At a time of heightened unpredictability in an evolving world order, investors can find an element of consistency by focusing on high quality companies that prioritise sustained innovation, according to portfolio manager for the Morgan Stanley Investment Management’s International Equity team, Bruno Paulson.
“In order to thrive and withstand the current market volatility, even the world’s most enduring franchises must keep evolving.
“Companies that demonstrate innovation through groundbreaking product development or cutting-edge AI applications remain best positioned to navigate market shifts, capture new opportunities and are more inclined to succeed in the long term,” said Mr Paulson.
Innovation extends beyond disruptive or breakthrough inventions. Incremental innovation is a core strategy for maintaining relevance, driving competitive differentiation, and enabling long-term growth.
According to Mr Paulson, companies within mature and well-penetrated industries like consumer staples still need to innovate in order to strengthen their market positions and meet evolving client needs and expectations.
“In an industry like consumer staples, achieving growth and maintaining pricing power requires a steady pipeline of innovations that address consumer needs, supported by sustained marketing investment and best-in-class execution.
Mr Paulson pointed to Procter & Gamble and Coca-Cola as examples of the select consumer staples companies the team chooses to own through its quality portfolios that demonstrate sustained innovation.
“For example, Procter & Gamble (P&G) allocates 14 per cent of its revenue to research and development (R&D) and advertising, ensuring continuous product innovation.
“Most recently the company launched Tide EVO, a water- activated laundry tile incorporating fifty patents. Packaged as a dry tile rather than encased in plastic, the product is targeted at consumers who want to a zero-waste product and can decrease plastic and energy use. The innovation of this product not only addressed the need to adapt swiftly to changing consumer needs but also helped P&G to gain more market share, sustain pricing power and resilient gross margins, after maintaining for the past five decades mid-single digit organic growth in this category,” he said.
In the beverages sector, Coca-Cola, which operates over 500 brands across soft drinks, waters, juices, teas and coffees, continues to expand its functional portfolio through strategic innovation. This year it launched Simply Pop, it first prebiotic soft drink, and the Fairlife brand, which is now a leader in the US protein drink segment.
“Despite currency headwinds and macro-economic turbulence, Coca-Cola continues to grow earnings. This is a testament to its strength and alignment of its global system and continued persistence towards the “Total Beverage Company” strategy. The company continually looks for gaps in the market to expand into and innovates new products to meet those changing consumer needs.
“Coca-Cola also innovates at an operational level. It strategically refranchised it bottling operations by streamlining its structure, reducing capital intensity and directing focus to higher return activities. This has resulted in improved gross and operating margins, as well as higher returns on capital, supporting a more favourable valuation multiple.
“In our view, Coca-Cola’s integrated growth strategy, underpinned by innovation and operational efficiency, positions it well to navigate economic challenges and sustain its market leadership,” said Mr Paulson.
Companies that have mastered the art of recurring revenues and pricing power are often underpinned by strong innovation, which Mr Paulson said is important to weather the turbulence of today’s market.
“In order to thrive, even the world’s most enduring franchises must keep evolving. We continue to deepen our understanding of companies that demonstrate innovation to underpin longevity, whether it be through groundbreaking product development or cutting- edge AI applications, high quality companies that prioritise sustained innovation are on the right track for long-term and sustainable performance,” he said.
