Some of the largest companies in the world are disruptors that introduced new business models and changed established industries to create entirely new ones. Prominent examples are Amazon (AMZN), Facebook (FB), Netflix (NFLX), and Uber (UBER).
Disruption is a subcategory of thematic investing, and there are emerging opportunities to gain exposure to these types of innovative companies and themes—if it aligns with your strategy and objectives. Thematic investing can enable you to invest in long-term trends or themes that you believe in, and thematic funds can allow you to find opportunities that may cut across countries, sectors, and market capitalization.
If investing in a specific theme meets your objectives, disruption might be a thematic category to consider.
What are disruptors?
Disruptors are companies that have the potential to change or entirely displace existing companies and industries. These companies can have innovative technologies or operations that are more efficient or make the old way of doing business obsolete—cloud computing, mobile payments, and autonomous driving to name a few.
"Disruptive companies have changed a range of traditional industries, bringing innovative approaches, often enabled by technology and internet platforms, to deliver products and services to customers," says Chris Lee, managing director of research and co-portfolio manager of the Fidelity Disruptors Fund (FGDFX).
"Take what we've seen with shifts in how people watch movies at home," Lee notes as an example. "As preferences and technologies have changed from VHS and DVDs to streaming services, this has created investment opportunities amid disruption. Consider the divergent paths of Netflix and Blockbuster. Looking forward, the rollout of 5G could create further disruptive opportunities in this space. The same movie that might take several minutes to download on a 4G network may take just a few seconds on a 5G network."
Disruptive investments dissected
While disruptors can be found across many areas of the economy, Fidelity has identified 5 key areas of disruption: automation, communications, finance, medicine, and technology.
"Automation is one of the most powerful trends our research team is watching in the world today," according to Chris Lee. "For example, there's amazing innovation happening on the factory floor to improve efficiency and increase safety through the use of industrial robotics and advanced sensory equipment."
Lee also notes that disruptive technologies are transforming consumer experiences through internet and mobile platforms. "Our research teams see many more disruptive opportunities for new business models to deliver unique value to consumers and improve our daily lives, not to mention the advances in machine learning and companies harnessing the explosion of data and shift to cloud computing."
Risteard Hogan, managing director of research and co-portfolio manager of Fidelity's Disruptive Funds, notes the prevalence of disruptive companies helping to develop and deliver more efficient financial solutions. "Think about the growth of mobile payments," he says. "We're seeing rapid growth in payments made over mobile devices, offering faster and more secure transactions, yet the penetration rate is still low. This suggests that we may be in the early innings of a long-term disruptive trend."
Disruption is happening across the scope of medical therapies and services as well. Hogan notes the excitement from Fidelity's research about the breakthrough innovation in life sciences tools and equipment that are fundamentally changing our understanding of human biology.
"Our research is uncovering companies that can now use new methods to create drugs for both very rare diseases as well as other large untapped markets. Our team is anticipating that these advancements will help foster the creation of new biotech companies, some of which will invent the drugs of the future in areas like immuno-oncology, cell therapy, gene therapy, targeted therapies, and more."
Is disruption a theme for you?
Most or all of the investing risks associated with other categories of stocks exist for disruption as well. You should do your due diligence on any individual stock, fund, or other investment to fully understand its characteristics and risks.
Disruptive investments may also carry some unique characteristics to evaluate. For example, in some cases disruptors may exhibit higher than average levels of volatility, as investors may have differing opinions on the near-term prospects for these industry-changing companies. This can create opportunities for investors with a long-term focus; however, it also reinforces the importance of diversification. "Thoughtful portfolio construction can help mitigate company-specific risks and overall portfolio volatility," says Michael Kim, quantitative analyst and co-portfolio manager of Fidelity's Disruptive Funds. If you are interested in these types of investments, you may want to consider a disruptive fund that balances precision to a given theme with exposure across a range of companies and sub-themes.
A common myth about disruption funds is that they are too narrow or too focused for an investor's portfolio. In fact, a thematic fund can hold dozens of stocks, with stocks from different regions, sectors, and market caps. These funds can typically serve as a satellite holding to gain exposure to a theme you believe in alongside a broader diversified portfolio.
The growth in disruptive investments has been substantial with increased investor interest and new fund offerings (see sidebar).
Disruptive companies may shape what the market looks like for years to come. Disruption funds may focus on long-term trends that are still developing, and depending on your investing objectives and risk constraints, these investment opportunities may be worth considering.