One of the biggest challenges facing investors at the moment is the rapidly increasing pace of change in a world where companies are being disrupted and displaced at a startling rate. Disruption is occurring in a host of industries for a wide variety of different reasons, but regardless of the specific cause, disruption is a key feature of our current economic landscape and investors must consider its impacts. For this reason, we will be exploring the idea and effects of disruption in more detail at our conference next week. In the meantime, here are some of our thoughts on the topic…
What does disruption mean for us?
Consumer choices paint a stark picture of how rapidly technological innovations can become ubiquitous. While television took several decades from its invention to become a fixture in American households, the internet took just nine years to become a feature of most people’s everyday lives. In January 2014, mobile gaming app Flappy Bird became a global obsession, netting its developer up to $50,000 per day in advertisements and sales, before being removed permanently by the developer just weeks later, owing to his guilt about the app’s overuse and addictive qualities.
However, it is not just technology that it is creating a rapid pace of change. Our changing climate, coupled with increasingly prominent environmental activism, has the potential to act as another powerful disruptor to the world’s most significant industries. Clearly, the energy sector will be affected, given the necessity for the world to move away from its reliance on fossil fuels, but climate change is also likely to affect the transport sector, consumer sectors like fashion and food, and any company involved in building and designing physical infrastructure. Already, companies are having to consider where to build their facilities, with research suggesting that major cities like Bangkok and New York may see frequent flooding by 2050. Over the coming decades, a lot of financial capital will be invested in countering climate change, and as long-term investors we seek to find companies that will be on the right side of that equation.
All the ways in which disruption affects companies are magnified at the global level. The high rate of technological innovation means that traditional sector definitions are starting to break down. Technology used to be a sector in its own right, but with technological improvements changing every industry on the planet, from finance to health care to education, what’s going on in technology has the potential to affect every investment we make, and therefore we must stay informed and alert to new technological disruptors.
For investors, this means a paradigm shift. While investment managers once sought reliability and stability in their long-term investments, the focus now lies in companies that are able to swiftly pivot to new business models and products. CDs were invented in 1982, but in 2019 are functionally obsolete in many parts of the world, giving that product a lifespan of only a few decades. For any company that only made CDs, the last decade will not have been a fruitful one, and any investors in such firms would have been left without much to show for their outlay. It is only companies that are able to embrace new technology with speed that will be able to thrive in a world so ruled by interference and innovation.
How do you cut through the noise?
At Newton, we have used themes for many years to help us understand a complex and changing world. We believe that considering the world through the lens of select investment themes, alongside rigorous bottom-up analysis, is the most effective way to find value in an economic landscape bursting with new entities and business models. The themes that we believe will be most instrumental in shaping the investment landscape over the coming years include:
- rapid technological changes
- the impact of China
- the increasing power of consumers in a digitised world
- the impact of climate change
- demographic changes, especially in the emerging world
We see these ideas as indicative of long-term, structural trends which are likely to disrupt many industries and business models.
One of the core reasons we use thematic analysis to inform our investment decisions is that themes gives us perspective. It is easy to get bogged down in the details, worrying about what the market will do week to week, or even day to day. However, we want to consider the trends that will shape the world of investment and avoid being distracted by market noise, an approach that we believe is important in a world where each day throws up new drama.
How will this affect the financial sector?
Financial services are by no means exempt from the effects of disruption. Digital financial services are coming to the fore, ageing populations and uncertain life paths are changing the pensions landscape considerably, and investors must try to find opportunities in an increasingly ‘noisy’ economic setting. We know that the primary architects of disruption – technology and climate change – are already affecting the financial sector, with responsible and sustainable investment growing rapidly in popularity and new technology influencing everything from stock analysis to the dealing desk.
We also believe an increasingly disrupted world creates an opportunity for active managers. These changes disrupt industries and incumbent companies, which creates considerable uncertainty. Increased levels of uncertainty generally contribute to market inefficiency in the pricing of securities, which should create opportunities for active investors guided by long-term trends. The dispersion in returns can be particularly acute between those companies that are able to adapt and develop their business models in response to structural and technological changes, and those that are not. By analysing these trends and understanding their implications, we believe we will be better placed to identify the companies that can thrive in dynamic markets.
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Please note that holdings and positioning are subject to change without notice.