Right across the board – in everything from agriculture and health care to entertainment and leisure – innovative companies are leveraging the power of big data, the Internet of Things, AI and automation to drive change. And they are doing so at a rate that was unimaginable a generation ago. The emerging new technologies are making mischief on the competitive landscape: market leaders are being created and then ousted faster than ever before.
“Our job at Investment Quorum is to seek out those bone fide disruptors – the Amazons and the Apples of tomorrow that represent smart, long-term investment opportunities. The challenge now is to invest in those opportunities as early as possible”, says Chief Investment Officer Peter Lowman.
Technology trends and disruptive innovation have a powerful influence on the investment landscape.
“As investors, we need to understand this new reality and position our clients’ portfolios for long-term growth”.
As the rate of technological change continues to increase, Moore’s law will become less relevant, and under the new law of more exponential growth, innovation will accelerate at a previously unimaginable place. The result is a technological arms race, and companies around the world are having to go back to the drawing board on a regular basis in order to not simply thrive… but survive.
Disruption has to be the norm
In a changing world, innovation catalyses growth and success. Companies that do not embrace innovation are more likely to lose market share and ultimately face the threat of insolvency. History is peppered with famous examples: the rise and fall of Kodak, Blockbuster failing to predict the success of online streaming services and Microsoft’s Steve Ballmer comically underestimating the pull of the iconic iPhone, to name but a few.
Innovation comes in a number of shapes and sizes. At one end, you have constant tiny improvements being made to products or services – such as minor upgrades to operating systems or firmware. And at the other, you have fully-fledged disruption: the application of new technology or processes to a company’s current market.
On its own, innovation might simply impact a process in some moderate way (such as a factory production line), but without annihilating an industry’s long-term future. True disruptive innovation, however, can destroy or irrevocably alter entire sectors.
What this means for investors
The way in which we invest is also being changed by the pace of innovation. Historically, companies had a lifespan of 50 or more years. So any investment decisions had lasting repercussions. A long-term view was therefore critical. But to secure long-term returns in today’s fast changing environment, investments need to be robust and structured more flexibly in order to seek out and keep pace with fast-moving opportunities.
Disruptive technologies will most likely create opportunities across all asset types – everything from utilities and transportation to renewable energies and telecommunications. But where change will be felt most acutely is difficult to predict – it is influenced by factors such as regulation, funding… and more recently pandemics.
A knock-on effect
As we wrote last month, by 2022 there should be over 500 different electric vehicle models available globally, and cheaper batteries should continue to drive EV prices down until they account for up to 10% of global passenger vehicle sales.
Disruption in the transport sector is having a knock-on effect on other sectors. Increasing EV charging rates are expected to put pressure on local utility networks and circuits, so more resources will be needed to handle these increasingly large energy consumption rates. As more EVs are connected to the grid, significant spikes in demand will likely impact stability, efficiency, and operating costs of the grid. Owners of these grids must therefore invest substantial amounts in their infrastructure to replace and upgrade their transmission networks, otherwise they will not be able to accommodate these changes.
3D printing has been used in manufacturing, healthcare, the safety industry, the food sector and even in fashion. And in another corner of the transport sector, 3D printing is set to significantly impact freight, logistics, shipping and much more. Being able to build large and complex components at significantly lower costs will transform how many major ports operate in the future.
Containerisation, for example, has been one of the most important logistics inventions of the 20th century and has played a significant role in globalisation. Containers have standardised dimensions. They can be loaded and unloaded, stacked, transported and transferred from one mode of transport to another – container ships, trains and lorries – without being opened. However, as costs fall and 3D printing technology becomes more sophisticated, the direction, velocity and volume of global commodity flows are changing. For example, we are transporting fewer finished products, and more raw and semi-processed raw materials. As printing technology improves and becomes more mainstream, ports that cannot adapt to the diversification in types of freight risk becoming redundant.
When it comes to disruptors, timing the market is practically impossible
At Investment Quorum, we watch out for and keep abreast of disruptors and invest accordingly when selecting fund solutions for our clients’ portfolios. The problem is, it is not always easy to predict when and where exactly shift will occur… and when we should embrace it as investors.
Investing in emerging technology is an interesting challenge, but getting the time horizon absolutely right is tricky. The reality is that major disruptors are few and far between. And more often than not, the time between invention and mass adoption is difficult to predict. Once a new technology reaches critical mass, however, the market takes notice quickly and acts swiftly.
The example on everybody’s lips at the moment is Zoom Video Communications – makers of Zoom Cloud Meetings… or just Zoom for short. Zoom was first released in September 2012, and its share price changed very little over the first 12 months following its IPO. It joined the NASDAQ 100 stock index on April 30, 2020, and its share price is now up an astounding 547% on what it was five years ago. Zoom’s unpredictable timeline confirms the legitimacy of a long-term buy-and-hold strategy in order to benefit from the growth curve of disruptive technology stocks.
But then what about Skype – once the darling of peer-to-peer VoIP-based video telephony? Acquired by Microsoft in 2011 for US$8.5 billion, the Redmond giant has decided not to bundle it with the forthcoming Windows 11. “Together we will create the future of real-time communications,” Microsoft’s then-CEO Steve Balmer had enthused. It turned out to be rather short-term future. In the space of only 10 years, the disruptor has become the disrupted.
Targeting the industries that are leading disruption is key
In March 2012, Amazon acquired Kiva Systems (a Massachusetts-based company that manufactures mobile robotic fulfilment systems) for US$775 million. This acquisition – Amazon second-largest at the time – turned out to be a gamechanger. Since then, companies have used AI and robotics to create equally massive change in many other industries: companies are disrupting the healthcare industry by using AI technologies to remotely manage patient care. They are solving the global crises around access to healthcare, helping to reduce costs, and easing the issues presented by the pandemic and the imminent GP shortage.
These solutions are helping to serve the exploding population of aging adults. Genomics, diagnostics, and precision medicine companies are also changing healthcare as we know it. The ability to sequence the human genome, discovered just 15 years ago, has made it possible to predict, diagnose, and treat diseases more precisely and more personally than ever. There is no way that we would have such an array of Covid vaccinations were not for our ability to interface AI and big data (as of 8 July, 20 vaccines have been approved for use across the world and an astonishing 94 further vaccine candidates are undergoing human trials).
Disruptors in a post-covert world
While every one of these disruptive technologies is compelling, there are many others waiting in the wings—which is why trying to predict the winners is almost impossible… or at least a challenge requiring the skills of an experienced team of investment analysts-cum-futurologists. At Investment Quorum, we are focused on funds that are positioning themselves so they can capitalise on genuine growth. According to Mark Hawtin (who runs the GAM Disruptive Growth fund), that can sometimes mean excluding many mega-cap companies, notably Apple, which he believes is over owned by asset allocators.
“We believe there are two key reasons why the strategy is positioned for outperformance in 2021. The first is our structural thesis as the world moves away from platform disruption and multi-year winners like the FAANGs, and more in the direction of the Internet of Things, where disruptive names in industrials, the automation of knowledge, transportation and healthcare will gain better traction. These sectors will be driven by 5G rollout, data proliferation and advanced AI”.
Innovation and disruption will most likely be the most important drivers of stocks in the years ahead. “Investors cannot ignore disruption”, agree James Dowey and Storm Uru, fund managers of the Liontrust Global Equity and the Liontrust Global Dividend funds – even if it is extremely difficult to pinpoint where exactly it is hiding.
Furthermore, many fund managers believe that the cyclical move towards a post-Covid world will benefit names that were less favoured in 2020. It is expected that “work from home” facilitators will take a pause in relative terms, and that the market will pivot its focus towards cyclical economic recovery and areas of the digital economy that were heavily impacted by the pandemic – such as travel and leisure.
Peter Lowman believes that owning the right companies through the right funds will allow investors to capitalise on fast-moving trends that will influence the world in the decades ahead, providing flexibility to build portfolios that deliver both long-term capital growth and yield.
Conducting appropriate research affords us the understanding we need to be able to apply the correct risk-adjusted exposure to disruptive technologies in each of our strategies. This will provide our clients with an advantage so they can leverage the potential of disruptive technologies in their own portfolios.
Peter Lowman is the Chief Investment Officer at Investment Quorum,
a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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