Economics

Disruption is everywhere, but so are the investment opportunities

Disruption is changing the face of a broad range of industries, but the incumbent companies which can adapt and evolve should not be overlooked by investors.

16 February 2018

Simon Webber

Simon Webber

Lead Portfolio Manager

I’m not usually a subscriber to “this time it’s different”, but when it comes to the emerging disruption in so many industries, “this time it’s more than average” doesn’t really seem to cut it. This time I have a feeling it really may be different, because today’s disruptions are everywhere, and that means that there are investment opportunities right across the spectrum, from the disrupters to those “incumbents” willing to invest in the future.

We have become used to new entrants overturning a wide range of markets and industries. For example, Amazon, which now accounts for around 16% of US retail spending. Other examples would include the rapid growth in market share being seen in craft beer and other local consumer product companies.  Or Netflix and YouTube,   which are mounting cutthroat competition to US cable and satellite television companies. 

Soon, artificial intelligence and the Cloud will disrupt traditional consumer and technology businesses, while driverless cars will threaten longstanding automotive manufacturers. Even services are not exempt from the revolution, with everything from banking to dry cleaning moving online. 

Much rarer, and in many ways more interesting for investors, are the incumbents that are successfully adapting to change. Here I’ve chosen a few that have demonstrated both the courage and the capability to take on the new world:

Umicore – The largest profit driver for Umicore today is catalyst materials for petrol-driven cars. However, Umicore has focused almost all its capital investment and most of its research and development on a cathode technology business for electric vehicles, planning to quadruple cathode production capacity over the next three years. This will eventually replace the catalyst business completely.

DNB – Despite being the largest and one of the oldest banks in Norway, DNB now operates with only 50 branches, having reduced the network by 70% since 2013, and migrating the vast majority of its customer interactions to digital. In the last 10 years, this programme has improved the cost/revenue ratio from 56% to 44%, while the revenue per full-time employee is over 35% above DNB’s main competitors.

Philip Morris International – PMI is one of the largest tobacco companies in the world. Even so, it has a new mission: to replace cigarettes with smoke-free products. Accordingly, it has dramatically shifted capital allocation in this direction. Its iQos heat-not-burn product is already taking radical share in markets like Japan and South Korea and has important footholds in Europe.

Burberry – While many traditional luxury brands have seen the internet as a threat to the exclusivity and control of their brands, Burberry has embraced digital solutions. Its industry-leading “omnichannel” shopping platform integrates in-store and online sales. It has also established social media marketing leadership, which has strengthened the brand and brought in many younger customers.

NextEra Energy – Once a simple regulated Florida power utility, NextEra has over the last 10 years relentlessly allocated capital to its renewable energy development business. It is now by far the largest owner and developer of renewable assets in the US, enjoying economies of scale and an unrivalled working knowledge of the technologies transforming the global power generation landscape.

This is an exciting time to be an investor. Such a period of pervasive and disruptive change across many industries will be a powerful source of outperformance. Many of the exciting disruptor companies have a place as core portfolio holdings. But I believe that there will be just as much outperformance to be had sorting out the wheat from the chaff among the incumbent businesses on the disruption front line as there is from the disruptors themselves.

The above companies have been mentioned for illustrative purposes only and are not to be considered a recommendation to buy or sell.

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