Since March 2020 we have all become overly familiar with personal disruption in a variety of forms. Whether it be the extremes of hard lockdowns, social unrest, or load shedding, the upheaval has been real.
In the process, you have likely adapted, innovated and come out ‘different’ on the other side, whether through embracing solar power, joining your neighbourhood Community Action Network, or simply figuring out how to stay in contact with your closest personal humans virtually.
At its core, “disruption” is simply another word for change and while change is usually unsettling, it’s not always a bad thing.
What are the effects and possibilities of disruption in investment markets?
As an investor, you may have ridden a rollercoaster between hope and dismay as successive global shocks have affected financial markets. As a Netto Invest client, you’re well-versed in investing for the long term and not letting emotion determine your immediate actions. But we’re all human. Keeping one’s nerve takes discipline and it’s good to know that business disruption is not necessarily destructive of value.
In business terms, disruption isn’t an inconvenience: except to your competition! Many companies actively seek to be ‘disruptive’ by finding innovative ways (often technology-based) to trade in existing sectors, or by creating a new market entirely, and in the process shaking up the status quo.
So disruption can lead to positive outcomes
A recent Goldman Sachs report, focused specifically on disruption, highlighted the fact that investment returns could in future be driven less by targeting differences between sectors/regions / economic cycles and more by the emergence of entirely new companies.
Indeed, the pace and scale of disruption is accelerating at a rapid rate and a mergers and acquisitions supercycle is currently underway globally with larger companies acquiring new and innovative start-ups.
As an investor, how can you make the most of disruptive technology?
One could argue that passive index funds could be most at risk in terms of losses due to future disruptions. This is because their essential nature results in top-heavy allocation to larger companies.
An example of a passive index fund would be the S&P500 which is the stock market index that tracks the 500 largest companies in the US. The top 5 companies on the S&P500 make up 21% of the overall index. The Goldman Sachs report mentioned earlier found that 31% of the portfolio is at risk of being disrupted or is vulnerable to future disruption.
If not passive investment, then what?
We know that trying to pick and choose to isolate the Next Big Thing isn’t the right approach. Singling out a company as, say, “a future Apple” is impossible.
Instead, the thematic investing approach – focusing on predicting long-term mega-trends rather than trying to pick specific companies or sectors – could be an alternative approach.
Key trends under a thematic investment approach
Some of the current important trends for thematic investing are environmental sustainability, technological innovation and demographic changes. Let’s take a closer look at these:
- Decarbonisation trends are the most urgent priority at the moment in order to stabilize climate change. The goal is to reach the net-zero transition point (the point at which greenhouse gases are produced equals the amount removed from the atmosphere).
- Technification of everything: this is probably the broadest and hardest trend to predict due to its incredible breadth. It encompasses the spread of technology into every corner of the economy. Three areas that are currently attracting a lot of interest would be electric vehicles, the Internet of Things and the Metaverse (which is a virtual reality world that provides a space for social interaction).
- Demographic trends look to predict how things will be consumed going forward. Where are the growing populations as well as what are their spending habits? How does a Millennial (who is now the largest population) spend versus a Baby boomer?
Asset managers are hard at work
Without a doubt, a disruptive environment presents a massive challenge, even at the most basic level of crunching the numbers for meaningful analysis. Asset managers are focused on staying on top of the changes to be able to add value to the portfolios they manage in the coming years.
What is Netto Invest’s underlying premise?
At Netto we continue to advocate this fundamental investment principle: own a well-diversified investment portfolio that is split between a variety of management approaches with long-term track records. If you have questions about this, please do not hesitate to ask at your next review meeting: your wealth manager will be able to offer detailed insights as to how your portfolio is invested currently.
Jonathan Botha BCom CFP®
