Ryan Giannotto, CFA
Innovation is an often-overlooked yet powerful driver of long-term portfolio performance. The Alger Russell Innovation Index captures this by identifying companies that effectively monetize research and development while maintaining profitability.
- Innovation drives outperformance: The Alger Russell Innovation Index returned 16.44% annually, outperforming traditional growth indexes with lower volatility.
- Smarter growth strategy: It combines R&D intensity and profitability to identify high-value companies, avoiding the usual high-risk growth traps.
- Better value, stronger growth: Despite lower P/E and P/CF multiples, it posts the highest long-term growth forecast—showing innovation can be undervalued.
The beckoning call of innovation
Market volatility is a passing phenomenon but innovation is an enduring reality. A key question facing investors is whether they can position their portfolios for the next wave of technological disruption—or whether they will be subsumed by it.
Short-term market dislocations attract a lot of attention. But whether the CBOE Volatility Index (VIX) is at 10 or 30, the 40% compound annual growth rate in computer processing power (i.e., Moore’s Law) has been a constant for more than four decades.
The Alger Russell Innovation index confronts the classic innovator’s dilemma head-on. It quantifies and selects companies according to the extent by which they effectively monetise research and development expenditures. Based on simulated past performance, the index yields unique outcomes from perspectives of historical performance, risk efficiency, valuations and factor exposures.
Innovation and the digital economy
There has been an inexorable rise in intangible assets as a percentage of total assets in equity markets: for example, the share of intangibles over the last 30 years in the Russell 1000 Index has soared 160%. As a result, the true drivers of growth may be eluding conventional balance sheet accounting.
Alger Russell Innovation Index Total Returns: 2004-2024
Source: FTSE Russell Data, December 2024. Past performance is no guarantee of future returns. Alger Russell Innovation data is simulated. One cannot invest directly in an index. Please see the end for important legal disclosures.
To contend with this changing reality, the Alger Russell Innovation Index uses a two-fold approach to rank and select constituent companies from its starting universe, the Russell 1000 index: the relative intensity of companies’ expenditure on research and development; and their profitability. This hybrid methodology teases out many of the common pitfalls in high-growth strategies, which frequently overweight high-beta, high-multiple and high-duration names. Typically, such high-growth strategies incur additional risks, while failing to capture the key variable— Return on Innovation (ROI).
Innovation as a driver of returns
Based on a back-test, with a selection of 50 equally weighted companies from the Russell 1000 starting universe, the Alger Russell Innovation index achieved a 35% higher risk efficiency compared to its benchmark from 2005 to end-2024. The index returned 16.44% on an annualised basis, outperforming the Russell 1000 Growth Index by 288 basis points a year.
These returns, moreover, were accomplished not by the assumption of greater risks, but rather through the strategic selection of stocks. Not only was the historical beta slightly below 1.00, but the Alger Russell Innovation index’s volatility in excess of the Russell 1000 and Russell 1000 Growth indexes amounted to only 182 and 136 basis points, respectively.
Persistence of Returns and Drawdown Analysis
Source: FTSE Russell Data, December 2024. Past performance is no guarantee of future results. Alger Russell Innovation data is simulated. Please see the end for important legal disclosures. Past performance is no guarantee of future returns.
Over the period, the persistence of the return patterns was resilient to a striking degree. While the Russell Alger Innovation index outperformed in 72% of observed years, the worst 5-year return (at -5%) paled in comparison to -10% for the Russell 1000 Index and -39% for its Growth Index counterpart. Empirically, the Russell Alger Innovation index methodology accessed non-standard return factors to drive its performance history.
Re-examining the price of growth
The traditional calculus contends that elevated growth rates must necessarily command a premium to market valuations, but the Alger Russell Innovation Index re-examines this relationship. Essentially, the index maintains that innovation is a more efficient predictor of future growth than past growth rates, and the historical data bear out this contention.
Valuation Multiples and Growth Rates by Index
Source: FTSE Russell Data, as of December 31st, 2024. Alger Russell Innovation data is simulated. Please see the end for important legal disclosures. Please see the end for important legal disclosures. Past performance is no guarantee of future returns.
The Alger Russell Innovation index realised the lowest Price to Earnings (P/E) and Price to Cashflow multiples among indexes in its peer group, with multiples of 26.34 and 16.81, respectively. And despite being valued at a discount, the Alger Russell Innovation index achieved the highest IBES long-term growth forecast of 16.6%.
To put these figures in perspective, this innovation-centric index combined a 51% earnings yield premium to the Russell 1000 Growth Index with an additional 31 basis points of long-term growth. This seemingly contradictory phenomenon transpired as the US equity market became highly concentrated in a few high-multiple companies: in other words, the monetisation of innovation can broaden portfolio exposure profiles.
The innovation factor
Our research shows how the inexorable pace of innovation can reshape performance, volatility and volatility measures, but it also fosters new alignments between market factors. By examining the factor exposure of the Alger Russell Innovation index between September 2024 and April 2025, we can see that the index’s twin-track focus on innovation and profitability is most meaningfully exposed to quality and small size. The portfolio’s average market capitalisation is reduced to $35.9 billion (from $58.3 billion in the Russell 1000 index), and importantly, the strategy is not reliant on momentum either.
Alger Russell Innovation Index Factor Profile
Source: FTSE Russell Data, April 2025. Factor exposures reflect end of month values. Past performance is no guarantee of future
This unique confluence of factors suggests that innovation has its own, distinct exposure profile, outside the strictures of established definitions. It is not duplicative of existing risk bets: indeed the index’s 50 equally weighted holdings received only a 3.32% weighting within the market capitalisation-weighted Russell 1000 benchmark.
By targeting innovation leaders, the Alger Russell Innovation index eschews assumed trade-offs and truly extends the investment frontier.
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