The future is already here

Seeing the world as it really is

In a previous commentary, we noted how the fundamental nature of capitalism is changing and why it is important to see the world as it really is. We further explored the phenomenon of technological disruption in our recent article “The four most dangerous words in investing.” We noted how technology-driven competitive advantage is becoming increasingly important in almost every sector. Today, investing in “technology” is far different from my father’s siloed technology investing in the 1970s and ’80s. MSCI, the world’s leading index and analytics provider, which manages the Global Industry Classification Standard (GICS®) that categorizes all companies into specific sectors, is belatedly making some changes to recognize this reality.

On Sept. 28, 2018, the “telecommunications” sector was renamed the “communications services” sector, to account for the integration of telecommunications, media, and Internet companies. The renamed sector will include existing telecommunication companies, as well as selected consumer discretionary companies currently classified under the media industry group and the Internet and direct marketing retail sub-industry, along with select companies currently classified in the information technology sector. While these are the largest changes for the GICS in its history, it does not go far enough, in our view, for those who seek to see the world as it really is.

Investors who are forced to view investing through the lens of the GICS sector classification system – like almost all institutional investors – will necessarily need to see the world through the eyes of MSCI. Unfortunately, we believe this view is a lagging indicator, as it will belatedly recognize a world that has already changed. They are already behind, even before they make their biggest structural changes so far!

We can all see that consumer behaviour is evolving faster than at any other time in living memory. This is due to the increasing ubiquity of always-on technology, the powerful influence of psychologically addictive content, and customized social media feeds. We believe that in order to reach their customers, almost every company is a digital company, whether they know it or not. In our commentary, we cited Domino’s Pizza Inc. (NYSE: DPZ) as an incredible turnaround story and its self-described transformation into a “technology company” as an instructive mental model for the modern era. Describing Domino’s over four years ago, a JP Morgan analyst commented, “You’re a technology company disguised as a marketing company, disguised as a pizza delivery company, and you have really functionality in all three.” Bingo.

We don’t really care whether MSCI considers Domino’s a technology company or not. If a company acts like and considers itself a technology company, then that apprises our thinking on the subject. We prefer thinking independently and staying nimble, rather than following the strategies of slow-moving institutions and popular opinion.

“The future is already here — it’s just not very evenly distributed.” – William Gibson

History has shown that technological disruption is not new. However, what has changed is that the pace of technological change is accelerating. The time between the early adopters (the future is already here) and when the masses arrive in force (evenly distributed) is shrinking (see the chart below). Widespread adoption of electricity took more than four decades after it was first commercialized in the U.S., but it has impacted virtually everything over time.

Change is much more rapid today, with smartphone adoption becoming widespread in the U.S. in less than a decade. It too will continue to have widespread impact. What will be more evenly distributed 10 years from now? Autonomous driving? Cryptocurrency? Drones? Yet-to-be-developed business models that will be driven by the upcoming advances in artificial intelligence? Today is not the time to be complacent with companies and management teams who are content to milk their historic cash cow businesses. The willingness to experiment, and having the capacity for continuous reinvention, will be a source for emerging competitive moats and tomorrow’s potential compounders.

Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management. He works alongside David Barr, Pender’s President, in setting the direction of Pender’s overall investment strategy. This article first appeared in the Pender blog. Used with permission.

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