Barring a few political junkies, most will be tiring of the General Election and relieved that it almost over (though that may depend on the result, of course). It’s time to look to the future, but how far ahead?
- Investors are told to look through long-term noise, but does that mean a portfolio full of AI and robotics stocks?
- There are areas of structural growth in the economy, but investors shouldn’t neglect price
- In practice a balance of tomorrow’s winners and today’s incumbents is likely to be the right option
Investment managers are fond of telling us that we should ‘look through’ short-term noise and focus on the longer-term. But where would that longer-term lead us? Are there key trends that should form a part of every investment portfolio?
One path would be to identify the fastest growing industries and ensure that client portfolios had exposure of some kind. Industry research firm IBISWorld identified four major areas of structural growth in the global economy: Internet growth, environmental issues, cost cutting and evolving technology.
Within these four areas fell a number of sub-trends, including voice-over internet protocol (VoIP), wind and solar power, e-commerce and online auctions, biotechnology and video games. These are the type of glamorous industries that might be expected, but growth industries also included prisons and insurance claims adjusters, so it wasn’t all rock ‘n’ roll technology stocks.
In practice any technology manager worth their salt will include exposure to these areas and should have the analytical skills to judge whether new technologies will endure, and whether they can be monetised. The problem with trend investing is that it is often difficult to map the trend onto specific stocks. ‘Wearables’ were an area of huge growth, but FitBit was the main stock providing access and it did not prove the strongest option.
This highlights another difficulty - price. The Value team at Schroders are quick to point out that Tesla is currently afforded a similar valuation to General Motors, despite the latter selling hundreds of thousands more cars. Certainly Tesla will be disruptive and incumbents are usually slow to react, but will Tesla be that disruptive? Will the incumbents be that slow to react? Elon Musk is visionary, but for an investor anticipating trends too far in advance may not be a route to riches.
As ever, the right answer is to strive for balance. Today’s disruption is more disruptive, and companies that don’t innovate die faster. Investors need to ensure that the companies in which they invest are keeping pace with change, otherwise they are unlikely to provide the growth and inflation-proofing people need from their equity holdings. Nevertheless, paying up for growth for growth’s sake, or investing in companies purely because they seem to be attached to secular trends, is unlikely to be the right option either. Good fund managers should steer a middle path.