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Disruptive growth or innovative investing took its lumps in 2022 amid rampant interest rate tightening by the Federal Reserve, but led by the artificial intelligence(AI) investing renaissance, that narrative is changing for the better this year.
Still, there are reservations about investing along disruptive lines. Advisors that have been in business in awhile know that with the advent of each new technology, criticism, fear and resistance often follow. It happened with the cell phone, online shopping and many more examples. And it's happening with five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics.
Yet, these concepts are going to disrupt the economy and investing as we know it. Some already are. Genomics companies are working on technologies, including early cancer detection, that will improve patient outcomes. Fintech companies are offering bank accounts and money transfer services (and much more) with economics that are far superior to traditional banks (bank branches are really expensive and fintech companies don't have those).
Point is the case for investing in innovative industries and technologies is alive and well and, in the eyes if some market observers, is a prime avenue for generating alpha.
Why Innovative Investing Matters
As this year’s hubbub surrounding artificial intelligence proves, life comes at investors fast in the world of innovative tech.
“Today the speed and impact of technological breakthroughs are exponential and unprecedented,” notes Anqi Dong, State Street Global Advisors (SSGA) senior strategist. “Easy access to super computing power; rapid developments in artificial intelligence; robotics and automation; hyper-connectivity between the physical and digital world; and biological innovations are the driving forces behind technological breakthroughs that continue to transform society.”
One of the hurdles advisors face when it comes to discussing innovative/disruptive investing is the perception of elevated. After all, history is littered with examples of innovative companies collapsing, burning shareholder capital in the process, before full potential is realized. However, history also suggests this style of investing can be rewarding.
“Empirical research shows companies that drive technological innovation deliver higher shareholder returns,” adds Dong. “Companies ranked in the top 20% for innovation had double the shareholder returns of their industry peers, according to research by Arthur D. Little, the world’s first management consulting firm, which examined the shareholder returns of 338 Fortune 500 companies between 1987 and 1996.”
As the SSGA strategist points out, there is a correlation between companies with strong research and development efforts and positive returns for investors. That’s a point worth conveying to clients.
Getting In on Ground Floor
While some clients are apt to be skittish about embracing smaller stocks with disruptive traits, there is merit to this approach. Think of it this way: It’s better to find the next Amazon or Apple before the company ascends to such revered status.
There is no foolproof for accomplishing that objective and stock-picking along disruptive lines is difficult, underscoring the validity of broad-based approaches.
“Taking advantage of mispriced innovative stocks requires identifying and investing in innovative companies in their early stages. For example, some of the most-recognized innovative brands — Amazon, Netflix, Microsoft, and Apple Inc. — were included in the S&P 500 Index more than eight years after filing their initial public offering (IPO),” concludes Dong.
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