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January 2018

Caution, Disruption Ahead!

Tomasz Godziek
Mr. Tomasz Godziek is a Senior Investment Analyst for equity research at J. Safra Sarasin Asset Management. He joined the firm in March 2014. Tomasz combines quantitative and fundamental analysis with sustainability research. He is specialized in the Information Technology sector and manages the Technology Disruptors strategy.

Disruption is a popular buzzword these days. How do you understand technology disruptors and why is it so important for investors to pay attention to this trend?
A disruptive innovation is an innovation that entirely changes an existing market, business model or value chain. Although disruptive companies can also create an entirely new market or product, in most cases, disruptive companies do not create new categories per se, but rather radically redesign or reinvent key elements of existing products and services. A good example is Tesla, that obviously didn’t invent the car, but created an innovative and energy efficient one.

Can you give an example of a disruptive company?
Sure. A great example of a Disruptor is Coherent, a producer of laser-based photonics solutions. Coherent is unique in offering a laser technology which is key to the production of high end organic light-emitting diodes (OLEDs). Why is this relevant? Starting this year, foldable displays will be introduced in smartphone models. The challenge is to deliver a product with the thickness of today’s smartphones that once folded, can also serve as a tablet or even a notebook without using a hinge or other connectors between screens. To do this in seamless way, a high-end OLED display is needed. The race between smartphone vendors to produce best foldable displays will accelerate the  pace of adoption of OLED displays. And given the fact that currently still 80% of smartphone displays are LCD-based (we expect LCD share to decline to 20% over the next five years and disappear in the long term), this technology could cause a large disruption in current display producers.

As a portfolio manager investing in this space, can you describe your approach and how does it differentiate from other such strategies?
Many of our peers focus on single themes, e.g. Big Data or Robotics. While these may experience periods of success, other years might be more difficult. Our approach is to diversify across themes such as Artificial Intelligence, Big Data & Analytics, Cloud, Internet of Things, Robotics & Drones, Autonomous Driving, Virtual and Augmented Reality. This allows me to find opportunities throughout different phases of the market cycle. A key part of our approach is to differentiate between enablers and beneficiaries of technology. Enablers tend to be high growth tech companies that create the technology, while beneficiaries tend to be non-tech companies that implement these disruptive technologies in order to gain an edge against their competitors.

What are examples of enablers and beneficiaries?
Let’s take the field of Autonomous Driving. One of the biggest challenges for Autonomous Driving is related to machine vision. In order to fully utilize the predictive power of Artificial Intelligence, cars need to be able to see beyond the line of their horizon. Initially, cameras were used as primary source of vision for cars. But cameras are of course imperfect, as their reach is limited. Therefore, engineers came up with a laser-based solution (so called LIDAR, this strange device on the top of the Google car). This was an improvement, but still not the ultimate solution. The ultimate solution is that our cars will be using the vision system of the vehicles in front of us. In order to establish such a connection, special semiconductor chips are needed. We consider firms that produce such chips to be enablers of technology. On the other hand, car manufacturers (e.g. BMW) that implement these innovations faster than peers and will gain first-mover advantage, can be seen as the beneficiaries of technology.

In your view, what is the most important disruptive technology for the coming years?
First and foremost, Artificial Intelligence. In 1950 Alan Turing posed the question “Can a machine think?”. Nearly 70 years later we can say that for the first time significant progress has been made. There have been many advances in recent years in machine learning accuracy which has opened up a host of new applications such as digital assistants, chatbots, autonomous driving, more sophisticated and relevant search algorithms. The ability for a machine to learn retroactively and be able to make a best guess predictions will have in the future multiple applications across a broad range of sectors. Let’s take Health Care as an example. According to different studies, a radiologist misses on average 20-30% of abnormalities on a scan with the percentage being much higher for breast cancer. However, for a radiologist that is supported by an A.I.-fuelled algorithm, the miss-ratio drops to low-single digits. In terms of our portfolio, Artificial Intelligence is currently the most widely represented theme.

There is a lot of talk of disruption in your own industry, the financial sector. How do you perceive the impact on jobs for those working in this sector?
There is definitely a risk that certain types of jobs in the financial industry will become obsolete in the future. Innovations such as Artificial Intelligence or Robotics aim at increasing efficiencies by replacing repeatable, manual processes that are currently executed by humans. This often involves cutting out the middleman, so the potential for efficiency gains here is very significant. For example, it currently still takes a full two days to settle a simple bank transfer or dividend payment. In order to accelerate things, the Australian Securities Exchange is working on a project that targets replacing the cumbersome settlement process with a near- to real-time, automated solution that incorporates Blockchain technology.