The pace of technological change of the past 10 years is as nothing to the rate of change that will take place over the next 20 years, and it may fundamentally change how companies are valued and portfolios are constructed, according to Magellan chief executive officer, chief investment officer and lead portfolio manager Hamish Douglass.
Douglass told Magellan’s adviser roadshow in Sydney yesterday that investors need to learn to assess a range of factors, including the probable pace of change, the effect change is likely to have on different types of business – both positive and negative – and the potential timeframes in which change is likely to affect those businesses.
Douglass said the process of identifying potential winners and losers is not easy “and you have to start thinking business by business, and industry by industry, and some of it you just don’t know at the moment”.
Douglass said the accelerating pace of change may lead to “some fundamental shifts in core investment beliefs.” He said Magellan has been “a very strong proponent of the rise of globalisation and the benefits for emerging market consumption … and we’ve been thinking this is a 20-year trend”.
“But if it is that 3D-printing and advanced robotics are going to re-localise manufacturing in the world, maybe the growth rates in emerging markets over the next 20 years aren’t going to look like you think they’re going to look, and therefore you may have to temper your expectations as maybe hundreds of millions of jobs in those markets disappear from their export engines,” he said.
“Could rapid advances in technology lead to massive reductions in costs for goods and services? That is very realistic I think, over a 10 to 20 year timeframe, which means inflation may be fundamentally lower over the next long-term cycle because of technology and technological advances.”
How to value businesses?
Douglass said the resultant displacement of labour “probably means” lower interest rates.
“Why is that relevant? Because it affects what businesses are worth in the long term,” he said.
“So now we have to start thinking, how do we value businesses? Some businesses may have no terminal value in a decade. A car manufacturer could be worthless in a decade. You need to take that into account.”
But other businesses may not be disrupted and in these cases “you may value them with lower discount rates and therefore they could be much more valuable,” Douglass said.
“So that’s what we’re starting to think. Even some old-world non-tech businesses could be highly valuable to own…through the change in economic circumstances that technological disruption may bring over a long period of time.”
Douglass said that if the world really is at a tipping point where the pace of technological change begins to massively disrupt the status quo then all investors will need to be able to “start distinguishing between businesses that are pretty immune, or businesses that could get disrupted, [and] businesses that we just don’t know.”
“We having to actually look at things in different ways,” he said.
“A business like a water utility is probably not going to get disrupted in 20 years. Quite a lot involved in food production and food companies, maybe like a Nestle or a UniLever or a Kraft, or maybe even a business that delivers food like a McDonald’s or a Yum Brands, in the next 20 years I don’t think they are going to be that subject to disruption risk. So there are businesses that are relatively safe.”
Fossil-fuelled cars may become the fossils
However, he said, at the other end of the disruption scale are companies like the car manufacturers, who could be severely affected by the development of driverless cars.
“And there are other businesses coming up that could be massive winners, like technology platform businesses,” he said.
“So distinguishing between businesses is becoming very important, and also starting to think about the pace of disruption. There’s no point saying, well, something could get disrupted in the future, like a pharmaceutical company, but if it happens that 30 or 40 years in the future we don’t need any drugs any more because we solved everything, not investing in them for the next 30 years for a 30-year risk is kind of insanity – because you could make a lot of money in the next decade by the next wave of solving problems by pharmaceutical companies.
“So getting the timescale of how different businesses potentially would be impacted is very important for decision making.”
Magellan has attracted almost 3500 attendees to its national roadshow, including 800 in Sydney in person yesterday and a further 400 watching a live stream of the event.
