Programmatic TV advertising (personalised ads on streaming services) is another favoured trend. Loftus owns Roku, a leading US maker of smart TVs that is disrupting advertising by providing free ad-supported channels on demand, tailored to user preferences and location.
“Every industry is being disrupted,” says Pollak. “Management teams know what’s coming, and the risks of not moving quickly enough. But most companies don’t have the right management or remuneration structures to respond, or can’t put a cost of capital on developing a disruptive technology. That creates opportunities for new rivals.”
If Pollak is right, retail investors need to rethink portfolio construction. Considerations include: higher global equities exposure; a larger sector allocation to technology, including funds that invest in disruptive technologies and businesses; viewing disruption as a core portfolio theme; and avoiding index funds that do not include emerging disruption stars.
An immediate task is avoiding companies that will be disruption roadkill. “Investors face catastrophic wealth destruction if their portfolio is full of incumbent companies that will be disrupted or cannot respond fast enough to change because of legacy assets and business models,” says Pollak. “COVID-19 is magnifying that risk by speeding everything up.”
Nobody doubts technology’s power to drive disruptive innovation that reshapes business models and industries. But the concept is hardly new: Seek, for example, has disrupted job advertising in Australia since the late 1990s and continues to make inroads.
To some, the notion of disruption is overhyped and overvalued – another business buzzword that has fuzzy meaning and describes what has always happened in industry.
When asked about disruption opportunities, fund managers often nominate the same dozen or so stocks, including Alphabet, Facebook, Alibaba Group and Tencent Holdings. “Crowded” doesn’t do justice to describing the “disruption trade” or the risk if investors sell the big tech names at the same time. Falls in leading US tech stocks this week show the potential for heavy losses.
Also, do investors need specialist disruption funds? Any fund manager worth its fees knows disruption is ubiquitous across industry. Market leader Magellan Financial Group, for example, has successfully invested in disruption through its broader global equities funds.
“Australian investors are massively underweight global innovation and disruption,” says Heath Behncke, co-founder of Holon Global Investments, a specialist asset manager in this trend. “If you live outside the US and China, where most of the action in disruption is happening, you tend to be a user of disruptive new technologies rather than an investor in them.”
Behncke believes most managed funds are not set up to invest in innovation. “Typically, a managed fund has a certain investment style (eg, growth versus value) and their methodologies don’t value disruptive companies. When you change your mindset from ‘local linear’ to ‘global exponential’, you look differently at the valuations of Xero, Afterpay and other disruptors.”
Xero, held in the new Holon Photon Fund, shows the potential, says Behncke. “The sharemarket continues to misprice Xero because it does not fully understand the long-term value being created as more people globally use its accounting software. Investors need to look a decade out with Xero and other disruptors, rather than value them on next year’s revenue or earnings.”
Behncke is bullish on fintech. Photon’s largest exposures include Visa, Mastercard, Alibaba (for its payment-services division) and Afterpay. “The world is going cashless in a hurry as industry digitises. COVID-19 is accelerating that trend. Blockchain (distributed ledger technology) will take that conversation in new directions as it decentralises personal data storage.”
Holon is launching a global fund that will hold Bitcoin, and is part of an Australian group championing the creation of Libra, a new global cryptocurrency. “Having Bitcoin in a disruption portfolio is akin to having gold as a defensive holding in a traditional portfolio. A global digital reserve currency will emerge in the next 10 years, possibly led by China at this stage.”
The Holon Photon Fund is one of a handful of specialist innovation-disruption funds in Australia that is open to retail investors. Unlike funds that invest only in listed tech companies, disruption funds can invest across industries. As technology blurs sector boundaries – for example, is Afterpay a financial services firm or a tech company? – broader definitions are needed.
Getting concentrated exposure to disruption trends is harder than it seems. One option is buying Australian or international tech stocks directly, a mostly rewarding strategy this year but fraught with company, diversification and valuation risks.
Another option is investing in a new breed of technology exchange traded funds (ETFs) on the ASX that aim to match the return of a broad-based technology index or one based on a disruption theme, such as artificial intelligence and robotics.
ETFs are useful, but disruption is arguably making sharemarket indices less relevant. Tomorrow’s technology winners could be companies not yet in benchmark indices. Buy-now, pay-later star Afterpay was listed for two years before it joined the S&P/ASX 200.
Also, tech indices may not adequately reflect industry disruption because of stock classifications. Domino’s Pizza Enterprises, a fast-food disruptor and ordering-technology developer, is not in the S&P/ASX All Technology index. Nor was Seek when the index launched in 2020 (it is now).
Investing in actively managed tech funds is another challenge. There are relatively few such funds in Australia, principally because superannuation funds allocate capital based on asset classes rather than investment themes. Some tech funds are not open to retail investors.
Wealth manager Evans & Partners in 2017 launched a listed investment company (LIC) on the ASX that invests in global disruption. Managed by Walsh & Company Asset Management, the Evans & Partners Global Disruption Fund is up about 50 per cent from its March 2020 low.
Move to cloud
Walsh portfolio manager Raymond Tong says global disruption trends, such as cloud computing, are in their infancy. “The move to the cloud will accelerate as more people work from home, more consumers watch digital entertainment such as Netflix and Disney+, and businesses look to become more efficient and innovate faster. The big winners are Amazon Web Services, Azure (Microsoft) and other giant cloud-computing providers.”
Enterprise software is another favoured trend. “As companies accelerate their digital transformation and digitise their operations, they need to adopt innovative software,” says Tong. “Leading software-as-a-service providers have years of growth ahead, particularly as companies use technology and software to become more efficient, and better understand and serve their customers. Many of these software platforms are business-critical.” Microsoft and Salesforce.com are two of the fund’s largest holdings.
Digital-payments providers, such as PayPal Holdings, are also held in the Evans disruption fund. “We’ve seen massive growth in e-commerce adoption during COVID-19,” says Tong. “Some people are shopping online for the first time. Others are buying much more online than before COVID-19 and in new (product) categories. Fewer people will want to handle cash in the future and that’s accelerating the shift to digital-payment services.”
Semi-conductor makers also rate highly. “Higher demand for computing power means higher demand for semi-conductors that enable all of this technology,” says Tong. “Artificial intelligence and emerging technologies such as 5G will only accentuate this demand.” The Evans fund holds Taiwan Semiconductor Manufacturing Company.
Platinum Asset Management invests in disruption through its global equities fund and the Platinum International Technology Fund. Cameron Robertson, a portfolio manager of Platinum’s tech fund, says electric vehicles and new battery technologies are highly disruptive.
“In the near term, there will much higher demand for electric vehicles,” says Robertson. “That means rising demand for battery-management systems and technologies that use sensors in vehicles to capture information, interpret video images and crunch data.”
The fund’s largest holding is Alphabet, owner of Waymo (formerly the Google self-driving car project). The fund also owns Samsung Electronics, which has a long history in renewable energy and energy-storage technology through its listed affiliate, Samsung SDI. Analog Devices, a leader in battery-management systems, is another holding.
Robertson also favours new e-commerce platforms – for example, Carvana, an online retailer of used cars and reportedly the fastest-growing used-car dealer in the US. Customers choose and buy a car online and Carvana delivers it to their door. After six days, Carvana checks that a customer is happy with the car and, if not, picks it up for return.
“Carvana has grown to $US4.4 billion ($5.94 billion) in revenue in just six years,” says Robertson. “It shows the value that can be created through online retail platforms that disrupt traditional markets. One day we will buy new cars online rather than visiting a showroom and having a test drive.”
Platinum’s technology fund holds Medallia, a leader in the emerging field of customer-experience software. “Medallia helps companies understand how customers interact with the organisation through its website, call centre and other channels,” says Robertson. “Medallia software might be behind an SMS that prompts hotel guests to rate their stay.”
Technology is also disrupting the healthcare sector. “There is a convergence between biotech and technology that will shape the next decade of healthcare,” says Bianca Ogden, portfolio manager of the Platinum International Health Care Fund, which has an annualised return of almost 17 per cent over 10 years to end-July 2020.
The Platinum fund was an investor in the 2018 initial public offering of Moderna Therapeutics, the US biotech that has a leading candidate for a COVID-19 vaccine. Platinum trimmed its position as Moderna soared.
Platinum also owns BioNTech, a German biotech trialling a COVID-19 vaccine with Pfizer.
Ogden says advances in molecular diagnosis are changing disease detection and treatment. “In the past, a tumour, such as lung cancer, was named after its location. Today, the cancer is determined by its molecular profile and treated accordingly. The development of liquid biopsies will help physicians profile a cancer’s molecular structure, by drawing blood. The result will be cancers being detected earlier and treated more precisely.”
Advances in imaging technology and sensors are also disrupting healthcare, says Ogden. “That could range from an app that analyses your blood to artificial intelligence that analyses medical imaging and a ‘smart toilet’ that collects samples and sends them off to a lab for testing.”
Technology is also disrupting research labs. “Tools today allow a much deeper interrogation of a disease,” says Ogden. “Drug developers can choose from many ‘drug’ tools, such as editing tools, engineered antibodies and, in the future, synthetic biology.”
Having analysed biotechs at Platinum for 17 years, Ogden knows how long it takes for drugs to get to market and how much can go wrong. “It takes a lot to get approval, but companies that develop a new drug for a global market reward investors for years. Technology-led disruption is speeding that process up.”