Our grandparents could buy blue chip stocks and put them in a drawer without concern for 20 years. They invested in solid and dependable household names, such as banks, mining companies and department stores that were part of their lives.
Many of these large cap blue chip companies are still with us and familiarity can gloss over the potential that old stalwarts might be ripe for disruption and not the solid long-term investments of the past.
We have been talking to clients for some time about the changes the current industrial revolution is making, and will continue to make, to our lives and the flow-on effect to companies that thrive and those that fall by the wayside. This is interesting and impactful in terms of the way we live but also important in driving how we invest.
While there are and always will be companies disrupted by a newcomer or a better idea, what we are talking about is the disruption of whole industry sectors and the broader market.
In times of disruption, change is not linear. Instead, it takes the form of an ‘S’ curve with rapid, almost vertical growth. For growth to follow this trajectory a convergence of technologies is required and, when combined, they deliver solutions that achieve momentum to drive the price down.
History tells a story
The new option becomes not merely viable, but compelling to the point that traditional incumbents cannot compete. For example, who owns a Kodak camera today? Some of you will remember the competition between Beta and VHS, quickly replaced by Blu-ray and now streaming services.
Many of you will have seen photos of Fifth Avenue in New York in 1900 showing the horse and carriage as the primary form of transportation with just one vehicle and a second photo showing the same street just 13 years later in 1913. The second photo shows only one horse and carriage, as they had been all but replaced by vehicles. This rapid change from horse to vehicles happened in a timeframe most could not have imagined. In addition, during this short time the infrastructure, roads, petroleum industry and outlets to fill up were established.
These rapid changes were not isolated to one industry; they broadly impacted a range of industries. In transportation (horse to mechanical to electric and soon autonomous), communication (telegraph to telephone and now to data and the cloud) and energy sectors (steam to fossil fuels and solar). These three key areas - transportation, communication and energy - impact all parts of our life, work and economy and together provide the momentum for an industrial revolution.
Disruption is not without pain. It is a time where old industries and jobs are lost and new industries and jobs created, with an unequal impact on individuals. Longer-term, the disruption ultimately provides significant productivity benefits, lower cost of living and improves people’s lives. Owning a car is an expensive, and for many a necessary, cost to buy, run, register, insure and maintain. Tony Seba, an author, thought leader and lecturer at Stanford University, researches and speaks extensively in this area. He predicts that travel due to electric and autonomous vehicles will cost as little as 18 cents a mile (29c per kilometre), making it uneconomical to own a car - but perhaps still desirable for some.
The coronavirus pandemic is not likely to significantly change the impacts of the current industrial revolution, but it is likely to speed up an already rapidly changing space. In transportation, we are likely to see an increase in drone delivery, as well as electric and autonomous vehicles given the ability of these solutions to provide both efficiency and social distancing benefits. In personal transportation, cars may no longer be idly parked for the majority of time by owners, but instead in continuous circulation (increased unit productively). Electric vehicles can achieve 2.5 to 3 times the life of a petrol vehicle and are cheaper to run and maintain, making them an obvious choice for fleet providers. There are always flow-on effects such as repurposing empty car parks as green zones or bikeways. New buildings will have minimal parking and old buildings will need to find another use to get a return on the empty space. Even with social distancing and a reduction in public transport in the short term, cheap driverless vehicles in continuous circulation can offer the social distancing at a significantly lower cost than car ownership and parking in the future.
In communication, we have seen a massive shift to online meetings (Zoom, Microsoft teams) and the need for cloud computing due to working from home and the inability to travel. This has highlighted the flexibility going forward of more people and businesses opting to work from home more permanently or as a partial supplement to the office. Online meetings have replaced business travel, at least for now, and are more cost-effective compared to flights and hotel accommodation, not to mention the time commitment. Online shopping also gives us more time, often more choice and is conveniently delivered (contactless) to your door.
In energy, the move away from fossil fuel to clean renewable energy provides cost benefits aided by the convergence of safe fast battery storage capacity. Both in travel and home use, energy cost will see a significant reduction and a disruption of incumbent energy providers who will struggle to compete with property owners providing their own energy for themselves and their tenants at a marginal cost that is almost zero.
The productivity increase and cost savings that result from new technologies and convergence, combining to provide new solutions, delivered faster and cheaper, ultimately increases living standards as goods and services become more affordable.
How does this influence my investment decisions?
Having an investment strategy that provides an appropriate mix of growth and defensive assets and provides diversification by investing in a range of asset classes remains the foundation of constructing your investment portfolio. Selecting specific investments is a bit more complicated because of the research required, which only becomes more challenging in times of significant disruption.
Without expertise, stock picking can be a passive form of investing, as investors tend to buy and hold (like the old blue chip stocks in a draw) and base their thinking on familiarity and information readily available. This approach can be a higher risk option today with the potential for stranded assets and industry disruption.
A more active style is required to navigate the rapid changes and new directions driven by technology convergence. This applies whether investing in your own name, your super fund or another entity - the investment basics and challenges are the same.
Managed funds remain a good alternative to obtain additional diversification and expert management and can be selected by specific asset class, blends of assets and investment style (e.g. passive, active, growth, value). The benefits of an appropriate mix of defensive and growth assets, investment styles and asset classes outweigh the small cost of a managed fund.
Investing is not about how a company is performing today, it is about the long term and how a company will perform in the coming years. Determining which companies will do well in a time of broad market disruption can be difficult by only traditional means, such as considering management quality and experience, balance sheet, industry position and market share.
For instance, consider the following:
- What industries will benefit from the move to cashless payment? Does it change who controls the payment space today (banks) and which companies might be positioned (PayPal) to grow or be further disrupted by a new entrant (block chain/electronic currency)?
- When delivery becomes cost effective for merchants and fast enough (on time delivery) for consumers, a situation that is already rapidly approaching, online shopping will explode beyond the already increasing rates. Which businesses will be best positioned to benefit and provide services (cloud computing, logistics, drone and driverless delivery, 3D printing) and which will suffer (retail, existing delivery that fails to adapt, warehousing/property)?
- Which business will benefit from cheap electric vehicles? Will companies outsource deliveries to fleet providers? Will you own a car in five or ten years, and if not, what combination of companies will provide transport?
Expertise and research are essential to stay ahead of these questions and consider both the positive and negative impacts. Identifying an opportunity at the bottom part of the ‘S’ curve can provide an exponential upside. The better fund managers are not only aware of these trends; they are already capitalising on them.
Not all managed funds or fund managers are equal, and there is still research to do. Naturally, you want to select a manager who has the expertise, experience, and resources and systems to deliver. The particular fund you invest in must also be managed in line with the stated objectives and parameters.
Managed funds provide easy access to assets that most of us would not otherwise have access to, such as international companies, and provide the expertise and research needed to navigate the changing investment landscape.
If you need help navigating your investment options, please talk to a BDO Private Wealth Adviser today.
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