Look for companies set to benefit from innovation: BAEP

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Despite recent talk about ‘disruptors’ and the impact that new companies can have on traditional marketplaces, investors shouldn’t assume that ‘innovation’ necessarily means disruption and fear the worst for their portfolio.

“Innovation and disruption are part of capitalism, and have been happening for a long time,” says Julian Beaumont, investment director at Bennelong Australian Equity Partners (BAEP).

“Investors therefore shouldn’t get too carried away with the idea that all innovation is disruptive, and is going to turn markets on their head and force incumbents into the gutter.

“Companies such as Uber have perhaps led to the idea that new approaches will lead to the destruction of traditional operators.

“Certainly new and innovative companies can have a significant impact on an industry, but the subsequent demise of existing companies isn’t inevitable.

“Nor is it a new phenomenon.  Seek, the job search company, could be described as a disruptor, and has without question had an enormous impact on the newspaper companies and their employment classifieds revenues. But it was founded 20 years ago and is hardly a new company.

“Likewise, there are many established companies innovating for better and better products, not necessarily replacing old ones. CSL, Cochlear or ResMed are extremely innovative in advancing product capabilities, user-ability and other features.

“Therefore ‘new’ or ‘innovative’ does not automatically mean ‘disruptive’,” he said.

He said that one of the least risky ways for investors to take advantage of the theme is to find the companies that are benefiting from the new ways of doing old things.

“We search for the companies that are beneficiaries of innovation, who are leveraging innovation to build on existing revenues streams, improve efficiency and reduce costs, and push further their competitive advantages.

“We believe it is preferable to invest in proven businesses with an existing strong competitive position and scalable base of earnings.

“A good example is Dominos, which has just started trialling robotic delivery drivers and drones to deliver pizza.

“At this stage, it seems gimmicky, but if successful, it has the potential to excite the customer, take out wages and other costs, and speed up delivery times. Ultimately, whether it works or not, Dominos is thinking about continuous innovation to improve its offering and competitive position.

“Another example is Rio Tinto which has recently started using driverless trains. It might be tongue in cheek to say, but they beat the likes of Google and Tesla to driverless vehicles.

“In both cases, these are existing strong businesses that can take advantage of innovation.

“We tend to be cautious of new businesses formed out of new innovation that have yet to prove profitability. Just as they might have disrupted an industry, so they may easily be disrupted themselves,” Mr Beaumont said.

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