Active is: Investing to enable the next wave of innovation
Disruption is impacting all industries as societal shifts drive innovation. We believe active managers are best equipped to help clients navigate this changing landscape, but to do so, it is imperative that they stay ahead of disruptive trends in all sectors.
Disruption is not restricted to tech firms and is affecting all industries
Companies are broadening their remit and embracing areas outside their recognised sectors
Societal evolution focused around the younger generation’s shifting expectations is driving disruption
Innovative thinking is required to protect firms from evolving digital threats
Few companies, industries or sectors will emerge unscathed from the current wave of disruption. New technologies such as artificial intelligence (AI) and machine learning are causing companies to rethink their business models.
While the early impacts of these innovations were predominantly confined to the technology sector, their wide-ranging uses are now spreading, sometimes blurring the boundaries between industries and creating opportunities for investors. For example, tech companies have reached into the automotive and health-care industries, and cyber-attacks exploiting digital technologies have businesses in all areas increasingly vulnerable.
It all adds up to a rapidly changing landscape that we believe can be best navigated with an active investment approach. Indeed, our recent independent research of institutional investors showed that 71% believe active managers are better equipped to manage the market risks caused by digital transformation.
Disruption is being felt in boardrooms
The speed of disruptive change is unrelenting, as reflected in the turnover of companies in the stockmarket. The average company’s lifespan on the S&P 500 Index, for instance, stood at 60 years in 1960, according to disruption specialist consultancy Innosight. By 2016, that lifespan had fallen to 24 years – and it is now expected to shrink further, to 12 years by 2027.*
As asset managers, it’s our job to enable our clients to take advantage of this evolution and separate the winning companies from the also-rans. We seek out those firms with the potential to embrace or pioneer new technologies, identifying those that we think will come out on top. Our investment also helps ensure their continued growth, enabling them to keep innovating – and disrupting.
In addition, our active style means that we don’t focus solely on strengths: we analyse all potential investee companies’ existing business models to identify those that are most at threat. When we find areas in need of attention, we highlight them as part of our practice of continually engaging with every company we invest in.
Lines between sectors are being blurred
Our search for opportunities relating to disruption isn’t confined to traditional tech firms. The financial-services and health-care sectors, which already collect millions of data points, are probably best-placed to take advantage of new technologies. But that’s just the start. Even those industries that might be less obvious candidates for a technological revolution – like construction or agriculture – are being transformed.
And new technology has brought a blurring of boundaries across sectors. For example, what we think of as a technology company may see its focus evolve to embrace something completely different. Some tech firms have already reached into the health-care field. The latest smart watches are equipped with health-monitoring features that can detect an irregular heartbeat and even contact emergency services if needed. Other tech firms are playing as big a role as automobile manufacturers in the development of self-driving cars.
The opportunities within disruption
The world is changing rapidly as disruption impacts every sector. An active management approach is essential to make the most of the opportunities, while managing the threats inherent in this technological and social shift.
Keeping pace with societal change
Beyond these changes, we see disruption manifesting in other ways. For instance, innovation is as likely to be driven by consumers as the companies that serve them.
Notably, social and generational shifts are having an impact, particularly as the way young people want to spend and invest evolves. Raised in an “always-on” technological environment, millennials (born between 1981-1996) and Generation Z (born between 1997-2017) are more open to emerging social trends, willing to embrace technology-led services such as robo-advice, and demanding of round-the-clock service. Companies must adapt to win the business and loyalty of this new generation of customers.
Allianz Global Investors actively looks for these trends using our comprehensive, collaborative research process. For example, our investment professionals tap our global research platform – including proprietary research from our Grassroots® team – to assess what’s really happening inside a company. This helps us invest in firms that we believe have the best long-term potential. What’s more, our ongoing relationship with these companies gives us the opportunity to influence their strategy and enhance their longevity.
Technology to protect businesses
Beyond powering businesses’ development, technological innovation is essential for protecting companies from evolving digital threats. Cybersecurity, for instance, has raced to the top of the boardroom agenda, thanks to many high-profile breaches.
As an active manager, we engage with the companies we invest in to detect and address any vulnerabilities: do companies truly understand the underlying risks they face, and are the right mitigation measures in place? How will they communicate a breach to their customers, and do they have the expertise to manage any crisis and maintain trust?
As companies become increasingly vulnerable to malicious disruption, an active-management approach designed to uncover hidden risks becomes more critical than ever.
The asset-management industry must adapt
As disruptive forces extend across the business world, the asset-management industry itself is also undergoing huge change, and this is reflected in our own internal processes as much as in our outward-facing business.
For example, in the information age, active managers can process data more efficiently than ever, giving them an unprecedented level of insight. That’s why we have made AI an integral element in how we conduct research, which has enhanced our own investment decisions.
And investors agree with this approach: 61% of our institutional respondents believe active managers are better at taking advantage of AI and big data to capture market opportunities.
We don’t envisage that AI will replace the human aspect of portfolio management. Rather, it will augment the work already being done, including enhancing our research abilities, enabling our human managers to work smarter.
Above all, AI will further improve our ability to assess the impact that technology will have elsewhere, directing our future investments and driving continued disruption in all sectors.
This article is part of an ongoing series that explores our vision for active asset management – as an evolving partnership between investors and asset managers – as we answer the question:
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How “active” is active asset management? There are a number of variables that investors can use to assess how active their portfolio is – including so-called active share – but what ultimately matters is the quality of a manager’s decisions and the alpha they generate.
The concept of measuring the “activeness” of an investment strategy has gained considerable prominence among investors over the past decade
Active share is a popular way of identifying managers who might be sticking too closely to their benchmark, but there’s not necessarily a link between a fund’s active share and outperformance of its benchmark
Active share is one of a number of metrics that should be used collectively to create a holistic picture; none should be used in isolation