Even more challenging is that disruption in one sector can arise from multiple sources – as Invesco’s Disclosing Disruption report demonstrates. It could be digital (artificial intelligence, robotics), environmental (climate change, emission control), regulatory or perhaps the most volatile source – changing consumer tastes.
It is, therefore, important that they understand how the companies they invest in – or potentially invest in – are responding to disruptive trends. This will be crucial in helping to predict their long-term fortunes and thus building a portfolio that can better withstand the unexpected.
Forces of change – digital and consumer
Since the year 2000, 52% of companies in the Fortune 500 have either gone bankrupt, been acquired or ceased to exist as a result of digital disruption. Over half (51) of the companies in the FTSE 100 dropped out of the index in the 15 years up to 2015. The evidence of consumer-led and digital disruption is all too stark on the UK’s high streets too, with former bastions Woolworths, BHS and Toys ‘R’ Us now relegated to the history books, while retail ecommerce sales are expected to surpass $4 trillion in 2020, making up 14.6% of total retail spending compared to 10% in 2017, according to eMarketer.
Environmental and regulatory pressures
Environmental disruption is also hard to ignore – and leading to a fast-changing regulatory environment. The most forward-thinking companies are re-evaluating their business models and supply chains to improve efficiency, to prove their green credentials to investors and to anticipate regulatory change. These consumer, digital, environmental and regulatory pressures go some way to demonstrating that disruption is rife.
Fund manager and FTSE fears
Invesco’s report surveyed 106 fund selectors and 105 FTSE company executives to understand where these two groups expect the most disruptive forces to emanate from.
Half of the fund selectors thought changing consumer preferences would impact companies the most in the next three years, while nearly two fifths (39%) expected digital disruption to be the main influence.
While the FTSE cohort broadly agreed, 40% also felt that environmental pressures would be one of the top two biggest disruptors over a 10-year horizon.
This presents a potential conundrum for fund managers in constructing their portfolios. Should funds purely focus on one area of disruption or try to deal with all of them? And should they worry purely about the disruption they can see now, or prepare for the most compelling ‘what if’ scenarios too?
This is why it is extremely important that fund managers openly discuss disruption with the senior management of the companies they invest in to ascertain their awareness of potential risks and to understand what actions are being taken to protect profits.
As responsible investors, we stress-test the investment case of all the companies we back by rigorously engaging with management teams so we can see whether they are addressing environmental disruption.
Our study suggested that different drivers of disruption – whether they are digital, environmental, regulatory or consumer – are expected to play out over different timeframes. But, as outlined above, the speed of individual drivers can accelerate at a moment’s notice.
No portfolio is bulletproof, but it is vital for fund managers to regularly stress-test the business models of investee companies and scrutinise potential disruptive forces.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
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