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.” –
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
blog. Used with permission.
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