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The art of disruptive investing

The art of disruptive investing
3d rendering of human on geometric element technology background represent artificial intelligence and cyber space concept

Investing in disruptive companies requires a blend of new entrants with established companies to minimise risks, according to Wesley Lebeau, Paris-based thematic equities portfolio manager at CPR Asset Management, a subsidiary of Amundi Asset Management.

Lebeau, together with Estelle Ménard, is co-manager of the CPR Invest Global Disruptive Opportunities fund.

The Ucits compliant fund, launched in December 2016, invests in companies that “are established or benefit from disruptive innovation business models,” according to its fact sheet.

In a conversation with our sister publication Fund Selector Asia, Lebeau defined a disruptive company as one that brings to the market an innovative product that will be cheaper, simpler, more convenient to use, and which will create a new market or transform an existing one.

The fund’s management process starts with establishing investment themes, for example robotics, cloud computing, electric vehicles or cancer immunotherapy.

Four themes

The various themes with which Lebeau currently works, can be grouped in four broad ones. The first, digital economy, encompasses big data, sharing economy and fintech. The second, “Industry 4.0”, includes new manufacturing technologies, such as 3-D printing, as well as autonomous driving and artificial intelligence. Life science and healthcare is the third and “Earth”, which includes solar energy, precision agriculture and energy efficiency, is the fourth.

Within each theme, Lebeau chooses several firms that exemplify it, while adopting a value approach. “We want to make sure we don’t get caught in any hype and don’t overpay for any stocks,” he said. This is why his current exposure to robotics and other “Industry 4.0” themes is relatively light, as such companies are overvalued.

Broadly, the fund aims to blend a value and growth approach. The average price-to-earnings ratio of its holdings at 24x is higher than that of the MSCI World Index (17x). But Lebeau believes the sales growth of his invested companies will be 22%-25% in the next 12 months, compared to around 6%-7%  in the index.

The fund held 90 equity positions at the end of December 2017, according to Morningstar. Around 66% of its exposure was to US equities and the rest to Europe, Japan and Asian emerging markets.

The fund’s top holdings include well-known names, such as Alphabet, Paypal, and Softbank, but also the HR software provider Ultimate Software, the US mortgage processor Ellie Mae and the medical equipment manufacturer Edwards Lifesciences.

Disruptive risk

Investing in disruption is a risky business. Unlike investments in conventional companies, the disruptive bet is far easier to get wrong than to get right.

The risks include the ability to identify disruptors and the strength of their proposition. This is particularly visible among social media companies. Today’s disruptor may fizzle out tomorrow, as established companies, better resourced and equally agile, defend themselves by copying and incorporating new ideas.

An additional challenge that Lebeau faces in managing his fund is having to develop a high level of understanding of the many disparate and fast changing industries in which he looks for opportunities. He finds healthcare and life sciences the most complex.

Lebeau takes a short-to-medium-term approach, including in his portfolio upstarts as well as established companies, which he believes should reduce risk. Diversification of risk involves not only covering many themes, but within each theme, a blend of upstarts with more established companies that, while still disruptive, are expected to be more stable, he said.

 

Part of the Mark Allen Group.