How can advisers and paraplanners capitalise on the continuing developments this exciting sector has to offer for client portfolios? L&G ETF, part of Legal & General Investment Management (LGIM), highlights some of the threats and opportunities which exist as well as some effective solutions
Our world is being transformed as a new wave of innovation, often technology-led, challenges every aspect of how we live and work. From the spinning jenny and the steam engine, to the wireless and the Ford Model T, there are countless examples of small innovations that have ushered in profound social and economic change. Driving these technological advancements is the unending quest for productivity improvement. For investors, this enormous trend could be creating new investment opportunities, offering exposure to potential growth strategies rather than traditional equity investments.
In some cases, technological advances are creating entirely new industries that would not have been feasible 30 years ago. “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run” is the observation of Roy Amara, a researcher and scientist who worked at Stanford. The growing use of data for technological advances, the drive for efficiency and the quest for sustainability are together shaping our future society. To identify these investment opportunities, it is perhaps helpful to separate these major technological advances into separate groupings:
Robotics, automation and AI
From Amazon’s Alexa to Google Assistant, automation technologies are becoming increasingly deployed in all aspects of our lives. As a result, the robotics and automation sector is expected to be worth $1.2 trillion by 2025 (Myria Research, 2015). Increasing adoption of sophisticated robots, enhanced by artificial intelligence (AI), is fast becoming an instrument of profound change that is likely to leave a lasting impact on global productivity and future economic sustainability.
The possibilities yielded by AI apply across every sector. In our view, the real beneficiaries of the growing capability of AI will be the companies that can combine technical capability and large datasets with the crucial ability to deploy AI at scale in their core businesses. However, the scale providers of AI capability – the large-cap technology players such as Amazon, Google, Microsoft, Facebook, Alibaba, Tencent and Baidu – are, once again, front and centre of this profound long-term investment theme.
Multiple high profile cyber-attacks highlighted the significance of this issue last year. Ransomware isn’t going away, nor is it slowing down. In a connected world, no business or industry should consider themselves immune from attack. As more data, systems and people connect digitally, vulnerability is on the rise. Cyber-attacks pose a growing threat to governments, companies and individuals who are growing ever more concerned about security, financial and reputational damage.
Needless to say, the IT security market is currently booming. Having seen exponential growth in these past few years, this looks set to continue as government regulation, increased corporate focus and the growing complexity of threats fuel demand. Advisory firm Gartner predicts total worldwide spend on security products and services will hit around $100 billion this year and 8% forecasted growth per annum.
One of the things that stand out about electricity as a commodity is that it is difficult to store. New developments in battery technology are changing the way we transport and power the world, with innovation happening all along the value chain. Significant progress has been made to improve the energy density, price, lifeline and safety of batteries while mitigating the impact on the environment.
One of the most public examples was the installation last year of the world’s largest lithium-ion battery in South Australia. Designed and built by billionaire Elon Musk’s Tesla company, the 100-megawatt battery will be used to store renewable energy so as to avoid a repeat of the previous year’s state-wide blackout due to storms. Musk had promised on Twitter that if the battery was not built within 100 days, the state would receive it for free.
From applications such as electric vehicles (EVs) and consumer electronics to stationaries like grid storage, battery storage technologies are currently experiencing a growth in investment, research and production.
The ease and convenience of online shopping has led to an unprecedented change in the retail business landscape over the last decade. The growing popularity of ecommerce and greater internet connectivity have driven sales volumes and revenues to an all-time high.
Since Amazon acquired Wholefoods, strategic priorities have shifted. Online penetration continues to grow as technology breaks down old barriers. Whilst grocery has been slower to shift to online relative to other retail categories, the signs are ominous. In conjunction with AmazonFresh, this has inevitably increased competition and customer expectations.
As a result, traditional supply-chain models have been challenged and companies have been forced to rethink their logistics operations to meet the growing demand. This has fuelled increased investment in technology and infrastructure to enable logistics providers to compete in an increasingly digital world.
Growth in the pharmaceutical industry has historically been marked by major breakthroughs in research and development (R&D) of drugs. However, increasing global competition and patent expirations have squeezed margins in generic drugs. In response, regulatory and commercial incentives have encouraged investments into ‘orphan’ drugs that are used to treat rare diseases. With approximately 7,000 rare diseases globally with only 10% having treatments, pharmaceutical companies that are engaged in the R&D of orphan drugs may offer an exciting opportunity for investors who are looking for long-term growth in this sector.
Diversification is the key
For investors looking to gain exposure to these trends, there are some important considerations. It is often hard to predict where the next major disruption will come from, as many of these opportunities are still in their infancy. Investors can be blindsided by technology risks, from smaller disruptors or from other industries, and even well-understood technologies can have unexpected impacts. Understandably, markets sometimes initially misprice these risks and the eventual correction in asset values can be extreme. From an investment perspective, identifying the threats posed by technology change is crucial to properly understanding the risk profiles of portfolios and to preserving shareholder value over the long term.
Investors should therefore be aware that growth may be volatile and is not guaranteed. Furthermore, there is likely to be a need to have broad exposure across your chosen theme.
At LGIM, we are pleased to offer diversified exposure to each of these investment opportunities via our range of Disruptive Technology ETFs. In many instances, these are the first European ETFs of their kind, tracking the growth of these rapidly evolving investment themes.
To learn more about L&G ETFs and our latest thinking to help you make more informed investment decisions, visit www.lgimetf.com