Disruption has become something of a Silicon Valley cliché. 
Yet the term still conveys a wider truth for investors: Being on the right side of change potentially brings great rewards. Unfortunately, the same truth applies in reverse: Being on the wrong end of disruptive change can be an expensive investment mistake.
For investors, being on the right side has never been more important than today. The waves of disruption washing through the global economy and society are unprecedented, both in size and in speed. It is coming from multiple directions: technology, health care, politics, popular culture, economic policy, and regulation.
Disruption often has a winner-take all dynamic, with a handful of early movers grabbing the lion’s share of the benefits. It can also be explosively fast, especially if technological innovation and enthusiastic consumer demand pave the way for blockbuster products that quickly transform an existing market.
A classic example: the convergence of wireless broadband and computing that made the smartphone possible. The device almost instantly transformed mobile communications, first for business users and then for consumers. Mass smartphone adoption, in turn, enabled innovators to develop a host of spinoff products and services, from tablet computers to ridesharing apps.
The vital lesson for investors is that extreme outcomes do happen.
Explosive revenue and earnings growth – plus higher valuations as the market recognises future growth potential – can generate rapid, but sustainable, price gains. When paradigms shift, markets tend to underestimate the long-term outcomes and focus too heavily on short term valuation metrics. In many cases, investors simply do not understand the scale of the opportunities disruption has created.
Below are five key industries where we are currently witnessing powerful disruptive change.
Web-based data services
The ability to deliver enterprise and consumer applications over the Internet has created booming markets for cloud hosting, software by subscription, interface design, and other services and is encouraging even larger companies to outsource data operations.
Potential winners include large online retailers or consumer technology companies able to leverage data platforms to serve the outsourcing market. Potential losers include older providers of hardware, software, or system integration services for in-house corporate IT departments.
On-demand video
Streaming web delivery has enabled on-demand services to challenge traditional cable in both the delivery and production of entertainment content. Potential winners include on-demand services able to achieve global scale and use intensive viewer analytics to identify niche audiences. Potential losers include cable providers or content producers relying on bundled channels for significant revenues.
Electric cars
The automotive industry is at the intersection of a convergence of technologies, including electric drive trains, battery capacity, autonomous software and mobile broadband.
Potential winners include start-ups or existing tech companies using the luxury market to scale up production of electric and/or self-driving cars, then penetrate the mass market. Potential losers include established US automakers and foreign counterparts.
Pharmaceuticals
The mapping of the human genome and accelerated inflows of venture capital into biotechnology research have led to exciting advances in the health sciences.
However, media coverage has fuelled hostility to patent ‘roll up’ strategies, in which companies acquire the rights to existing drugs and then raise prices, possibly leading to political or regulatory backlash. Potential winners include stable biotech firms developing promising therapies and some larger diversified pharmaceutical companies with profitable drugs still under patent.
Potential losers include firms relying on patent roll-ups and/or acquisition deals to generate revenue growth.
US banking
With bank balance sheets much improved since the crisis, the regulatory climate for banks is shifting.
Performance of indices over 5yrs
Source: FE Analytics
Capacity is finally exiting the industry as some global players shrink and exit specific business lines. A handful of strong players are gaining share in higher return areas. Ultimately, improved returns on capital are likely to drive these stocks higher.
Potential winners include major global banks with strong leadership able to gain share in key end markets and return capital to shareholders. Potential losers include banks responding to regulatory pressures and sluggish growth with poor strategies, management churn, and a lack of focus on core competencies.
The ‘buy and hold’ approach to growth is gone
For growth investors, the days of ‘one decision’ investing – buying reliable growth companies with durable, entrenched franchises and holding them for years – are gone, probably for good.
Understanding the factors driving change, identifying winners and losers, recognising when to take sizable positions, and determining when the risks outweigh the potential benefits are all complex ongoing challenges.
Successfully navigating these currents requires a combination of high conviction and prudent attention to risk. Valuation entry points become especially important, so investors need the stomach to add to their best ideas when market conditions are volatile.
Finally, we believe the ferocious pace of change makes a strong argument for greater exposure to global markets. Some sources of disruption – like technology – have no respect for borders, while others may be national or even local.
Comparing companies across geographic regions may reveal hidden opportunities, provide access to segmented markets, like China’s Internet sector, or otherwise leverage the ability of fundamental stock picking to add value.
Dave Eiswert is manager of the T. Rowe Price Global Focused Growth Equity fund. All the views expressed above are his own and should not be taken as investment advice.