NEWARK, N.J.--(BUSINESS WIRE)--Given the lightning-quick pace of technological change, investors must evaluate their portfolios to weed out obsolescence risk from incumbent products and business models that might soon be displaced, while developing a disciplined active investment framework to identify potential technology-driven winners, according to the latest report examining megatrends from PGIM, the $1.2 trillion asset management businesses of Prudential Financial, Inc. (NYSE: PRU).
While the world is just beginning to feel the early effects of driverless cars, artificial intelligence, augmented reality and other technological shifts, it’s imperative for investors to consider how technology might impact all sectors of the economy, says PGIM’s report, The Technology Frontier.
The next wave of technology-driven disruption will be in the real economy
“Contrary to popular sentiment, the disruption unleashed by technological change has spread well beyond Silicon Valley start-ups and FAANG stocks and will ultimately reshape every industry in the global economy,” said Taimur Hyat, PGIM’s chief strategy officer. “The implications will radically transform investment opportunities across asset classes and geographies.”
PGIM considers three sectors as examples of the unexpected breadth and reach of technological change:
Real estate: New technology is changing how we work and live which is, in turn, transforming how real estate is developed, used and repurposed. Given the unprecedented pace of technological change, real estate investors are increasingly “future proofing” buildings to ensure they can be easily converted to meet evolving tenant needs.
Energy: The introduction of new energy extraction and power generation technologies will continue to reshape an already innovative sector. Over time, firms that invest in next generation technology will gain an edge: For example, advanced robotics, automation and big data are driving increased productivity through automated drilling robots and sensors in wells that provide early warning signals around potential risks.
Consumer goods: Thanks to the reach of social media, small brands have quickly gone global using integrated shipping networks to increasingly disintermediate traditional wholesalers. New brands can reach even remote villages in the Himalayas. At the same time, established brands are increasingly relying on predictive analytics and big data to create personalized customer journeys that are transforming the retail shopping experience.
But where’s the productivity?
Unexpectedly, technological advancement has yet to produce material increases in productivity growth, confounding economists and investors alike. Slow and uneven diffusion across industries has meant that sectors such as construction and health care have lagged significantly behind those on the forefront of innovation, while winner-take-all firms have captured most of the tech benefits, concentrating productivity gains in a few leading companies. Even where technology is being used, technological change only produces notable productivity gains over time due to the level of investment required in changing processes, personnel and managerial mindsets.
Portfolios shaped by the winds of technological change
To plan for the long-term impact of technological change, chief investment officers should consider five actions to reap potential benefits while protecting their portfolios against risks:
- Protect against obsolescence risk: CIOs will want to carefully evaluate the potential impact of technological change on their holdings, paying particular attention to less liquid, longer-duration investments that bear the risk, but not the upside, of technological change.
- Identify technology leaders across the portfolio: Investors should seek out firms that have consciously structured their business models around technology adoption, demonstrated their ability to leverage disruptive technologies, disproportionately invested in technology research and development to build proprietary mission-critical systems, and continue to actively supplement in-house efforts with tech-driven mergers and acquisitions.
- Look beyond venture capital: Investors will want to broaden their investment vehicles to invest in technology-savvy public companies, scaled offerings in the private markets, or the real asset and infrastructure investments needed to enable the promise of new technologies.
- Evaluate alternative data and predictive analytics for managing their own investment portfolios: Fundamental investors will need to evaluate if, where and how to adopt artificial intelligence and other predictive technologies to shed light on their portfolios, while avoiding the danger of overfitted models identifying false patterns that do not actually exist.
- Brace for a “techlash”: Whether the lag between advancing technology and regulatory oversight plays out through antitrust litigation against dominant tech firms, data privacy rules that limit firms’ ability to profit from user data, or increasingly acrimonious cross-border intellectual property disputes, investors will want to ensure these risks are explicitly captured in their evaluation of new investment opportunities.
The Technology Frontier is the latest in PGIM’s Megatrend Series, which has so far included in-depth reports about the growth of cities, aging populations, the tussle between globalization and nationalism, and the long-term rise of emerging markets. Now, amid unprecedented technological change, PGIM examines the profound implications technology will have across asset classes. The paper draws on insights from investment professionals across PGIM’s fixed income, equity, alternatives and real estate businesses.
With 15 consecutive years of positive third-party institutional net flows, PGIM, the global asset management businesses of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world* with more than $1 trillion in assets under management as of June 30, 2018. PGIM’s businesses offer a range of investment solutions for investors around the world across a broad range of asset classes, including fundamental equity, quantitative equity, public fixed income, private fixed income, real estate and commercial mortgages. Its businesses have offices in 15 countries across four continents. For more information about PGIM, please visit pgim.com. For more information about Prudential, please visit news.prudential.com.
Prudential Financial Inc. of the United States is not affiliated with Prudential Plc, which is headquartered in the United Kingdom.
*As ranked in Pensions & Investments’ Money Managers list, May 2018; based on Prudential Financial, Inc. total worldwide assets under management as of December 31, 2017.