An interesting dichotomy is playing out in sector and style investing this year. Growth stocks and the technology sector, using the S&P 500 Growth and S&P 500 Technology indexes as the guides, are poised to again top the S&P 500.
However, and this is the dichotomy, disruptive or innovative growth strategies aren't participating in this year's tech sector upside. Funds focusing on concepts such as fintech, genomics, industrial innovation and next generation internet are scuffling and those funds combining broad-based exposure to those themes and other are faltering mightily in 2021.
That weakness is an opportunity for advisors. Opportunity knocks because clients remember the stellar performances delivered by some innovative growth strategies in 2020, but some of those clients may now be apprehensive about this style of investing due to this year's disappointment.
Additional advisor opportunity comes in the form of steadying clients' nerves. “Long-term” is a phrase often bandied about in investing – perhaps too much. However, the fact of the matter of is investing for disruptive growth is very much a long-term proposition and while the growth prospects for many related industries are undoubtedly compelling, that doesn't mean the relevant equities and funds will move up in straight lines. So it's important that advisors articulate to clients there's still ample opportunity with disruptive growth, but there are bound to be bumps along the way.
Highlighting the Opportunity Set
Underscoring the point about disruptive growth delivering, well, growth, honing in on the market values of artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology shows that those groups, on a combined basis, nearly doubled in value to almost $14 trillion from $7 trillion between just 2019 and 2020.
However, ARK Investment Management forecasts that that $14 trillion could scale to a staggering $200 trillion in 2030. Even if that projection is off by a few trillion dollars or $10 trillion, even $20 trillion, it confirms the advantage of patience and a long-term approach when investing for disruption.
“Traditionally, advisors and consultants have calculated the capacity available in an investment strategy by the total market cap in existing benchmarks, a measure that we believe will become less relevant with time,” according to ARK research. “Thanks to the convergence between and among the five innovation platforms around which ARK has centered its research, technology is likely to evolve at an accelerated rate, increasing the universe of innovative companies significantly. ARK focuses on opportunities likely to scale exponentially in the future as opposed to those that already have scaled.”
The aforementioned platforms are at the forefront of disruption and are likely to (some are already doing so) render older industries and technologies obsolete.
“We believe that these five innovation platforms will add dramatically to investment opportunities in the future,” adds ARK. “They will displace old technologies and enable humans to achieve feats that seem unimaginable today.”
Again, it won't materialize in straight line fashion, but as older, less nimble companies cede market share to disruptors, the latter category will add equity market capitalization. In some cases, that could occur rapidly as markets price in elevated future growth prospects.
Future Is Bright
Currently, the artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology platforms aren't littered with mega-cap companies. Several aren't even home to many large-cap companies, but that's a positive because at just 10 percent to 15 percent of global equity market cap today, there's a long runway for growth.
“According to our research, the market cap of innovative companies will scale exponentially during the next five to ten years, as should ARK’s capacity,” concludes ARK.
At the end of the day, advisors know that forecasts don't always come to fruition, but if the aforementioned $200 trillion estimate comes anywhere close to being accurate, clients are likely to thank advisors for helping them stay the course with disruptive growth concepts.