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Finding new ways of doing things that disrupt traditional business methods are at the heart of disruptive innovation – who knows what the phone market would look like today if Steve Jobs had not challenged traditional thinking. And we now see it every day. Driverless cars, 3D printing, cloud software, social media, genomics, renewable energies and artificial intelligence are all innovative technologies having a greater impact on our lives. So, could investing in disruptive assets provide diversification to your portfolio?

Technological disruption may pave the way for falling consumer prices

Tech disruption is making its mark on just about every industry. From streaming platforms driven by the population’s ‘on-demand’ entertainment consumption habits to using big data to innovate in primary industry and agriculture with GPS-tracking integrating with climate data, which could have huge consequences for global food production.

But, as technologies become more efficient and cost effective, disruption could ultimately prompt a shift in value from producers to consumers. For example, The McKinsey Institute predict 3D printing has widespread implications for manufacturing with the potential to affect 12 per cent of the global workforce and US$11 trillion in global manufacturing GDP1. On demand manufacturing could disrupt traditional supply chain logistics with cheaper prices for consumers and impact global trade should raw materials and production be cost effective. While it has a long way to go, you can already easily (and somewhat affordably) buy 3D printers with your groceries at Aldi or while in the sausage sandwich queue at Bunnings.

Businesses are now arguably reaching a tipping point with technology

Businesses are increasingly having to address the potential challenge of choosing between directing investment to improve or sustain their existing technologies, investing in disruptive technologies and stepping into the unknown to create a new market or product.

For example, to facilitate a deal to export cotton to China, last year Commonwealth Bank and Wells Fargo used a combination of disruptive technologies – Blockchain (the technology behind Bitcoin), the Internet of Things (the tech behind the smart fridge) and Smart Contracts (stored on the Blockchain and self-executing2). 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.3

Incremental improvements in tech growth lead to rapid developments. If we continue our current trajectory, there’s likely to be an increase in innovation and technological disruption. This will require businesses to become more adaptable and think ahead; one such business doing this with aplomb is Amazon. They began disrupting retail by expanding products and services through facilitating third-party vendor transactions, storage and delivery.

In the US, Amazon now account for 50 cents in every dollar spent online4 and over half of online consumers in the US begin their shopping searches with Amazon, a survey found5. As a nation of shoppers with widespread access to high speed internet actively seeking new brands and choice in their core repertoire – Amazon’s impending Aussie entrance is forecast to cost local retailers up to $12 billion within the next decade6.

If you’re considering investing in the disruptive sector, take a measured approach

Diversification continues to be an important hedge against certain companies and industries facing severe disruption. For example, an overweight exposure to banking could see a portfolio significantly more affected if the rise of ‘fintech’ (using technology to innovate banking, for example using smartphones for banking) continues. While developing technology has the ability to disrupt established business models, real assets are typically 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 (again think Amazon), the physical presence of these assets often makes them less susceptible to the effect. For this and other reasons, we generally continue to suggest investors retain a portion of their portfolios in select real assets.

We believe there is a broader trend of established industry players being disrupted by new entrants, however, much technological change is still in its infancy. While rapid tech advancement has the ability to result in widespread economic transformation, existing markets will not disappear overnight and there is still an array of solid traditional opportunities. However, disruptive assets are a worthwhile consideration 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.

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.
 

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Lyle Meaney

Managing Director, Family Wealth Management

In his primary role as Managing Director, Family Wealth Management, Lyle ensures all Investment Advisors and Analysts deliver the highest level of proactive service and advice in line with Dixon Advisory’s Investment Committee’s views on market conditions. All Investment Advisory clients have a dedicated Investment Advisor, who works closely with Dixon Advisory’s Superannuation Specialists, Financial Advisors, Estate Planners and Property Investment Specialists to deliver the best possible financial outcome. 

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