How Tech Innovation Could Damage Your Portfolio Returns

The textbooks tell us innovation is good for the economy - but as robotics and technology disrupt the status quo could your portfolio returns be impacted?

Emma Wall 9 May, 2017 | 11:28AM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Neptune's James Dowey to talk about whether innovation is good for us.

Hello James.

James Dowey: Hi, Emma.

Wall: So, technology is both a headwind and a tailwind, I think, for economies and deep portfolios. If we can perhaps start with the opportunities that technological advancement provides.

Dowey: Well, the textbooks tell us that tech is good for us and it's as simple as that, and history does bear that out in terms of the very big picture. So, technological change has been very rapid since the British Industrial Revolution in the late 18th century and we've seen alongside that a huge tech dividend. So, back then, we were all very, very poor on about £1,500 a year. Today, we earn about £30,000 a year and that's almost entirely due to tech.

So, tech is good for us, but at the same time it has a dark side. In Neptune, we're very conscious of two risks that tech poses to investors. First is the risk that tech hurts their wages. In the case that technology automates some of the jobs that they do or replaces some of the tasks that constitute their jobs. And second, there's a risk that tech has the portfolios if it kills the companies that they're investing in. So, there's this very much two-sided case for tech when we're thinking about its impact on our living standards.

Wall: If we'd start with the first one, then I suppose that's the kind of the rise of the robots, there is some sci-fi concept, that a lot of jobs will indeed be placed by robots, where they used to be done by human. This is already happening in lot of factory work, automation. Are there particular sectors where you can look – in fact, I've read an article once that journalism is one of those few places that can't be replaced by robots, which I hope is true. Are there particular sectors where you think actually that's safe, that is not going to be affected by robotics?

Dowey: I think that the impact is going to be pretty pervasive across the entire economy because what we're seeing right now is machine learning which is computers programming computers. So we're going to be increasing the cognitive content of what's automatable.

What I would say in terms of tech proofing your career or your children's career, you want to be looking at sectors and occupations where as the price for those ultimate goods and services comes down in the economy, actually the demand for them goes up over time. And I think there is one very obvious sector, where the case can be made very strongly for that and that's health care. We currently spend less than 10% of GDP on health care. Looking out 20 years or so from now, I wouldn't be surprised if that represented around a quarter of GDP.

So, health care very price elastic, and I think it's going to be a huge growth sector and probably a good sector to aim one's ambition towards.

Wall: I think that's a really interesting point, because when people think about tech stocks, this is something your colleague Ali Unwin had said before, they think Google, Facebook, Snapchat, but actually technology is much more pervasive than that. It's actually in every single sector, isn't it? And what we consider as tech innovation and tech investing is going to be a lot broader in the future.

Dowey: Yeah. So, Neptune, we think about the global economy in terms of sectors primarily. And you have got a tech sector and then you have got every other sector, but we've reorganized our research team, our research capabilities over the past couple of years, so that we think about tech on a sector-by-sector basis, and that's how we research it.

I think that it's absolutely essential that good active managers think about the impact of tech on a portfolio in those terms sector-by-sector who were the winners and who were the losers as opposed to perhaps just thinking simplistically, I should overweight the tech sector.

Wall: James, thank you very much.

Dowey: Thanks a lot, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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