Historically, blue-chip companies have been seen as a solid investment with recognisable and trustworthy brands high on people’s radar.
However, Michael Russell, portfolio manager of the Hermes US All Cap fund argues that S&P 500 listed companies are too at risk from being disrupted by up and coming firms.
He said: “Blue chip companies are ones that people assume to be low risk, have been around for 100 years, have grown their dividend year after year and everyone knows their name. But we think that actually, there’s a structural decline.
“If you buy the index, you can buy an ETF which basically gives you exposure to every company in the market which is great. But we think that potentially up to half the index could go away in the next 10 years.”
The major cause of disruption is the rapid advancement of technology and the accelerating pace of its adoption by consumers, according to Russell.
He said: “Companies such as GE, Exxon Mobil and Chevron are some that are exposed to technological disruption.
“Particularly in media with names such as Comcast and Walt Disney – the truth is that people are now watching movies and videos over the internet and so they no longer need to pay $100 a month for a cable package. That’s not great for these blue-chip companies or for investors.”
Considering the macro environment, Russell explains that there has been low inflation and low interest rates and that the economy has grown. “In that environment, the market has been a very smooth upwards trajectory year after year.
“We do think however, that’s likely to change, we think the economy has now recovered and we think there is going to be three interest rate hikes – one in December and the others next year.”
Amazonable
Meanwhile, Kames Capital’s Craig Bonthron co-manager of the Kames Global Sustainable Equity Fund agrees that technology is a disruptor, stating that it is the established companies with big markets and high returns on capital that are most at risk.
According to Bonthron, the conundrum many investors are facing is which of the incumbent companies are disruptable or ‘Amazonable’ and can weather the storm.
He said: “Bricks and mortar retailers, industrial distributors, previously imperious consumer staple brands and TV networks are all feeling the heat.”
“From positions of high margins and returns earned via opaque pricing models or scale dominance, these companies are staring at strategic dilemmas, as the costs of deploying new technology is getting cheaper and more scalable, and the internet giants highly public price transparency is deflating prices now and depressing future expectations.”
He added: “Businesses that have horizontal business models, opaque pricing and high returns are at risk, particularly if they are valued for their stability of earnings. This stability premium can quickly be eroded if a disruptor enters its market.”
