Monik Kotecha

Does the company behind disruption have the expertise and finances to exploit the opportunity? Moreover, is the company immune to disruption itself or a true agent of disruption? Insync Fund Managers asks if disruption advantage is enough of an argument for investing in a stock.

Disruption has always been a force in the development of open economies that are using innovative technologies/online platforms to upset traditional business models. However, is evidence of disruption or the threat of disruption enough in its own right to build an investment strategy?

Monik Kotecha CIO of Insync sees disruption as only a part of the puzzle: “Successful disruptors in the short term have themselves faltered on the back of competition due to low barriers to entry. Look at the malaise impacting Uber since entry of similar apps like OLA and Didi.”

Monik suggests firms positioned within global megatrends such as Low Emission Energy, Beautification or Online Gaming have a natural tailwind to growth, and this is at least as important to any disruption advantage they may enjoy.

“Even so, these two things are like a two-legged stool when viewed in the context of time.

“Disruption may be providing a short-term advantage to a firm, and the megatrend maybe supercharging growth, but history shows only the healthiest firms are enduring.

“We examine high quality firms who are very profitable given there is substantial research supporting that these firms overwhelmingly remain so, and even improve that profitability over 10 years.

“The marriage of quality businesses with megatrends provides the perfect mix for growth.  But factors such as Reinvestment Rates within a firm helps retain competitive advantage and lifts barriers to entry for competitors, and underpins the sustainability of that growth,” said Mr Kotecha.

When viewed in its entirety, disruption advantage may provide short term and often supercharged growth when undertaken within a global megatrend, but there is much more to the story when it comes to generating sustainable growth.

Insync’s investment philosophy concentrates on high quality companies at first instance, then revolves around disruption and its interrelationship with a global megatrend rather than just investing in disruptive companies.

They look for the most highly profitable companies that are reinvesting for the future and benefiting from disruption within global megatrends. This is delivering a portfolio profile with sustainable growth and relatively lower volatility, nirvana in an investment sense.

By Monik Kotecha, CIO

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