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Second order effects key to tech disruption

Article by Sarah Kendell at Financial Observer

Investors should look towards the “second order effects” of technological disruption in order to position their portfolios effectively for the future, according to Magellan Financial Group.

Speaking at an adviser lunch in Sydney yesterday, Magellan chief investment officer Hamish Douglass said the less obvious effects of disruption were just as important when considering how the dominant companies of today would weather the storm of new technological advancements.

“If you look at past changes in technology like self-service checkouts in supermarkets, the first order effects were that checkout people lost their jobs, but the second order effect was chewing gum sales – over the last six or seven years gum sales have dropped by 15 per cent because the business model was an impulse purchase in the checkout line,” Douglass said.

“Our job as fund managers and investors when we can see a lot of change going on in society, particularly the induction of new technology, is we want to see the next chewing gum before it happens.”

He identified a number of potential second order effects of emerging technology trends, such as the effect on the property market as consumers moved from owning to sharing cars and no longer needed parking spaces.

“It is estimated that in cities like Sydney 30 per cent of land space is taken up parking cars – if we have a massive reduction of needing to park these cars all the time, that could be very disruptive to real estate in a major city,” he said.

Consumer goods conglomerates such as Procter and Gamble were also likely to lose market share as their primary communication channel with consumers – television advertising – ceased to exist as a result of online subscription video services taking over, he said.

In light of this trend, he said Magellan had significantly shifted its portfolio positioning over the past five years to gain exposure to major technology names such as Facebook and Apple, and lessen its holdings in consumer goods, with the exception of a few businesses it believed to be insulated from disruption, such as Starbucks.

“We want to own a portfolio of businesses that we think face very limited chance of disruption, [and] I don’t believe in the next 20 years you are going to get a technology change where we are going to be drinking virtual coffees,” he said.

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