Experts warn that some companies won’t be able to adapt to the increasing pace of change, so how can investors protect their portfolios?
Change, we are always told, is inevitable and constant. The way it will affect our investments is completely unpredictable, so a diversified portfolio is needed to absorb unforeseen shocks and allow us to seize opportunities when they emerge.
Louis Jamieson, Global Equity Analyst at Sanlam Private Wealth, explains: “If you look back a decade ago, the 10 most valuable companies in the world were mostly in oil and gas. Energy prices dropped so those companies suffered, while tech firms like Amazon and Google’s parent group Alphabet have come from nowhere to replace them at the top of the tree. Over 20 years ago, some of these tech companies did not even exist and anyone who had forecast that Amazon was going to be one of the world’s five biggest companies would have been dismissed as a madman. This is why it isn’t wise to put all your investment eggs in one basket, because nobody knows how individual stocks or other financial assets are going to perform over the long term.”
Change is coming
According to consultant Jonathan MacDonald, author of Powered by Change: How to design your business for perpetual success, 74% of members of the Fortune 100 list of the world’s largest corporations have disappeared since 1980 and 88% of the Fortune 500 have left the list since 1965.
“The rate of change is quickening so rapidly that I confidently predict that in the future the 88% statistic will apply to a time frame of just five years, rather than the 50-year period of the past,” says MacDonald. He believes more than half of the top businesses of today are unlikely to survive the changes brought by everything, from artificial intelligence and robotics to geopolitical upheaval, climate change and skills shortages.
Consultant McKinsey & Co adds weight to his prognosis, estimating that only one-third of corporate transformation strategies, designed to meet such challenges, succeed.
The wealth of research generated on the failures of companies like Kodak, Enron, Yahoo and Nokia can contribute to the problem, perpetuating a myth that inability to adapt to change is something only a mere handful of businesses are guilty of.
Biggest companies in 1998
2. General Electric
3. Exxon Mobil
4. Royal Dutch Shell
7. Intel Corporation
8. The Coca-Cola Company
Biggest companies in 2018
2. Alphabet Inc.
6. Berkshire Hathaway
7. Alibaba Group
9. JP Morgan Chase
10. Johnson & Johnson
By market capitalisation: based on the Financial Times Global 500 Rankings.
MacDonald believes the opposite is true. Despite their colossal size and reputations, only a few of the world’s largest corporations are going to survive the changes that will batter their business models and strategies over the next 50 years. “A greater degree of change is on the way than has occurred in the past,” he says. “The rate of ongoing change is going to be a lot faster than we have previously experienced and history shows that companies are poor at coping with and responding effectively to change.”
So how can companies protect themselves and their investors from the ravages of constant change? Philippe Silberzahn, author of A Manager’s Guide to Disruptive Innovation, believes the ability of established companies to innovate and respond successfully to innovation is at the heart of the issue.
“Somewhere a start-up is at work disrupting companies’ businesses,” he says. “Companies often maintain the belief that sticking to their core business and customer base will see them prosper in the face of disruption, but this is not the case.Disruption often means you must target new customers. Successful innovation is ultimately not about creativity or devising bold blue sky projects, but about transforming management. Companies must develop a management system that allows for this type of internal innovation. Ultimately, if management is inflexible and manages budgets ‘too well’, disruptive projects will be asphyxiated and disruptors will eventually usurp the business.”
MacDonald goes further, arguing that the conventional model, under which companies often wait for their successful strategies to come unstuck before responding with three-year transformation programmes, are misguided and will be insufficient to weather the economic and financial storms ahead.
Instead, he says companies must see change as a constant and perpetually come up with ways that their businesses can adapt to manage their acceleration across trends, industries, macroeconomic forces, societies, behaviours and markets.
Investing for change
At an investment level, all this adds urgency to Jamieson’s conviction that battening down hatches on a portfolio has a great deal to do with diversifying the assets held within it. “The enormous level of uncertainty when it comes to forecasting the future means it is vital that investors have a balance in their portfolios so that if one of the investments goes wrong or another company takes away its competitive advantage, you still have other investments in other industries that can support you through that,” he says.
This can be done through balancing the sectors in equity investments so that investors are not unduly exposed to any one industry area and domestic risks are offset by international opportunities, and vice versa. However, spreading the risks of equities in one’s investment portfolio is not enough, because a balanced portfolio should also include a diverse mix of other asset classes.
“There will be times when some asset classes do well and times when they don’t,” says Jamieson. Nobody knows when that is going to happen, so having a balanced and diverse portfolio guards against that uncertainty. It is very important not only to balance equity investments, but also to have a balance across other classes, such as fixed income, structured products, property and commodities.”
Of course, cash is also under threat from cryptocurrencies such as Bitcoin. It is further proof, if any is needed, that simply talking about the inevitability of change is little protection when it actually happens. Constructing investment portfolios that balance the risks and opportunities in order to capitalise on long-term growth therefore remains the best way to access the potential of a fast-changing world.