Disrupted! Investing in Change
Whether you call it disruption, transformation or creative destruction, they are simply new age terms for change. Change is a constant in business and more often than not, the emergence of any competitor is generally disruptive to the incumbents, requiring a response that may be transformative, legalistic, regulatory, sunsetting or redefining in some other way.
We recently launched the Montaka Global Fund and the Montaka Global Access Fund. During the Montaka Global Fund’s first quarter ended 30 September 2015, global markets collapsed, led by the US falling 7 per cent and China crashing 28 per cent, however the Montaka Global Fund generated a positive return for Australian wholesale investors of 13.87 per cent after all fees and expenses. This was in part due to profits made from companies whose business models are being adversely affected by change.
The ‘Internet of Things’ and digital technologies are at the forefront of change and transformation. Cisco, for example, has estimated that the economic value to be created from the Internet of Everything could potentially reach US$19 trillion in just seven years as businesses change through innovation, improved productivity, increased efficiency and enhanced customer experiences.
According to the Global Centre for Digital Business Transformation at business school IMD in Lausanne, Switzerland, nearly 40 per cent of current market leaders in ten of twelve industries will fall out of the top ten in the next five years and over a third of respondents to a recent survey fear complete digital disruption of their industries.
No longer is it possible for most businesses to write a mission statement and a vision statement, and point the business from A and head directly towards B. Businesses now need to be not only able to recognize the emergence of new trends quickly, they must also be able to analyse the information and data using tools (such as regulation) that may not have advanced as quickly or be available at all and then execute rapidly. Retreating to a profitable niche (becoming smaller) or simply ‘harvesting’ a legacy business that is in a sunset industry may be the only alternatives.
When the car replaced the horse-drawn carriage it would have been difficult to pick which car manufacturer would be the winner(s). Far easier however would it have been to see that blacksmithing would be the loser. Unless a blacksmith harvested his sunsetting legacy business and reinvested in, and towards, new technologies his business would be adversely and permanently ‘disrupted’.
The Montaka Global Fund and the Montaka Global Access Fund are able to profit from the identification of businesses adversely and fundamentally impacted by change. By investing in a portfolio of sold stocks exposure to these industries and businesses, investors are also somewhat protected from the downside movements in markets and enjoy the benefits (and risk of course) of reduced net exposure to the market.
Some investors may wonder about the merits of such an approach but we note most investors would be drivers of cars. Cars transformed society, commerce and the landscape and we accept them without a second thought. Yet cars are the instrument of the blacksmith’s demise. Similarly many of us have digital cameras and smart phones. Again they are widely accepted as having improved our lives. They are without question, the instrument of the film camera’s demise.
Whether you choose to call it transformative, disruptive, creative or destructive, change is a constant. An investment in Montaka is an investment in change.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Lucas Hainsworth
:
I think, the key is, that technology isn’t the trend anymore, technology is the baseline.
The key is the application of the base line. And how the idea is refined.
i.e. a car still looks like a car from the 1920s, it has 4 wheels, a steering wheel, etc. (atm)
but they’re an idea that has been refined beautifully. and if you were invested in those who were the best at refining those ideas, you’d be looking pretty happy.
These are companies that have a point of differentiation.
Roll up strategies seem to get bogged down in bureaucracy and command control issues.
It’s why Apple and MSFT and Alphabet are killing it. They have an idea, they beautifully refine it. Alphabet identified what I wrote above ahead of me, and they know, just throw money at an idea, if it sticks it goes gangbusters, if it doesn’t stick, it’s R&D done for your next idea.
Roger Montgomery
:
All excellent points Lucas. Thanks again for sharing.
Joe
:
Hi Roger,
Thanks for the article! Quick question, how does short selling fit in with the traditional ‘long-only’ value investing philosophy?
Keynes famously said that ‘the market can stay irrational for longer than you can stay solvent’. In other words, unless we’re dealing with contracts of long duration, doesn’t short-selling involve predicting that prices of ‘blacksmiths’ will go down in a relatively stable, orderly pattern?
How is this risk (ie short term volatility) managed in the fund?
Roger Montgomery
:
Hi Joe, a really terrific question. The key is first appreciating that our brand of value investing involves the identification of high quality and bright prospects and purchasing at some discount to intrinsic value. Now the important point: You cannot simply short sell the opposite. You cannot short low quality expensive companies. Why? For the reason you articulated; the market can stay irrational for a long time. The global team at Montgomery have instead developed a four part framework that covers the types of situations that lead to profitable short opportunities. A company that meets two or more of the four criteria is an excellent candidate.