There's no sugar-coating it. Disruptive growth stocks and the related funds are languishing this year and that's troubling for clients that eagerly piled into this nascent investment style when it was soaring last year.
Compounding disruptive growth's woes and clients' concern are the facts that the broader market is up, traditional growth indexes are higher, the technology sector is in the green and the Nasdaq-100 Index (NDX) – home to an array of disruptors – resides near record highs.
Indeed, clients' questions and dissatisfaction with a style that worked so well as recently as 2020 is understandable. This is where advisors can help weary clients see the disruptive growth forest through the trees. Short-termism can be the death of many well-intentioned investments and portfolio moves, which is to say bailing on innovative growth while it's still in its early innings could prove foolhardy over the long-term.
In fact, the time is right for clients to be excited about the potential of emerging growth concepts and the related investments because technologies in artificial intelligence, biotech, digitization, mobile and many more are just getting going.
Good news: There are some approachable building blocks to keep clients engaged in disruptive growth.
Artificial Intelligence as Foundational Piece
The basis for many disruptive technologies and one that's increasingly familiar to clients is artificial intelligence. Advisors are familiar with it, too because AI is disrupting the financial advice industry. A base definition of AI is teaching machines human functions and while that's an evolving concept, there's no getting around the disruption AI will bring and not all of it means humans being displaced from jobs.
“In fact, I would make the case that artificial intelligence is the most general of all general-purpose technologies because we use our intelligence to solve all the other problems in the world,” says Stanford University's Erik Brynjolfsson in an interview with Global X. “If we can crack artificial intelligence, that would be the biggest change ever – bigger than electricity, bigger than the steam engine.”
Clients that are historians might say to advisors that the timelines under which prior disruptive industrial products paid tangible benefits were lengthy. However, AI is growing at a more rapid rate, meaning investment benefits are more likely to be realized in tolerable time frames.
“With the steam engine, it was about 40 years before we saw big productivity growth. With electricity it was about 20 to 30 years,” notes Brynjolfsson. “I’m hoping it will be even shorter with AI and other related general-purpose technologies. But until we had that business transformation to really harness the technology, we’re not going to see big productivity growth.”
Preparing for the AI/Digital Revolution
As noted, AI and disruptive growth at large are new concepts. Advisors may have seen the writing on the wall a few years ago, but many clients are just getting hip to the benefits offered by investing for increasing digitalization and disruption.
Fortunately, it doesn't require stretching into unfamiliar territory or embracing financially dubious companies to boost allocations to exciting growth concepts. A benefit of the coronavirus pandemic is that the global health crisis laid to bare companies' digital resiliency. Some have it. Some don't and as Stanford's Brynjolfsson notes, many are now forced to play catch-up.
“So those companies are actually investing more than they did before. And what we’re seeing is the potential for all companies to become much more digital than they were before,” he concludes. “One of the interesting questions is as other shocks hit, not just a pandemic, but earthquakes, hurricanes, and other types of shocks, whether the same kind of digital resilience that worked in 2020 is also going to help them with these other shocks. I suspect it will.”
Bottom line: Digitalization is here to stay and AI is leading that charge. Advisors should extol the virtues of long-term thinking when it comes to disruptive growth investing. Clients are likely to thank them. Over the long haul, of course.
Related: Disruptive Growth Investing Isn't Dead. It's Just Getting Started.