Rathbones: ‘How soon is now?’

Rathbones, one of the UK’s leading providers of investment management services for individuals, charities and professional advisers, has today released a report considering the investment implications of disruptive technologies. The report, titled How soon is now? The investment impact of disruptive technologies, aims to differentiate between ‘innovation’ and ‘disruption’ across sectors, and examines the potential and pitfalls of investing in new technologies.

Julian Chillingworth, Chief Investment Officer, Rathbones, and an author of the report, says: “This isn’t about airy futurology-style projections; as investors, it’s imperative we understand how even for those companies at the forefront of technological change, investment success is not guaranteed. While innovation is a facet of disruption, they are not the same thing, and this misunderstanding can be a sure-fire way to destroy wealth. While some market leaders can innovate and introduce new technologies, and the existing model survives, we have focused on markets and sectors where the status quo could change radically or is under threat.”

Chillingworth adds that investors may be right about the potential of a particular technology, but they also need to identify how it will be adopted, and ultimately, which companies will profit: “The problem is that even after the dotcom crash of 2000, the ability to value a company properly remains superseded by the desire to re-imagine a future. The graveyard is littered with those corporate corpses that went bust before their technologies reached critical mass. Simply ‘buying the story’ isn’t enough.”

The report focuses on four areas where Rathbones anticipates a real prospect of disruption: personalised medicine; automation and labour markets; alternative energy, and blockchain.

1. Personalised medicine is coming soon to a clinic near you

Head of Collectives Mona Shah examines the vulnerability and opportunities for the healthcare sector from a possible shift to ‘designer’ drugs: “Personalised medicine could disrupt every part of the healthcare sector, from R&D and clinical trials, to diagnostic testing, regulation, healthcare provision and insurance. Governments can achieve greater efficiency in healthcare while improving success rates for patients by embracing personalised medicine. A key challenge will be the storage and analysis of the huge quantities of patient data. While these are early days for this investment theme, personalised medicine accounted for $94bn of sales in 2015, and this is expected to rise to $178bn by 2022. Pharmaceuticals with strong pipelines in immunotherapy or other areas of personalised medicine look well placed to strike the genetic jackpot. It may be that the biggest winners are the healthcare insurance companies. However, to maximise their profitability, they need to transform their business away from the concept of ‘shared risk’, which is central to their existence today.”

2. If the machines aren’t coming for your jobs, are they coming for your investment returns?

Rathbones’ Asset Allocation Strategist Ed Smith analyses the threat to jobs from intelligent robots, and asks, will capitalism self-destruct as swathes of white collar jobs are lost to machines? “Despite alarmist reports, a robot-fuelled dystopia is decades away. The risk to most jobs from automation is low for the foreseeable future. But history does suggest that the trend is likely to affect particular groups of mid-skill workers, possibly concentrated in particular regions. As a result, greater income inequality could exacerbate social and political tensions – in other words, the potential for technology to ignite further populism is high. The challenge for politicians is to find better ways to ameliorate the impact of change on specific groups, and to articulate better the wider social and economic benefits of technological progress. On the other hand, investors concerned about secular stagnation or the impotence of monetary policy to deal with the next recession should welcome the age of automation, for it appears that it is likely to exert a net upward pressure on the structural rate of interest appropriate for the economy.”

3. Charging forward: how the revolution in battery technology could transform our world

Head of Equity Research Sanjiv Tumkur considers the potential impact of solar and wind energy-generation and energy-storage technology on the utilities sector, and the outlook for electric and driverless vehicles: “Through advances in battery storage technology, we are on the cusp of major changes for electric vehicles and alternative energy, and ones which will emerge much more quickly than the market currently expects. The private sector will need to respond: these changes are likely to be disruptive to utilities – with the ability for homes to go ‘off grid’ – and car manufacturers. Less reliance on fossil fuel consumption could also have significant geopolitical implications. Companies which make or supply materials for batteries, solar cells or wind turbines might in theory do well, but rapidly growing markets often see sharp unit price falls that cause a lot of players to go out of business, as was seen in the solar panel market. The battery revolution is underway, and we will be monitoring developments in order to identify the winners and, perhaps more numerous, the losers.”

4. The internet of value

Ignoring theover-hyped” bitcoin, Risk Analyst Jakov Agbaba and Chief Investment Officer Julian Chillingworth look at the technologies that underpin much of the financial ecosystem, to assess the potential impact of blockchain: “Blockchain offers an alternative to many record-based transactions, from money transfers and asset custody to ‘know your client’ checks, healthcare records and music downloading. It would release huge cost savings and create additional value, but could negatively impact employment levels. In 2015 and 2016, venture capitalists invested around $1bn in the development of blockchain. The banking industry is expected to spend around $400m by 2019. Wide-ranging uses of blockchain are being tested in many other industries. Proponents argue that the technology is not as much about disruption as it is about innovation; to some extent they are right. For example, there could be significant improvements in the areas of cross-border payments and healthcare provision. But some companies will inevitably suffer disruption. In such cases, blockchain may prove impossible to adopt. These businesses will either have to readjust their offerings, which can take both time and resources, or face closure when other providers offer similar services at far lower cost.”

Chillingworth says: “Whichever approach investors take, disruptive technologies could have a disastrous effect on investment portfolios, as whole sectors are at risk of obsolescence. Active investing is arguably better suited to this challenge, as technologically vulnerable behemoths can be avoided in favour of more agile ‘new tech’ companies. Essentially, passive investors run the risk of holding a portfolio of canal operators just as the railway companies are about to take off. While this is not the place to rerun the active versus passive debate, active portfolios can more easily invest in the leaders of tomorrow. Further, while the UK has historically lagged the US in exploiting the commercial benefits of technological innovation, we believe it is now well positioned to benefit.”

For further information, please contact:

Madhu Kalia, Rathbones - 020 7399 0256/madhu.kalia@rathbones.com

Hugo Mortimer-Harvey, Quill PR - 020 7466 5054/hugo@quillpr.com