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Investing in technology

Rathbones recently held its annual investment conference, which this year focused on disruptive technologies. There is so much hype about developments like the cloud, big data and the ‘Internet of Things’ that it can be difficult to identify if, when and how they will actually happen, and how best to invest in their potential.

The term ‘disruptive technologies’ was first used in 1995 by Clayton M. Christiansen, a professor at Harvard Business School. It applies not to the initial invention, but the point at which it is widely adopted and changes the market. The invention of the motor car was not in itself disruptive – it took Henry Ford’s innovative use of mass production and the launch of the affordable Ford Model T in 1908 for it to cause a seismic shift in consumer behaviour.

I drew several key conclusions from the conference. Firstly, the technological revolution will gather pace over the next five years or so and the developments listed above will follow clear stages. The invention of the internet and worldwide web started the process, but mobile internet enabled the real transformation in how we apply such technology.

The cloud, which enables the remote storage of data and software, is already with us, but the benefits are still to be maximised, particularly by big companies. Many SMEs have already seen how cost-effective it can be to store data or rent software through the cloud, but many larger companies, which may be more worried about security or otherwise less nimble, are still to exploit its potential.

Next will be the so-called Internet of Things, which will link up the physical world through sensors and data transmitters in almost every object. This will make real the long-anticipated idea of ‘big data’, but this data will need to be analysed and acted upon. Within a decade, robotic devices will use this data to make decisions and act, just as humans do today. This is known as actuation.

The example often used is of sensors in your fridge reporting its contents to your mobile phone. This really is a poor example as most of us can remember what’s in our fridges. A better example is the cost savings that could be made using sensors to control lighting and heating in offices and homes. Early trials in a set of New York apartment buildings sharply reduced energy costs by predicting when heating would be needed based on past behaviour.

Secondly, the challenge is how to invest in these technological developments. History shows that it is easy to lose money for clients by investing in technology – you may be right about the potential of a particular technology, but you also need to identify how it will be adopted, and which companies will profit.

Should you invest in small, innovative companies, which are high risk but which could be the next Facebook; large companies like Amazon or Google, which are big enough to apply new technology on a sufficient scale to make money; or technology funds that are managed by specialists and diversify the risks across a number of companies, big and small?

Alternatively, the financial benefits of technology may accrue to the consumers rather than the innovators – if business costs fall sharply, the winners may be retailers, insurance or engineering companies, while the technology companies may destroy shareholder value through price wars or other bad financial decisions. Amazon still hasn’t made a profit for shareholders in spite of its dominant market position.

Finally, I concluded that we have some fantastic technology companies in the UK, several of which presented at the conference. Initiatives such as Tech City in London, Digital City in Middlesbrough and Newcastle’s Centre for Life foster innovation and consolidate our leadership in areas such as gaming or digital marketing. In spite of our national tendency to play down our success, the UK is a major player in the technological revolution.

Significant changes are coming and we should embrace the future with optimism.

James Kyle is an Investment Director at Rathbones’ Newcastle office. For more information about Rathbones’ investment management services, please contact James on (0191) 255 1440.

This was posted in Bdaily's Members' News section by James Kyle .