Equity expert on why traditional portfolio segments aren’t always the answer
Moving on from traditional portfolio analysis to assess companies as disruptors or the disrupted is key in today’s market.
That’s the view of David Polak, equity investment specialist at Capital Group, who said his firm’s investment selection is made very much company by company.
He believes that breaking portfolios down by industry and geography, for example, is increasingly outdated and highlighted the volatility of the technology sector’s famed FAANG group as an example of how each companies' strategies differ.
Polak said: “Another way of thinking about it is, how many companies do we have that we genuinely think are disrupting and creating new business models and can do so sustainably. And how many companies do we have that could be victims of that? In other words: disruptors and the disrupted.
He said: “An obvious example would be Amazon in the retail space and pretty much everyone else who is a landed retailer.
“In some cases where you have very high-end, luxury goods stores, Amazon aren’t going to have a huge impact but it’s understanding the portfolio in terms of those two categories.
“[It’s about looking for] new emergent business models and then you have to test those for suitability. Lots of people have great ideas but if they are not able to generate cash flow then they can’t invest in these new ideas and build barriers to entry.
"Then the other group are those that appear to be in the cross hairs of these disrupted industries: food retailers, apparel retailers, and electronic retailers in the US and broader with Amazon. It's about trying to understand what’s happening with some of the older media companies. How does Netflix impact them, for example?”
Polak said the important thing with this group is to understand whether the valuations have discounted that. He believes that, typically, the markets adjust downwards more slowly than in reality when it comes to disrupted industries.
Polak added that he hopes the recent tech volatility shakes out some of the money that was viewing the companies as having the same characteristics and buying and selling them as one entity.
“There are a lot of investment strategies that lump all of these technology companies together because they are fast-growing and they exhibit low volatility.
“What we’ve been seeing in this earning season is they are quite different and their business models are different, and therefore you are going to have different pressures on them and that’s going to lead to different stock performances.”
