“If you think disruption is just the latest buzzword, think again. Disruptive technologies are shaping our future and investors who don’t look outside mature industries for future growth will find themselves saddled with a stagnant portfolio.”
These are the words of Tim Samway, Managing Director of Australian equities investment manager, Hyperion Asset Management. He today warned investors to take a good look at their current equity portfolio and ask themselves whether their chosen companies will still be relevant five years down the track.
“Long term investors should be thinking about growth over the next five to ten years, not the next five to ten months. This can mean foregoing the familiar and well-understood in favour of new business models,” Mr Samway explained.
“Yes it’s true that some household name companies are using disruptive technologies to create new markets and disrupt old ones, and for those companies the “old dog” soubriquet does not apply.
“But the harsh reality is that the drivers of success for many Australian companies are changing. Many mature industries with capital intensive business models lack the agility – or the courage and foresight – to adapt to the changing world.”
Mr Samway went on to explain that this situation brings about a conundrum for investors. And that is, how to identify which ‘disruptors’ are likely to be here for the long haul.
“For these investors, embracing the new can feel like succumbing to fads and short termism. Mr Samway explained. “Accepting the necessity of broadening horizons to industries and technologies they don’t fully understand is one thing, but picking long term winners can be challenging because disruption in and of itself doesn’t guarantee success.
“New technology has vastly reduced the start-up costs for business and there are lots of new and disruptive ideas out there. I would warn investors not to pay the ‘hype premium’, and be cautious of ambitious forecasts made before new technologies have reached critical mass consumption.”
Mr Samway cited the introduction of companies delivering new hailing and payments services to the taxi industry as an example of disruptions that initially seemed like great opportunities that were themselves disrupted by the world wide growth of Uber.
“In a sense these new apps like goCatch and Ingogo have addressed only a part of the customer transport demand. Customers want fast, efficient and clean transport plus better billing and record keeping and Uber has supplied that.”
“However, there is no question that long-term success from new and sometimes untried companies is the way of the future, if investors can identify companies with quality fundamentals in the industries ripe for disruption.”
The good news? Identifying the disruptors most likely to provide long-term growth does not require a whole new set of skills, because the criteria which define quality fundamentals in a company are the same, regardless of its disruptor status.
“Investors should look for companies with a predictable and consistent cash flow, as well as strong management, growing addressable markets and pricing power.”
“But most important of all, to succeed, these companies require a valuable customer proposition that can tear a customer away from an existing supplier and satisfy the customers need so completely that the customer won’t return to the old supplier. We suggest you put yourself in the shoes of a customer to test each proposition”
In conclusion, Mr Samway said that embracing what is new and unknown can be challenging, but reiterated that the stakes are too high for investors to ignore the new wave of disruptive companies.
“Many of the mature industries have had their day, and won’t continue to provide growth.
“But quality fundamentals are quality fundamentals, and investors who understand that will still be able to identify the stars of the future, and outperform over the long term,” he said.
