The crucial role innovative technology investments can play in your portfolio

While many economic sectors have strong growth profiles, there are only a few areas of the market that capture true innovation. Technology — especially information technology and communications services — is the obvious choice given its disruptive applications and rapidly evolving ecosystem. The enthusiastic adoption of generative artificial intelligence and the ensuing rush to invest in the companies supporting it that occurred in 2023 is a prime example.

Another important area of innovation is healthcare, which drives a significant amount of research and development. Within healthcare, innovation plays a critical role in areas such as biopharmaceuticals — like the earlier-mentioned GLP-1 weight-loss medications — and medical technologies. These kinds of innovations can result in improved patient outcomes with the development of new therapeutics, medical imaging, better diagnostic tools and less invasive surgical procedures. Combining technology and healthcare can result in all-encompassing innovation exposure for investors.

Do disruptions actually result in significant returns over the long term? Afterall, for every successful launch of products like the Apple iPhone or Tesla Model S, there are failed or obsolete products like the Palm Pilot or the cassette tape.

Innovation that succeeds at achieving mass adoption often creates a new market that drives rapid growth. The first-mover or first-innovator advantage is often hard to replicate, and competition is slow to catch up. The result is significant return generation for innovation: between April 30, 2009 and April 30, 2024, the MSCI World Information Tech Index and the MSCI World Health Care Index outperformed the broader MSCI World Index — a proxy for broader global equities — by 6.81% and 1.27% on an annualized basis, respectively.

Even if we were to go back beyond the tech bubble in 2000, we would see this same narrative playing out in these two sectors. Both are drivers of long-term growth but provide it in two vastly different ways.

Information technology provides more upside potential for portfolios with access to faster growing companies that create significant competitive advantages through technological disruption. Healthcare provides clients with exposure to more defensive growth characteristics. The sector has outperformed global equity markets, as represented by the MSCI World Index, in every major market dislocation since the inception of the MSCI World Health Care Index in September 1999. Regardless of where we are in the economic cycle, people still need pharmaceutical drugs, the prevalence of disease stays fairly constant and long-term secular growth trends from rising health care spending and aging populations will persist.

Combining technology and healthcare sector exposure in a portfolio is a prudent way to increase innovation exposure and enhance long-term return potential. CIBC Asset Management offers professionally managed solutions, such as the CIBC Global Technology Fund and the Renaissance Global Science and Technology Fund.They enable investors to participate in these sectors conveniently and confidently.

CIBC Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. If you'd like to discuss the insights raised in this article and explore the role innovation might play in your portfolio, get in touch with your advisor or CIBC representative anytime.