up with a brand new process, and that's your disruptive innovation. Similarly, when it's about your goods or the services, you're offering three and then you are offering four, and that's sustaining innovation, you're just improving upon, but people want the iPhone 4 or the iPhone 5, because it doesn't have the head jack, or it's got more memory, it's smaller, bigger, you know, whatever the case may be. 

 

Alternatively, it could be disruptive innovation, which is something completely new. The problem - not the problem, but I suppose when you think about disruptive innovation, you're often going on gut feel, you don't have the data to back your decisions, because this is brand new. You don't know how big your market is, this is a brand new product. So, disruptive innovation, very much more risky when it comes to what's the end result going to be. Is it going to be successful or not relative to sustaining innovation, but both of them play into revenue growth, and improving margins for businesses.

 

Ian Fraser  07:02

 

Andrew let's talk now about these companies, these innovative companies, from an investment point of view. I'd very much like to find out about whether these companies are potentially more valuable. Let's take a high level view of it and kind of go, what are we looking for when we see these companies that are innovating and creating disruptive processes, etc.? Are they valuable companies to look at? Are they concerns? Are they high risk? What's the lie of the land there?

 

Andrew Dittberner  07:29

 

So, if you do a simple Google search around the world's most innovative companies, and then go and search the world's most valuable companies, you're going to see a significant overlap. It's going to be the same names that pop up - your Amazon's your Apple's, Microsoft's, Alphabet, or Google's of the world. So, innovation does lead to higher valuation. And that's because those companies are tending to grow a lot more quickly, their growth is a lot more stable, and at the same time, they're a lot more profitable. So, valuation or innovation does help or assist valuation.

 

Ian Fraser  08:05

 

Nice one. Andrew Dittberner, thanks for that insight. The Chief Investment Officer at Old Mutual Wealth Private Client Securities, thanks for your time today on the podcast. 

 

Andrew Dittberner  08:14

Thanks, Ian. 

 

Old Mutual  08:14

Old Mutual Wealth is a world class investment destination, offering you a wide range of investment strategies and specialist wealth management solutions. Whether your goal is to grow your wealth, generate income, or preserve capital, we select the best and most suitable investments based on your investment strategy and our extensive research and collective insights. It's vital to work with reputable specialists who can effectively structure an investment portfolio that is tailored to your unique needs and objectives. Email us at hardquestions@omwealth.co.za, so that we can help you take your wealth further.