10 Jul 2017 4 min read

Focus on the horse, not the car

By Emiel van den Heiligenberg

Whilst it can be enticing to focus on emerging technologies, it’s perhaps more important for investors to focus on the disrupted incumbents left in their wake.

Racing cars

I own a classic car, a Panther Kallista 2.8 litre. Though I love it, I have to be honest, it’s not a very convenient car; it's uncomfortable and it breaks down a lot.

I remember a friend warning me against buying a classic car:

“Buying a classic car only makes you happy twice: once when you buy it and then when you sell it”

The first ‘car’ was built as early as 1769. It would have been hardly recognisable as a modern car as it was basically a tricycle with a steam engine. By the 1930s the combustion engine and Henry Ford’s concept of mass production changed the world of transport forever. More than 20 million horses used for pulling buses, street trolleys and carriages became redundant. Whole businesses like carriage makers and labour that involved feeding and tending the horses were eliminated by what Schumpeter later would call creative destruction of a new technology.

Recently my colleague from the credit team, Madeleine King, co-head of European investment grade research, wrote an very interesting research document called; the disruption dilemma.   She makes a crucial point when it comes to investing in technology:

Whilst it can be enticing to focus on the emerging technologies, it’s perhaps more important for investors to focus on the disrupted incumbents left in their wake: these companies represent a far larger portion of the investable universe. This is true for equities but it is especially pertinent in fixed income!

This insight worked for the car industry as well; in early 1900 there were more than 2,000 separate auto manufacturers in the US. Even if you had bought shares in all of them, you would have lost money as it was virtually impossible to know which would fail and which would succeed. In the end less than a handful of companies survived. However, it was easy to see who would definitely lose out – horses. The best investment strategy would therefore have been to go 'short' horses. There were 20 million horses in the US in 1900. Today, there are just 4 million (example is originally attributed to Warren Buffett).

In other words it is most important to focus on the disrupted assets and less on the disruptor. This is especially true in fixed income where there is more downside risk (defaults) and less upside potential than in equities (as equity investors effectively own an option on the possible future earnings growth of a company).

Within multi-asset investing understanding the macro impact of technology is equally important as in bottom up investing. We ask ourselves many questions when thinking about the possible impact of technology disruptions. Here are a few examples:

  • Why is productivity so weak while we are see so much technological advances around us? See James Carrick blog from last year the productivity conundrum
  • To what extent has people’s fear of technological disruption contributed to the rise in populism in the world? See Lars Kreckel’s his blog Why so angry?
  • Will a rally in technology stocks draw the retail investor in and trigger a late cycle market melt up, like it did in the 1990s? Not sure but we have seen the first signs of the retail investor returning to the market in size in both the UK and the US. Moreover, we believe this is partially thanks to the narrative around new technological paradigms like big data, robotics and 3D printing.
  • Does technological development like shale oil drilling and self-driving electric cars disrupt the long-term supply and demand of commodities? See John Roe’s blog Dark at the end of the tunnel
  • Is there any evidence of what Madeleine calls the disruption dilemma? How much of the disruption is priced in the stock prices of possible disruptors like Uber, Facebook or Google and how much disruption is priced into for instance the auto sector (a likely disrupted sector)? In both cases we think quite a lot is priced in.

The Panther car company was disrupted a long time ago. My wife would say it’s probably for the better. She has been on the difficult end of yet another roadside breakdown at least once too many times. I love the design, the quirkiness and the fact that the car has character. But then again it proves my age; my disruptive moment might not be too far away either.   

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg