Retirement investment: The upside of disruption

by Noted / 22 March, 2018
In association with Harbour Asset Management

Øyvinn Rimer.

Are you saving for retirement through the likes of KiwiSaver? If you are, you might want to continue reading. If you don’t have the technologies of the future in your portfolio, your savings could struggle to keep pace with the changing world we live in.

Technological disruption is accelerating, and some of the biggest and most successful companies in history face being sidelined by change.

At the same time, nimble start-ups have big dreams of taking their place, says Harbour Asset Management senior research analyst Øyvinn Rimer.

Just look at giants such as Amazon, Tesla and Apple, which have existed for only a few short years or decades. If you’d invested before they made a name for themselves, your money would have multiplied many times over.

On the other side of the coin, imagine a world where our cars are all electric and we have no need for petrol stations. You may not want to invest in fossil fuels.

Traditional investment is at a turning point, with a growing gulf between the returns of the disruptors and the disrupted. Ignore this at your own risk.

“The impact of disruption is in its infancy, but the process has begun and momentum is building with the assistance of big data, the internet of things, processing power, artificial intelligence, robotics and complementary technologies,” says Rimer.

This matters to every investor in New Zealand, especially those who have their retirement funds invested in index tracking funds, he says.

Index tracking funds have been the darling of investors for the past decade, thanks in part to lower fees and favourable economic conditions. The rush to invest in these funds has, in turn, pushed up prices.

These so-called “passive investments” buy a small slice of every company in the NZX 50 or other similar indices such as the Dow Jones and FTSE 100. “The crux of passive investing is that investors get a slice of the entire market without any fundamental research involved in the selection of what goes into the portfolio,” says Rimer.

The trouble is that those 50 or 100 companies in an index tracker are often in the old industries that are ripe for disruption or possibly even extinction. Big incumbents aren’t known as innovators, meaning they don’t always harness new technology. Yet passive funds are still duty-bound to buy a slice of their shares.

The good news is disruption can have an upside for investors. An actively managed fund doesn’t have its hands tied by the need to buy the big companies listed in an index. The manager can tailor the fund’s investments to make money from the rising stars of disruption.

For this reason, Harbour’s analysts spend considerable time and resources studying emerging trends and technologies and choosing successful investments at the forefront of change. “For example, we have investments in the battery supply chain for electric vehicles, an industry we think will disrupt the global transportation system much sooner than most suggest,” says Rimer.

Harbour’s analysts also monitor their investments continuously and will sell if better technologies emerge. “If an investment fades or something better comes along, we can change our position to avoid going down with a sinking ship alongside passive investors,” he says.

As well as this, active managers can avoid industries likely to be disrupted, such as conventional subscription TV and traditional store-based retailing. “We can also pick and choose investments in industries that may be less likely to be disrupted in the foreseeable future, such as healthcare, aged care and consumer staples,” he says.

“I would be quite worried if stock selection didn’t have an active part in my portfolio.”

For more information go to Harbour Asset Management.

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