Leaders of today may not be winners of tomorrow

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MEDIA RELEASE With the accelerating pace of disruption across industries, it is important for investors to continually evaluate what makes a company a future winner, and to adapt investment portfolios accordingly, says Amit Lodha, portfolio manager of the Fidelity Global Equities Fund.

“Assessing the ingredients of long-term winners – including strong management teams and good industry structure in a growing market – is key,” Mr Lodha says.  “Market leaders have changed dramatically over the past ten years. We’ve seen the rise of companies that have disrupted an existing industry or challenged incumbents. The one thing that hasn’t changed is: the top companies of today are not always the top companies of the future.

“We assume that the rise of technology companies into the top ten positions in the S&P 500 index has been a recent phenomenon. However, if you look at the top constituents’ composition ten years ago, Microsoft, IBM and Google (now Alphabet) were all on the list, with Microsoft even then appearing in the top five and Apple knocking at the door at number 23*.”

According to Mr Lodha, the common success factors for those companies that have adapted and continued to grow have been few and simple. They include:

  • Moats and near-monopolistic industry positions and pricing power

Current example: Alphabet in search, Microsoft for office productivity tools, Amazon with e-commerce and Facebook on social media. 

  • Strong management teams with clear strategy and strong execution capabilities

Current example: JPMorgan and Bank of America. 

  • Good investment management

Current example:  Berkshire Hathaway.

  • An ability to adapt to change and innovate to turn threat into opportunity

Current example: Amazon and Netflix.

So if these are the companies of today, where will investors find the future leaders of tomorrow?

Technology 

The new entrant in this space would be a start-up which changes the paradigm on artificial intelligence/robotics/ quantum computing – to meet a completely unmet need. Within this, it’s my hope that with all the R&D investments and excess cash piles with top US corporates, these start‑ups will be absorbed within the likes of Facebook and Alphabet. For Apple, this is especially imperative as its dependence on the iPhone is currently too great. It needs to be early on the next wave of innovation, and inorganic growth could be the only way ahead.

 Healthcare

Healthcare has been a consistent presence in the top ten (Pfizer, Merck, Johnson & Johnson) and it is likely that one of these pharmaceuticals majors, especially one which has adopted personalised medicine, will be the leader of the next decade. With the rapidly growing old-age population, healthcare representation in the top ten is sure-fire for any company that addresses any of the various unmet needs of cures for Alzheimer’s, cancer, or diabetes, or develops new-paradigm care through gene therapy.

Energy/green energy

Oil companies have been a consistent presence in the S&P 500 top ten list and I expect them to continue their representation. The left-field disruptors will be any company able to harness renewable technology without undue requirement of scarce materials. For now, battery technology requires the use of scarce raw materials (like cobalt or lithium) and, so far, it seems difficult to see these technologies scale at the right price to replace oil as a source of transportation fuel in the next ten years.

 Moon shots

Start-ups working on artificial intelligence, big data, healthcare, energy technology, food innovation, space travel, or autonomous vehicles are all potential candidates and maybe there is one new entrant which we don’t know about today. A company which successfully commercialized space exploration would be my nomination for this position.

Mr Lodha comments: “A management team with clear, strong execution, operating in a good and growing industry, with differentiated products and services is the key to future success. With the pace of disruption and change only rising, an ability to adapt and change to the ever-evolving market environment through consistent innovation remains the key bulwark to shaping what will be the driving factors of the top ten in the decade ahead.” 

This piece was taken from Mr Lodha’s article ‘A time for imagining’.  Read the full piece here.