Seeing Innovative Investing Forest Through the Trees

Technology stocks started 2023 on a strong note, but what was shaping up to be a hospitable environment for beleaguered growth assets this year is now anything.

Even when dismissing the specter of more intensity to the Federal Reserve’s rate hiking regime, last week’s implosions of Silvergate Capital and Silicon Valley Bank serve as warnings that these are challenging times for some corners of the disruptive tech space. Not-so-fun fact: Silicon Valley Bank was once dubbed the “bank of dreams” because it loaned capital to so many startups. The shares lost 79.50% last week. That’s a nightmare. As of this writing late Friday, March 10, there was a line around the block to get deposits out of a Silicon Valley Bank branch in Northern California.

Undoubtedly, that’s an ominous anecdote and the cases of Silvergate and Silicon Valley Bank are enough to give many clients about embracing disruptive tech fare. However, the old saying about blood in the streets is pertinent today.

Translation: Advisors likely have work to do when it comes to navigating clients through what’s now a surprisingly volatile market climate, but the long-term case for disruptive tech remains intact.

Innovative Investing Can’t Be Ignored

As this year’s hubbub surrounding artificial intelligence proves, life comes at investors fast in the world of innovative tech.

“Today the speed and impact of technological breakthroughs are exponential and unprecedented. Easy access to super computing power; rapid developments in artificial intelligence; robotics and automation; hyperconnectivity between the physical and digital world; and biological innovations are the driving forces behind technological breakthroughs that continue to transform society,” notes Anqi Dong of State Street Global Advisors (SSGA).

No, advisors should not be expected to be up on all disruptive advancements, but foundational knowledge because clients demand it and because being at least somewhat versed in innovative investing strategies can potentially drive better outcomes for clients.

“Companies ranked in the top 20% for innovation had double the shareholder returns of their industry peers, according to research by Arthur D. Little, the world’s first management consulting firm, which examined the shareholder returns of 338 Fortune 500 companies between 1987 and 1996,” adds Dong.

Said another way, advisors would likely be on the receiving end of much praise if they directed clients to the next Amazon, Netflix, Microsoft, and Apple. Just one of those would suffice.

Get While The Getting’s Good

Obviously, market timing and stock picking are difficult endeavors. Even for advisors. However, popular broad-based equity benchmarks aren’t always the best strategies for accessing innovation. It’s just one example, but it highlights a flaw with passive investing: The iPhone had been around for two years before Apple (NASDAQ: AAPL) joined the S&P 500.

On the other hand, that scenario indicates advisors can turn innovative investing into a lemons-into-lemonade proposition by looking away from large cap-heavy benchmarks.

“Most broad market exposures have a natural bias toward companies with larger market capitalizations and longer histories, because they track market-cap weighted benchmarks. This may skew portfolios toward incumbent firms that are more vulnerable to technology shocks. Incumbents, after all, have a competitive disadvantage when it comes to adopting new technology,” concludes Dong.

Related: Passive Notches More Winning Against Active