Could investing in disruptive technology provide sustainable diversification?
New ways of doing things that disrupt or overturn traditional business methods and practices are at the heart of disruptive innovation. And we see them every day. Driverless cars, 3D printing, cloud software, smartphones, social media, genomics, renewable energies and artificial intelligence are all innovative technologies that are having a greater impact on our lives. And when it comes to technology, a disruptive advance generally results in the creation of a new market or product, which displaces an established technology over a period of time. For example, the internet and social media have had a detrimental impact on traditional print media.
Businesses are now arguably reaching a tipping point when it comes to technology
Who knows what the phone market would look like today if Steve Jobs and Apple had not challenged traditional thinking. Today, businesses must choose between directing investment towards the improvement of sustaining (already well-known) technologies or alternatively stepping into the unknown and seeking to create a new market or product.
We tend to experience technological growth exponentially, which means that over an extended period of time incremental improvements lead to explosive and rapid developments. And if we continue on our current trajectory, there is likely to be an increase in innovation and technological disruption. This will require businesses to become more adaptable while also giving a greater deal of thought to the future given they are dealing with increasingly rapid change.
For example, in order to facilitate a deal to export cotton to China, last month the Commonwealth Bank and Wells Fargo used a combination of disruptive technologies – Blockchain (the technology behind digital currency Bitcoin), the Internet of Things (connecting any device with an on and off switch to the internet and/or to each other, i.e. a smart fridge) and Smart Contracts (“self-executing contractual states, stored on the blockchain, which nobody controls and therefore everyone can trust”1). The move was designed to create greater transparency and security and to track the shipment in real time – considered a world first between independent banks.2
Technological disruption may also pave the way for structural deflation (falling consumer prices)
This could ultimately see a shift in value from producers to consumers as technologies become more efficient and cost effective. For example, 3D printing involves taking a three-dimensional digital model and using successive thin layers of material to make the physical object.
According to The McKinsey Institute3, the emergence of 3D printing has widespread implications for the manufacturing industry with the potential to affect 12 per cent of the global workforce (an estimated 320 million people) and US$11 trillion in global manufacturing GDP.
Using 3D printing technology, products can be manufactured on demand, which turns traditional supply chain logistics on its head and should lead to cheaper prices for consumers. It also has global trade implications, particularly for the emerging economies should raw materials and manufacturing production be cost effective in local economies. While 3D printing still has a long way to go, it may surprise you to find that earlier in the year you could purchase a basic 3D printer from Aldi for less than $5004.
However, much of this technological change is still in its infancy
While rapid technological advancement has the ability to drastically alter our way of life and result in widespread economic transformation, existing markets will not disappear overnight and there still exists an array of solid investment opportunities grounded in the ‘old age’.
It is however, a consideration that should be made when assessing the merits of an investment, as technological disruption may provide significant headwinds on the long-term profitability of a company or broader sector. Trying to assess how future changes in technology will impact a particular company can be difficult, and so diversification continues to remain important as a hedge against certain companies facing severe disruption. For example, an overweight exposure to the banking sector could see a portfolio significantly more affected if the rise of ‘fintech’ continues.
While developing technology has the ability to disrupt the established business model of a company, real assets are less susceptible to the phenomenon; we still need houses to live in, places to conduct business and infrastructure to transport essential services. While not immune to disruption (such as the rise of online shopping), the physical presence of these assets often makes them less susceptible to the effect. For this and other reasons we generally continue to recommend that investors retain a portion of their portfolios in select real assets.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.