Cover story – The disrupters
technologies or operations that are more efficient or make the old way of doing business obsolete. Some of the largest organisations in the world can be defined precisely by this definition of a disruptor: companies that were foremost in introducing new business models and changed established industries to create entirely new ones. Prominent examples are, of course, Amazon, Facebook and Netflix. The latter has changed how we watch films in the comfort of our own home. Technologies here have changed from VHS and DVDs to streaming services, this has created investment opportunities amid disruption. This example indicates the need to exploit or create new trends as a disruptor: Netflix ushered in a new age of streaming whereas Blockbuster stood still and failed to realise its position was under threat until it was too late.
The rollout of 5G could create further disruptive opportunities in this space. The same movie that might take several minutes to download on a 4G network may take just a few seconds on a 5G network.
The added challenge for some innovators, the Innovator’s Dilemma, is the decision a business must take between cater- ing to current customer needs or adopting new innovations and technologies which will answer their future needs. On a final theoretical note of disrupters, it has been observed there are seven drivers of disruption, although not all need to participate at the same time and on every occasion. These are: automation, artificial intelligence, brand fragmentation, digi- talisation, the environment, breakthrough science and plat- form business models – which can collectively permeate every part of the stock market, producing, in turn, winners and losers.
Disrupters of the future
Disruption and disrupters seem to be everywhere, and in their sometimes unsettling impact, they can suffer from negative coverage. This is, in part, because as an idea the positive part of the disruptor dynamic impact is not always obvious. But with such disruptive change comes benefits, especially it should be noted, for investors. Companies like Amazon show how tech disrupters are inno- vating whole areas of our daily lives. Although people will experience this innovation in other ways, in the slow decline of high street retail, for example. But the important part of disruption is that the successful com- panies of the future, like those in the past, will be those who not only adapt to change but embrace it, or more importantly, even bend change to their will. As one fund manager notes: “As an investor in disruption, I aim to look beyond the headlines and imagine what the future will look like. A modern investor needs to understand the
18 | portfolio institutional | June 2021 | issue 104
power of disruption, to identify which companies are likely to benefit, and which are set to become victims.” So how can investors identify future disrupters? Is there a framework to work from? While disrupters can be found across many areas of the economy, automation, communications, finance, medicine, and technology should be on investors watch lists. With such disruption, investments may well carry some unique characteristics to evaluate, which investors would do well to take note. For example, in some cases disrupters may exhibit higher than average levels of volatility, as investors may have differing opinions on the near-term prospects for these indus- try-changing companies. This can create opportunities for investors with a long-term focus – ideal for pension funds. Yet, at the same time, it could be said to also reinforce the impor- tance of diversification. Thoughtful portfolio construction could mitigate company-specific risks and portfolio volatility. Disruption could therefore make futurologists of us all. In fact, it could become an investment theme. Only the future can tell.
Climate change: a challenge or nightmare? Climate change can be said to be the ultimate disruptor. Two studies highlight how the issue ranges from being a major challenge to that of cataclysmic proportions for institutional investors.
On the challenging scale, climate change is the top agenda issue for institutional investors in the 2021 Institutional Inves- tor Survey by Morrow Sodali. Hardly a surprise. What investors do expect to see is linked to several factors. Links between climate change and financial risks and opportu- nities need to be identified – a regularly identified issue that still needs to be hammered down convincingly – time horizons of the expected impact of climate change on corporate strate- gies explained – essential for investors – and metrics, targets and achievements clearly disclosed – ditto criteria for investors. Yet investors do not require more information, but rather want to be provided with better quality climate-related information. Specifically, a good majority – 61% – are seeking improvements in climate-related disclosures that transparently show the clear links between climate change and financial performance, instead of boilerplate statements and generic qualitative reports.
Investors are also increasingly more interested in short to medium-term targets on carbon emissions which help them in assessing the roadmaps for transition to a low carbon economy. To address this, most large asset owners are building their own internal teams to conduct the analyses of ESG risks and oppor- tunities for their investment and asset disposal strategies.
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