A lot has been written about innovative companies with the ability to disrupt sectors, Amazon (AMZN) being a prime example. It’s already caused shockwaves through the retail and software sectors and is currently branching out into healthcare and groceries.
It’s certainly worthy of consideration for investors and Neil Dwane, global strategist at Allianz Global Investors, says it’s important to ask how much of the world can be Amazonised. “There’s clearly areas where if the industries themselves don’t get their act together, Amazon is going to come in and get their act together for them.”
But it’s difficult to predict the next big tech innovation. “Technology keeps redefining itself to include new industries,” adds Walter Price, manager of the Allianz Technology Trust (ATT). “Who would have thought technology would include car companies? Who would have thought a grocery business would be considered technology?”
As Julian Chillingworth, chief investment officer at Rathbones, points out: “You may be right about the potential of a particular technology, but you also need to identify how it will be adopted and which companies will profit.”
Clearly, the motoring industry is ripe for disruption, with electric vehicles becoming more and more mainstream and autonomous vehicles set to come down the line. But it’s unclear whether Tesla (TSLA), the company at the forefront of the EV revolution, will be the main beneficiary or whether others will.
Simon Gergel, manager of The Merchants Trust (MRCH), says the most interesting potential disruptors are the ones that people don’t yet know much about. He points to Eden Creamery, a privately owned US company, as an example.
Los Angeles-based Eden makes healthy and natural foods and owns the Halo Top ice cream brand that is famous across the Atlantic. Having come out of nowhere, it’s taken 5% of the US ice cream market already, advertising mainly on Instagram.
Going Direct to Consumers
Gergel says that in the past these companies had to have big marketing budgets, advertise on television channels and get their products sold in supermarkets. Now, that’s changing. “You can now go through the internet direct to consumers with products that aren’t necessarily in Walmart, allowing disruption of an industry that’s traditionally been very stable and quite highly rated.”
On the other hand, many fund managers are attempting to find sectors ripe for disruption; not to identify which newcomers they should invest in, but which they should not invest in. Or, consequently, which in those areas are likely to survive against the odds.
Price says he does not invest in the unlisted space. However, he’s continually on the lookout for companies that have the potential to disrupt those listed firms he holds.
His first contact with accommodation booking website Airbnb caused him to sell out of competitors Expedia (EXPN) and Priceline (PCLN). “Airbnb is an experience more than just a room, so we thought it was a disruptive model, quite a strong model,” he explains.
Lucy Macdonald, manager of the Brunner Investment Trust (BUT), comes from a different angle, more akin to a value-style of investing. She’s is more interested in companies where consensus says they will lose out to disruptors and therefore become lowly valued, but that are actually more likely to “come out the other end stronger”.
“When we invested in Microsoft (MSFT) it was seen to be dead,” Macdonald says, “and it was in software that was no longer growing. But in fact there was a new business within it [cloud computing] that was really not properly understood. Now it is a leader in cloud with Amazon.”
Gergel makes a similar point on the debate around how consumers are now watching television shows. Netflix’s (NFLX) popularity suggests people now prefer to watch TV over the internet and that the likes of ITV (ITV) and Sky (SKY) will be disrupted. “There may be great value opportunities within that debate at some point.”
