Looking for Growth? Harness the Power, and Inevitability, of “Disruptive Innovation”
Call it the Fourth Industrial Revolution. These are unique times, unlike previous economic revolutions when multiple technologies are emerging and converging all at once. And the “disruptive innovations” bearing down on us have the power to remake the entire economy in the matter of a few decades.
So, as disruptive innovations change all our lives in meaningful ways, we believe it would be naïve not to change the way we invest.
The trends are numerous and easy to spot. They include exponential increases in computing power; breakthroughs in gene editing and DNA sequencing; major gains in robotics and artificial intelligence; and the interconnection of potentially every device in the world through an Internet of Things. It’s difficult to fully comprehend how and where these and other disruptive technologies may come into play, as they can be applied to just about every industry, and just about every sector of the economy.
Take the COVID, stay-at-home economy: it changed how we all consumer goods and services; changed how we shop, access our finances, access our healthcare, entertainment, and education. It changed where and how many of us work. It disrupted almost everything. But it also showed how adaptable we are, and how quickly behavioral and economic shifts can remake society.
So even though life is slowly getting back to “normal,” it may never go back entirely to what it was. Because COVID accelerated preexisting economic and business trends – toward disruption of the old status quo – that were already well underway.
We see these changes affecting our lives every day. It is not illogical to think, for example, that the big banks consumers know and love (kidding!) could go the way of the dinosaurs and be replaced by some of today’s breakout names in digital financial technology (“fintech”). Some of the largest names in the S&P500 – particularly names in retail – have already disappeared. Index turnover is increasing, and we believe that pace of displacement is going to accelerate. Yet, many broad market indexes remain heavily weighted toward companies that may not be around over the next 10 to 20 years.
In our view, not having a direct, robust, and purposeful exposure to the theme of disruptive innovation poses a long-term risk of underperformance for diversified portfolios. We believe that a process of rapid disruption will create winners and losers, and it’s the winners of this new economy that will drive growth. That’s why our growth allocation is heavily weighted to this theme as a part of our client’s diversified portfolios.
It’s important to note that the theme of disruptive innovation is broad. It’s not about one company or one industry. It’s not as concentrated as you may think. It includes both the creators of these technologies, as well as those companies who apply and use the technology; and it covers all market caps, from small to large.
The theme of disruptive innovation can be exploited in a diversified, risk-managed, tax-efficient manner, the same way as any other market opportunity.
What we saw over the past year was just how fast – and seamlessly – the world can shift to entirely new ways of living, working, and playing. Over the next several decades, a realist would expect more of that – a lot more. As professional investors, we believe that it’s our job to capture such trends in client portfolios: avoiding being overly weighted to the successes of the past, no matter how attractive they still may feel, and instead, delivering robust, risk-managed exposure to the growth opportunities that will power the future.
Author
Mitch York
CIO
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