Part 1: Why invest in disruptive innovation?

Never before have investors been exposed to change on the scale and at the speed that they’re encountering today. Disruptive innovation is changing the way the world operates and how we interact with it and each other, and it’s happening at an accelerated rate.

New-for-old replacement

According to ARK Investment Management CEO and CIO, Catherine Wood, disruptive innovation is caused by the introduction of new technologically-enabled products or services that permanently change an industry or economic sector by providing greater simplicity, accuracy, customisation and accessibility while driving down costs.

ARK Investment Management — a Nikko Asset Management strategic partner — invests in companies focused on or which enable disruptive innovation as it believes these companies are riding down cost curves, creating tremendous unit growth, productivity and, ultimately, wealth.

Disruptive innovation by its very nature is controversial. It’s the replacing of the ‘old guard’ – the traditional players — with the new — the technologically-enabled disruptive innovators.

Today, there are a number of innovation platforms that are driving this disruption and they’re all evolving at the same time: automation, energy storage, DNA sequencing, next generation internet, and blockchain technology. The last time we witnessed multiple platforms emerging like this was in the late 1800s with the launch of electricity, the telephone and the internal combustion engine. The impact of these three innovations changed history and today is no different.

Genomic sequencing is changing the way biological information is collected, processed and applied; advancements within robotics, automation, energy storage, autonomous technologies, and 3D printing are enhancing logistics and productivity while reducing costs; and innovations including cloud computing, big data, machine learning and blockchain technology are changing the way we manage information, analyse data, purchase goods, and communicate across the globe.

Despite its potential, the full magnitude of these platforms and the investment opportunities they create can be unrecognised or misunderstood by traditional investors.

Decoding the opportunity

When it comes to investing in disruptive innovation, the key is finding opportunities associated with the old guard vs new guard paradigm, and picking stocks that offer a much lower valuation than you’d normally be able to get were it not for the disruption. Investors in this space are often seeking long-term growth by capitalising on rapid change and avoiding industries and companies that are likely to be displaced by advances in technology.

As Catherine Wood explains, “Benchmarks reflect past success. ARK’s investment approach focuses on innovation to capture future growth. If properly identified, investments in convergent innovations have the potential to provide significant outperformance.”

While disruptive innovation may not appeal to all investor’s, they should be interested in the development of these platforms if for no other reason than to become aware of the value traps that could be created in their existing portfolios, i.e. old guard stocks that are vulnerable to being disrupted and subsequently becoming redundant.

“As an investor it is critical to be aware of how these innovations not only create new investment opportunities, but just as importantly how they will impact incumbent market players”, said Sam Hallinan, Managing Director Nikko Asset Management Australia.

Read Part 2: Could a disruptive innovation strategy sit in a client’s portfolio?

For more information on the Nikko AM and ARK Invest Partnership: Nikko Asset Management and Ark Invest partner for disruptive innovation investment solutions

Parts of this document were prepared by ARK Investment Management LLC. This material is issued in Australia by Nikko AM Limited ABN 99 003 376 252, AFSL 237563 (Nikko AM Australia). Nikko AM Australia is part of the Nikko AM Group. The information contained in this material is of a general nature only and does not constitute personal advice, nor does it constitute an offer of any financial product. To the extent that any statement in this material constitutes general advice under Australian law, the advice is provided by Nikko AM Australia. ARK Investment Management LLC and Nikko Asset Management Co., Ltd. do not hold an AFS Licence.