Past growth companies may not be tomorrow’s growers, and differentiating between the two could have a big impact on investment returns. A common mistake of many growth equity strategies is that portfolio managers are often too focused on historical growth, explained Evolutionary Tree CIO Thomas Ricketts during a recent market update call. He believes investors are better served with portfolios that focus specifically on innovation, which is the root cause of future growth.

In this recently recorded market update call, Mr. Ricketts also explained the distinction between growth and innovation investing. The former Sands Capital portfolio manager goes on to explain what his new firm is doing to identify investable innovation. If you would like to listen (3 min 23 sec) to this excerpt of the call, please click below, or read his response to this segment below.

NOTE: This is a partial excerpt of a more in-depth audiocast, Bear Market Update: Navigating an Economy in Turmoil. The 1-hour audiocast includes information on the secular trends that are continuing to drive growth through the current recession and over the next five years and beyond. If you would like to listen to the full audiocast, click here.

The content of this call is presented for educational and informational purposes only. Forward-looking statements are not recommendations to buy or sell any security and reflect our own opinions and estimates. Investing in equity securities involves risk and principal loss is possible. Past performance does not guarantee future results.
 

Prefer to read his response? See below for a segment of the excerpt.

“One of the biggest insights I’ve had over the years is that it isn’t really the ‘growth industries’ that add the most value. It’s the companies that are creating real innovations … I think a lot of growth investors chase growth, meaning they do growth screens. They’re looking for companies that have above-average top- and bottom-line growth. The fundamental flaw in that approach is they’re really just finding historical growth. The problem with that is you don’t get paid on past growth, you only get paid on future growth…”

“A fundamental question is what really drives future growth? It’s innovation and evolutionary shifts. So I increasingly prefer to call myself an innovation investor and less a ‘growth’ investor.”

As part of the call, Mr. Ricketts touched on some of the things his firm does to find the latest innovators:

“We systematically track innovators and the innovations they are developing in a proprietary internal database. We include more than 250 leading innovators and track what they are currently developing. We try to evaluate whether those products and services are ready for mainstream adoption, and whether the company is protected with competitive moats around its business…”

“We have a team in place that focuses on identifying the root causes of growth and innovation, and the secular trends and shifts in society. We believe that will enable us to get earlier on the S-curve and we think it will be critical in an economy that’s evolving more quickly.”