Fintech on Friday: the twin threats of technological change
Disruptive technology is applying downward pressure on wages and could well impact even those on higher incomes. It is therefore doubly important that investment portfolios are positioned to benefit from this growing trend
The rapid pace of technological change poses a double threat to HNWIs that wealth managers and financial advisers need to take into account, argued James Dowey, CIO and chief economist at Neptune Investment Management at the recent Morningstar Investment Conference in London.
“Technology poses a risk to both labour returns and investment portfolio returns as vulnerable companies suffer,” he said. “We can’t do much about part one, so we need to be on the right side of portfolio contraction to protect clients from part two.”
In historical terms, technology has boosted returns from labour markets, with a 17-fold increase in measured living standards since the industrial revolution. But on two occasions it has put labour markets under real and sustained pressure – first, during the industrial revolution itself, and second during the last 20 years. “On these occasions, owners benefit, but not the labour force,” said Mr Dowey. “We are living in rare times, hence the feelings of anxiety over technology.”
Technology poses a risk to both labour returns and investment portfolio returns as vulnerable companies suffer. We can’t do much about part one, so we need to be on the right side of portfolio contraction to protect clients from part two
While the industrial revolution saw advances in precision mechanics, which, for example, greatly reduced the time it took to spin cotton, the key breakthroughs today are in the fields of machine learning and programmable precision mechanics.
In 1990 there were 0.7 robots per 1,000 workers in Europe, said Mr Dowey, but by 2015 this had reached 2.5. Meanwhile the cost of robots fell by 90 per cent between 1990 and 2017. And these robots are increasingly able to carry out higher cognitive tasks within fields such as transportation, medicine, legal, financial and retail. Could doctors and lawyers soon be finding themselves out of work?
“This wider scope of tasks mean the labour market will have a big job to do. We can expect to see sustained downward pressure on wages. It is a risk worth considering that our clients will be disappointed by the returns they get from the labour market.”
If this is the case, it is essential that investment portfolios are positioned correctly for this tech revolution.
“This seems to be a winner takes all economy,” said Mr Dowey. “The best firms keep on winning and the rest fall behind. And the firms with the best technology are increasing their tech advantage.”
An index tracking approach does not suit investing in technology, he warned, as it is vital to understand who the winners and losers are, and to diversify risk. “We need active management here, with a qualitative approach requiring complex research.”
Technology stocks are expensive, although Neptune has a “healthy” allocation to the sector. It is important to view allocations on a company by company case, he said, but high valuations should not necessarily curtail an investment.
Investors should balance these stocks by also buying companies which are not so vulnerable to technological disruption, he argued. “We would advise a moderately higher allocation to the predicted winners, but more importantly avoid the firms that are likely to lose out.”
Technology is certainly a sector that lends itself to big winners and losers, agrees Anthony Collard, head of investments UK at JP Morgan Private Bank.
“We try to embrace this concept by allocating to the best equity long/short managers we can find, because they are going to take a view on the winners and losers,” he explains. “When you are playing tech, it makes sense to think long/short. You are playing the story, but also the opportunity that there are going to be losers from this.”
Technology stocks do tend to be expensive, adds Mr Collard, so investors need to be comfortable with what a three to five year view of a company’s overall enterprise value could potentially be. He also highlights firms in emerging markets. “Stocks we have held include for a long time include things like Tencent and CTrip. They might be replicas of companies in the US, but sometimes they are even better.”
Many of tomorrow’s biggest winners are simply not accessible through stockmarkets though, warned Mr Collard, explaining how it was also important to consider the importance of private equity in this arena.
