Disruption, a driver of long-term growth

Wesley Lebeau, Deputy Head - Global Thematic Equities at CPRAM, discusses the role of new technologies in creating value for investors. He emphasizes the need to focus on the overall ecosystem of disruption rather than a specific sector in order to benefit from this phenomenon in a sustainable manner.

In recent years, we have seen a growing appetite from investors for funds that are highly focused on a specific technology: robotics, artificial intelligence, big data, or of course biotechnology. Investors naturally felt drawn to these values offering strong performances, but it seemed to us that funds of this type had too narrow a target and too narrow an investment universe.

We have carefully observed these various mono-themes by asking ourselves what they covered. Their common point is to be carriers of disruptive innovation that can impact many sectors. Therefore, it is this broad theme of disruption that we have chosen as our new financial strategy: it didn't come out of a magician's hat, but it is indeed the result of the analysis of what we consider a long-term trend. Once identified, this structural trend should generate long-term growth and create sustainable investment opportunities that we want to benefit from.

We talk about market disruption when a new product or service arrives on this market which, either because it is cheaper, or because it is simpler or faster, is capable of changing the codes of an entire economic sector, of disrupting the established order. We will thus identify as disruptive values the securities of companies capable of being "game changers" in one or more markets. We can cite the example of Amazon, which played a role as a disruptor in an existing market, distribution, by becoming the world's largest e-commerce company, but also in the way data is stored through the Cloud, a new market, by launching its "Amazon web services" division.

In every disruptive movement, there are obviously disruptors... and the disrupted, both in the directly affected sector and in related sectors. Not all established players necessarily know how to reinvent themselves and risk disappearing. For example, the transition from analog to digital photography not only affected camera manufacturers, but also film and chemical suppliers, as well as photo development services. Even among the core players in the industry, we saw that Canon and Nikon were able to navigate the transition, while Kodak, despite its longevity, reputation, and significant market share, fell victim to disruption, leading to its bankruptcy. Similarly, Nokia's dominant position in mobile terminals in the 2000s did not protect it for long when the disruption of smartphones occurred, with the arrival of Apple's iPhone.

There are several ways to look at things and it is important to keep in mind that disruption is not a linear phenomenon, but rather evolutionary. Let's take the example of the telecom services market in France. The arrival of Iliad and its brand Free had a very disruptive impact on the historical player in the market, France Télécom. Since then, it has changed its name to Orange - a brand it had acquired - and is starting to play the role of disruptor itself by targeting other markets where we would not have imagined seeing it 10 years ago: banking, with the launch of Orangebank, but also healthcare, through its subsidiary Orange Healthcare.

A first investment approach in disruption is to opt for mature players who have already succeeded in taking a prominent position in a market they have attacked. In this category, one can think of highly visible American players, such as Amazon or Alphabet (Google's parent company).

A second investment approach is to opt for more emerging disruptors, often younger and less solid, like Tesla for example. They offer a different risk profile, often more volatile. But let's not forget that such players can also be targets for mergers and acquisitions. Finally, one can invest in historical players who will reorient themselves towards more disruptive activities.

For example, Umicore, which historically was a mining group, completely reinvented itself, notably through the acquisition of the precious metals division of the German company Degussa in 2003, and has become a major player in material technology, particularly for the production of solar cells or high-quality batteries. It can therefore be a key player in the disruptive movement that constitutes the shift of the automotive sector towards electric vehicles.

In reality, if disruption continues to grow and accelerate, it is not a new phenomenon. The transition from horse-drawn carriages to steam engines and automobiles was obviously very disruptive. And the coachmen's union was opposed to the arrival of railways. The difference today may be that the number of affected sectors is increasing: the digital economy is currently the leading sector, but we are also looking for opportunities in industry 4.0, the environment, or health (particularly immunotherapy). The very fact of focusing our strategy on the global ecosystem of disruption rather than a specific sector will allow us to benefit from this phenomenon both now and in 10 years. This contributes to the robustness of our strategy, even if sector biases can vary greatly over time, depending on sectors subject to disruptive movements.