James Dowey

Why investors can’t ignore disruption

James Dowey

Disruption is on the rise and it is all around us. It is affecting every sector of the economy and the implications for the winners and losers it is creating are profound. On the one hand, disruptive companies are attacking markets with new products and business models, driving huge profits and growth. On the other hand, it is becoming increasingly common to see the destruction of existing products and business models and the companies – often long-lived and once loved – associated with them.

The rise of disruption is measurable. New products are spreading through society much faster today than in the past. In the early decades of the last century, it took 26 years for television to be adopted by 25% of the US population and in the 1970s and 1980s it took computers 16 years and the cell phone 13 years. But in recent years, it took only two years for 25% of the population to adopt tablet devices.

At the same time, the lifespan of companies is getting shorter. In 1960, the average age of an S&P company was 60 years, today it is just 20. Something is changing in the economy and investors should take note. Picking the disruptors and avoiding the disrupted can be a very successful approach.

What, in a nutshell, makes a good disruptive investment? A successful disruptor does two things. First, it creates value for consumers over and above the existing offering in the market. For all the passing fads and whiz-bangs in the world, there’s no getting around the basic economics of what this means: lower price, higher quality or a combination of both. Second, it captures a significant share of that value. A good disruption investor only invests when he or she sees both.

The rewards to investing in disruption can be very significant. Indeed, disruption is the most powerful driver of shareholder value. A dollar of sales generated any other way – such as competing for market share among existing products – tends to generate far less than a dollar of shareholder value. But a dollar of sales generated through disruption on average creates almost two dollars of shareholder value.

Disruption investing is not the same as the more commonplace strategy of tech investing. It is true that technology is very important for disruption because it often enables the development of new disruptive products and business models. But disruption is much broader than tech and as such it is a more diversified strategy. When we map the disruption landscape in our research, we refer to the “Magnificent Seven of Disruption”. These are seven fundamental drivers of disruption – automation, artificial intelligence, brand fragmentation, digitalisation, the environment, breakthrough science and platform business models – which collectively permeate every part of the stock market, producing winners and losers in every industry.

Looking forward over the next decade, we believe that investors simply cannot ignore disruption. This is because there are currently five accelerators of disruption today that will ensure even greater disruption ahead than we have experienced already in recent times.

The first of these is innovation, which is the pipeline for disruption. It is simply booming – the rate of patenting in the US is double what it was a decade ago.

Second, not every innovation is equal in terms of its implications for disruption. We believe artificial intelligence, which is currently coming on stream across most sectors of the economy, is a “game changer innovation” and is set to become one of the most disruptive innovations ever.

Third, the strategic race for technological supremacy between the US and China, which is rapidly heating up, will incentivise innovation just as Western versus Soviet competition did during the Cold War. This will accelerate disruption.

Fourth, today’s extremely low interest rates favour investing in disruption because they put the focus of valuation on longer-term rather than near term cash flows. This means the stocks of disruptors, with profit growth ahead of them in the years to come, are richly rewarded by markets, and those of disrupted companies, with question marks over future profits, are severely punished.

The final accelerator is the one that makes disruption so important to investors just now. The Covid-19 crisis is accelerating many disruptive trends, whether for retail disruptors like Amazon or automation disruptors like the Japanese company Keyence. We have witnessed three years of disruption in three months.

The two giants of investment styles historically have been value investing and quality, or “moat”, investing. Value investing is about reversion to the mean – returning to the past. Moat investing is about protecting the status quo – maintaining the present.

We believe disruption investing is the third great investment style. It is about investing in the future and its time has come.

Disruption investing could dominate the next decade.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.


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Friday, May 29, 2020, 9:53 AM