Left behind

Today technology allows companies to do more with less. However, the extraordinary rate of change can expose a gap between those that seize new opportunities and industries grappling to keep pace.

Mike Kelly
October 28, 2016 | 5 minute read

In virtually a flash, 13 people at Instagram reinvented the photography industry. Just two years after its launch, Instagram had 100 million distinct users for its photo app and sold itself to Facebook for $1 billion, while traditional players who once relied on powerful brand recognition struggled to stay relevant in the face of increased competition.¹ Facebook, Google and Amazon, none of which were in the S&P 500 in 2004, are now collectively worth about $1.3 trillion. Meanwhile, former S&P stars like Sears and J. C. Penney have fallen far off the list.

Technology allows companies to do more with much less, benefiting those few who run lean, productive companies. The above examples highlight the extraordinary rate of change today and the gulf between those that seize the opportunity of an ever-changing landscape and those grappling to keep pace and who, in turn, are left behind.

So what is the investment implication?

Identify the winners

Since following the status quo can lead to obsolescence, investment solutions that diverge from traditional approaches and take advantage of the opportunities created by evolving market conditions may win in the long run. Today, identifying the individual winners matters immensely.

The rate of change has been driven not just by technology but also by globalization. China’s urban population has increased by approximately 300 million people since 1996, driven by an agrarian migration in the grandest socioeconomic transition the world has ever seen.² Similarly, by the end of 2015, the world migrant population reached approximately 244 million people. Globalization drives a greater flow of capital, information and, yes, people. In addition, it allows companies to source the cheapest goods anywhere as well as identify the lowest cost source of labor worldwide.³

So what is the investment implication?

Seek diversification

Our global and market interconnectedness will continue to increase correlations as diversification becomes even more difficult to achieve. Portfolio diversifiers will increase in value. Constructing a diversified portfolio will require exposure to differentiated market segments not traditionally accessed by individual investors. These include opportunities in private equity and direct lending as well as geographies outside the U.S., like emerging markets.

Technological progress and globalization have provided real benefits, for example, the production of low-cost goods, which has helped keep inflation in check. However, these same forces have also resulted in notable costs, such as the displacement of millions of workers and the acceleration of social and economic tensions. While the net benefits appear positive, they are allocated disproportionately across the population, separating the world into haves and have-nots.

Although the percentage of the world’s population living in extreme poverty has fallen to approximately 10% (from as high as 35% in 1990), economic growth around the world has slowed and progress has been uneven (see “Hey, where’s the growth?”).⁴ People with less education are experiencing high unemployment, while wealth disparity reaches outlandish proportions. Those displaced don’t feel that globalization has benefited them. We are seeing their growing frustration and angst play out across Europe, the U.K. and the U.S. For example, U.K.’s Brexit was a prime example of growing frustration, which was catalyzed by older and less-educated voters.⁵

So what is the investment implication?

Balance your portfolio as volatility (and risk) increases

The pace of change and increasing vocal dissension of those left behind may bring market volatility and unforeseen disruption, potentially increasing portfolio risks.

Now, our country has seen this movie before. In the late 1800s, technological progress displaced agrarian life which, at the time, employed 80% of Americans. In the early 1900s, the assembly line displaced the manufacturing industry. Today, it is the services industry that is being shaken up.⁶ Technology adoption has caused disruption in the workforce; making companies more productive without increasing headcount (or even in some cases, decreasing headcount). One primary difference between these examples from the past and today is this: In the past, the pace of technological progress and globalization settled into a manageable range. Today, it is much faster and more unpredictable.

So what is the investment implication?

Adjust to a low yield environment

These trends are deflationary. Labor has less bargaining power when the competing labor pool is global and technology can render one’s job obsolete. As the world adjusts to lower growth, these trends will not only persist but also accelerate. Rates will likely stay lower for longer.

Regulations and government policies have been put in place to mitigate the effects of these trends, but their measures are akin to holding back the ocean. Some actions may even result in accelerating these effects. Quantitative easing, implemented by the world’s central bankers to alleviate the adverse effects of the 2008 crisis, has not stimulated the “real economy” very much but, instead, turbo-charged stock and bond prices. These measures have generally benefited investors with balanced investment portfolios, while many of those living off a fixed income have suffered as a result.

So what is the investment implication?

Seek out income

Expect policies to remain accommodative to ensure an ease of global transition. The global search for income will continue and will prove increasingly difficult. These policy trends suggest the asset economy will continue to be supported at all costs. However, it’s quite possible, and perhaps even probable, that one day the artificial support will either disappear or lose its intended effect, leaving significant future uncertainty.

Moving forward

Successful investing requires thinking clearly about the implications of major technological and economic trends and identifying opportunities and challenges that may result. When it comes to investing, following these five simple principles can help prevent getting left behind:

  • Identify the winners
  • Seek diversification
  • Balance your portfolio as volatility (and risk) increases
  • Adjust to a low yield environment
  • Seek out income

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Mike Kelly

Co-President + Chief Investment Officer

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