Industries across the globe are being disrupted by emerging technology, which makes Fidelity International stock picker Jeremy Podger believe that active managers have a unique opportunity to capitalise on this theme. 
Podger, who manages the five FE Crown-rated Fidelity Global Special Situations fund, pointed out that new technology is allowing companies to offer better products to the marketplace, reach a wider global customer base, deliver faster and more efficiently, and drive down costs – all at the same time.
This “hectic pace of change”, however, is not good for all businesses and those that are not able to keep up with such disruptive innovation are likely to fade away.
“Has there been a time in recent stock market history when we have seen so much disruption in so many industrial sectors? Or a time when it was so important for active equity investors to take a strategic approach to assessing the companies they invest in?” the FE Alpha Manager asked.
“At a time when increasing amounts of funds are being channelled into backward-looking passive funds, arguably the potential rewards for active managers taking a long term, forward-facing view have never been greater. But this doesn’t mean it will be easy.”
While there will be challenges in identifying companies that can benefit from the vast changes sweeping many industries, there are four sectors where Podger believes investors need to take an active approach to disruptive innovation.
Technology
The first and most obvious area of the market to watch is technology itself. Podger noted that many of “the dreams that fuelled the tech bubble of 2000” have become realities in today’s world, with the rapid growth of tech stocks meaning the sector now accounts for 18 per cent of the MSCI AC World index.
Performance of global tech stocks vs broader index over 10yrs
Source: FE Analytics
“These companies are now finding ways of taking a greater and greater share of the value chain in most sectors and industries. With the doubling in the last three years of the S&P Internet index and the Philadelphia Semiconductor Index (both measuring the performance of US technology companies), we need to be wary of more than a hint of euphoria around some of these names,” the manager said.
“Despite the sector’s strong performance, we are still finding really interesting opportunities, but it is now important to be a bit more creative, to hunt away from the mega-cap stocks and to be generally cautious about paying valuations that in many cases are still high on a forward view over a three-year perspective.”
Some 23.5 per cent of the £2.4bn Fidelity Global Special Situations fund is held in the information technology sector, which is a 5.9 per cent overweight to its benchmark. Names such as Google parent company Alphabet and Microsoft are in its top 10.
Utilities
Even sectors that have been dominated by solid incumbents for decades such as utilities are now being hit with “unprecedented amounts of disruption”, according to the manager.
“The standard model for utilities, for example, is being tested by a move from centralised to decentralised energy, advances in energy storage and other technological improvements in renewable energy business models,” Podger said.
“The difference in share price performance between the old guard like E.ON and Dong Energy, a leader in the global offshore wind industry, underscore the difference between the winners of the past and the future.”
The manager noted that Dong Energy has divested its upstream oil & gas business and transitioned into a green energy company, while retaining its robust in-house engineering expertise and ability to complete projects on-time and within budget. Furthermore, it has a strong track record in winning contracts, recently scooping one in Germany at zero subsidy and a second phase development off the UK coast at very low prices.
Dong Energy, which this week rebranded itself as Ørsted, is a portfolio holding in Fidelity Global Special Situations. It also owns US electric holding company Exelon Corporation within its top 10, with utilities being an overweight with a 4 per cent allocation.
Automobiles
Podger pointed out that the automobile industry is facing its own set of disruptive challenges to existing business models on the back of electrification, autonomous driving and shared mobility.
Investors are uncertain at the moment as to what this means for the incumbent car manufacturers, leading to languishing auto share prices. However, it is also too early for value investors such as Podger to differentiate between true value and ‘value traps’ within the auto sector.
But this does not mean the space is lacking in opportunities. “The semiconductor content per vehicle has been increasing and irrespective of the timing or form of electric/autonomous vehicles, this is likely to remain on the uptrend. Portfolio holdings, such as Renesas, once a relatively dull Japanese semiconductor business that was rescued by the government, has recently seen a step change in activity and broadening of wins in auto-related microcontrollers contracts,” he said.
“Notably, we have also been able to identify opportunities in areas that are unlikely to be disrupted. Adient, which was spun off from Johnson Controls and is a margin recovery situation, operates in a highly concentrated segment of auto suppliers, unlikely to see a slowdown in demand for its seats even if cars become driverless.”
Consumer goods
The final area where disruptive change is creating opportunities for active investors is consumer goods, where incumbent market share is being eroded by a combination of changing consumer preferences, reduced brand loyalty and niche, technology-savvy players.
Podger concedes that Fidelity Global Special Situations missed an entry point into Amazon, which he calls “the very face of disruption”, but instead prefers to hold some of the beneficiaries of disruption in consumer areas through technology, media and telecommunications names.
“In fact, in a sign that benchmark classifications are becoming less relevant than ever, portfolio position Softbank, formally classified as a telco, provides for indirect exposure to China’s largest internet retailer Alibaba (its largest portfolio investment),” he said.
“Softbank is a corporate change situation that has a stable telecommunications business with new growth options from its acquisition of ARM (the ‘internet of things’) and its establishment of a $100bn Vision Fund investing in cutting-edge innovation. Similarly, with online giants dominating the advertising landscape, holdings such as Alphabet represent exposure to the consumer space with additional monetisation opportunities around YouTube, self-driving cars, cloud services and other new ventures.”
Performance of fund vs sector and index under Podger
Source: FE Analytics
Podger has managed the Fidelity Global Special Situations fund since March 2012, over which time it has made a top-decile 145.61 per cent total return and beaten its MSCI AC World benchmark by close to 40 percentage points.
It is also in the first quartile of the IA Global sector over one and three years, as well as over shorter time frames such as one, three and six months.
The manager has been running global equity funds since 1996. He tends to buy three kinds of companies: those that are exceptionally undervalued; those with unique franchises that can grow their earnings faster than their peers; and, those undergoing corporate change that could be the catalyst for share price growth.
Fidelity Global Special Situations has an ongoing charges figure (OCF) of 0.95 per cent.