Disruption changes lives, but we can prepare for both the negative and positive consequences. A recent Rathbones investment seminar explored the potential outcomes of so-called disruptive technologies as they increasingly impact on the companies we invest in and how we live. We discovered that it is as vital to scrutinise what could harm your investments as it is to seek lasting opportunities.
At the turn of the 20th century, electric vehicles accounted for a third of motorised traffic. A start-up named Ford helped to demolish this nascent industry by introducing the petrol guzzling Model T. Fast forward over 100 years and electric plug-in cars represent just under 1% of the total global new car market. Yet this figure – and associated trends – was deemed enough of a threat for Ford’s CEO to lose his job in May this year. Tellingly, he was replaced by the company’s previous head of its autonomous vehicles unit.
If a company with a long history of success like Ford is struggling, surely many others must also feel the pressure of adapting to widespread technological change.
The importance of quality research
Therefore, investors need to be more cognisant of shifting sands than ever. We need to prepare for both the best and the worst that innovation can bring. While we always have to look out for opportunities, we must be aware that investing at the wrong time in the wrong place can be damaging to your finances. That’s why we rely so much on quality research.
Having the right access to valuable information is necessary if we are to take advantage of developments such as the rapid improvement in the efficiency of battery power, or the plunging costs of gene sequencing and solar energy systems.
This involves examining the same fundamentals that we always do when we invest in a company: the quality of management, strength of its balance sheet, value which can be unlocked and the competitive environment, among others.
A focus on preserving wealth
These are just some of the characteristics we look for in choosing investments for our clients, or that our partners on the ground in places such as Silicon Valley seek to unearth. “Our main emphasis as a company is to preserve wealth,” says Sanjiv Tumkur, head of equity research at Rathbones. “We always look for sustainable businesses, but find that many people in the technology sector tend to be over optimistic about their company’s prospects. Our job is to look from a detached perspective and reach an impartial view.”
Sanjiv cites many sectors such as banking, pharmaceuticals, automotive and energy as facing extreme change. And there is a great deal of momentum and expectancy behind this disruption. China, for example is prioritising electric vehicles and alternative energy in its current five-year plan. India plans to sell nothing but electric cars by 2030.
There are countless other examples; in fact, pick a sector at random and you can be guaranteed that emerging competitors are bidding to overthrow market leaders by offering products or services that are faster, cheaper, easier to use, or a combination of these factors. Even now, rapid high-tech advances mean we are just at the cusp of a completely – some might say, incredibly – different landscape.
Artificial intelligence (AI) author and commentator Calum Chace (who presented at the seminar) believes humanity is in for quite a rollercoaster ride over the next century, with the change principally driven by the consistent rate of machine improvement.
AI is “collar” blind
He states that Moore’s law – where computing power roughly doubles every 18 months or so – is still key to major new developments. The march of intelligent technology is also agnostic towards profession or creed. “It doesn’t matter whether you are a barrister or a barista, white collar or blue collar,” he says. “AI is collar blind.”
While Calum asserts that most companies “don’t have a God-given right to exist” and while he recognises there may be downside risks, especially with societal change, he is largely optimistic about the potential for intelligent machines to “produce everything we need” in future.
It is incumbent on us to spot the winners – behemoths such as Alphabet (Google’s owner), Facebook, Amazon and Apple that have the power to sustain their competitive advantages.
But what is even more crucial is to avoid the companies – both tech and non-tech – that may be materially affected by disruption. We need to guard against torpedoes that could damage portfolios. There are numerous examples to demonstrate the danger of complacency (which “breeds failure” according to former Intel CEO Andy Grove).
Consider the fortunes of Kodak, Hoover and even the internet giant AOL, which lost 90% of its value in the dotcom crash. More recently, witness the steady crush of photo-sharing Nasdaq darling Snap, caught up in the pincers of Facebook’s avaricious subsidiary (and notorious copycat) Instagram.
Rathbones has produced a research report entitled How soon is now? to explore the investment impact of disruptive technologies. We don’t make predictions, but we can help our clients prepare for any future changes through responsible stewardship of their capital now.