Revisiting the Innovation Equity Risk Premium with News

As global economic trends continuously reshape the world's financial landscape, thematic investing has emerged as a powerful tool for investors to capitalize on these shifting patterns. Traditional, human-based approaches to tracking companies with significant exposure to innovation are time-consuming and resource-intensive. Data-driven and NLP-based techniques offer a more efficient and comprehensive solution. By leveraging alternative data sources and employing advanced algorithms, these approaches can identify and track companies that align with emerging themes in real time, enabling investors to make informed decisions and stay ahead of the curve.

In this white paper, we propose a novel news-driven systematic procedure to construct equity thematic portfolios around innovation. We particularly find evidence that a volume-based measure of media attention tracking intellectual property is a strong predictor of firm-specific performance across various geographical regions for mid- and large-size companies from 2011 to 2023:

• Companies with high media attention around R&D outperformed their peers across all regions, with a returns spread of nearly 400 bps for the Global portfolio;

• Long-short and dollar-neutral equity strategies were profitable across all regions, with an Information Ratio of 0.69 for the Global portfolio. Outperformance remained when controlling for systematic factors, suggesting the existence of a distinct priced risk factor complementing the traditional Growth factor;

• Addressing the sector bias, a long-short, dollar- and sector-neutral portfolio generated an Information Ratio of 0.37 with a 3-month effective holding period (see Figure below).