Investing in disruptors, enablers and adaptors
Share this article:
Words on Wealth:
If you are investing for the long term – in other words, if you are relatively young and have a 20- or 30-year investment horizon – you should certainly consider investing part of your portfolio in companies of the future: disruptive companies that are driving the so-called 4th Industrial Revolution. The problem is that while some disruptive companies get their offering and timing just right and go on to grow exponentially, many fall by the wayside. So, at their early stages of growth, it is very difficult to pick a winner.
On the other hand, once the successful disruptors are dominant in their particular markets and are publicly listed, it’s too late to benefit from their exponential growth. And because “the crowd” has piled into these investments, the shares may be horribly overpriced and you may actually end up losing money.
So how do you benefit from disruption and the exponential growth it brings without taking on too much risk?
The secret may lie in broadening your selection criteria to include companies that are not disruptors themselves, but are enabling the disruptors to disrupt, as well as older-generation companies that are successfully adapting to the changes disruption is wreaking in their particular industry. (Of course, unless you’re a serious, experienced stock investor and are willing to do the homework and choose those companies yourself, it’s best to choose a unit trust fund whose manager does it for you.)
In a recent presentation in the Schroders Investment Symposium webinar series, Alex Tedder, head of global and thematic equities at Schroders, explained how his investment team has identified four types of companies under the “disruption” banner:
1. The disruptor: the innovative company at the forefront of change, the source or cause of disruption.
2. The enabler: a company that acts as the conduit for change, whose technology or expertise the disruptor is reliant on to take its innovations to the market.
3. The adaptor: the “positive respondent”, an established company that risks losing business to the disruptor, but is able to adapt to the new environment and compete with the disruptor, without having to learn the hard lessons the disruptor has had to do.
4. The denier: the company you don’t want to invest in – one which might have a dominant place in the market currently, but is resistant to change and which will lose ground. IBM, Kodak, and Nokia are good examples.
Tedder says disruption is happening in all market sectors, and it’s happening exponentially, driven by technology. Moore’s Law, which has traditionally applied to computer hardware, which states that computational power doubles every two years, now also applies to data storage, bandwidth, connectivity and software.
He gave some examples of disruptors, enablers and adaptors in various industries.
The Covid crisis naturally accelerated progress in vaccine research and development in the pharmaceutical industry. Here, German company BioNTech is a disruptor, developing the revolutionary mRNA vaccine, which works differently from traditional vaccines and is easier to manufacture. But it needed another little-known company, Illumina, to provide the technology in the form of a state-of-the-art gene sequencing machine. Illumina is proving a good investment, says Tedder.
In the fintech space, Square has revolutionised digital payments in the United States, but couldn’t have done so without enabler Visa’s global distribution network. Banking giant JP Morgan, which stood to lose out to the disruptor, is successfully adapting to compete with Square.
And then there’s Tesla, which has pioneered the electric car almost single-handedly. After letting Tesla take the pain in the initial phase of the global movement away from fossil fuels, traditional car manufacturers such as Volkswagen and Daimler are now getting in on the act, as are new disruptors such as Chinese manufacturer Nio. All these companies are threatening to disrupt the disrupter.
Tedder cautions about the “irrational exuberance” around shares such as Tesla, whose trailing price-to-earnings (P/E) ratio (an indicator of how over-or undervalued a share is by the market) is a staggering 133 times at the time of writing. This makes shares such as Apple, Facebook and Microsoft, with trailing P/E ratios of 20, 28 and 34 respectively, far less risky propositions.