Disruptors

Analysis, Explained, Long Term Savings, Market Watch

23 Feb , 2015

A recent portfolio review for a client led a very interesting discussion.

My client has small part of his investment flowing into an energy fund. Though the fund is all encompassing (from fossil burning to wind farms), the recent and dramatic changes in the price of a barrel of oil has impacted the funds value substantially.

So, what does client do? Sell out of the fund, cut his losses? Or take advantage of cheap prices and continue to invest in the fund?

Ultimately it is the client's choice. His position, and my recommendation, was to take a long term view and continue investing into energy.
The rationale behind the fall in the price is wide and speculative. Will it go lower? Maybe. Though, the underlying truth is that the world needs to oil to keep things moving.

My client rightly queried the impact of alternative / new energy sources on the value of the fund. There are two responses to this, the fund itself does have exposure to these suppliers, though given the small market share of these energy sources, it does not counter the fall in the price of the all mighty barrel of oil. But can these new energy sources impact the market?

This led to a discussion about disruptor, and me writing this blog.

Disruptors can be a major innovation, development, or invention that changes the way an industry, or even the world, works. For example, the demise of Nokia, the rise of the iPhone, demonstrates the negative and positive results of disruptors. Though it was not an overnight process, the relative speed of this change in the industry and the resulting impact were substantial.

Swapping a Nokia for an iPhone is a relatively inexpensive, painless (and for some, a magical) experience. Retrofitting your house for alternative energy, replacing your oil driven car for a battery driven vehicle (everyone wants a Tesla though, don't they?), or investment into new power generation, is neither inexpensive nor painless. That is why; we are unlikely to see a disruptor impact the energy industry with the same impact of Nokia / iPhone position.

So, how does an investor take advantage of disruptors? Not easily, and not directly. The nature of energy funds are that they are generally available are not highly speculative, high risk propositions. Indirectly, however, there are opportunities.

Disruptors can play a large role in the IT industry. Most of the IT funds available have investments into large IT stocks, for example Google and Yahoo. Google in 2014 acquired over 30 new businesses, Yahoo fewer than 20. The chance that a disruptor will be amongst the selected businesses is slim, but there is more chance of finding one in a small pool than an entire pond.