I have recently returned from California. On my way to the airport I drove through Silicon Valley and it struck me that the names on the gleaming offices and campuses were in the main companies that did not exist 20, or in a lot of cases, even 10 years ago. It made me think back to the early 1980s when I had a summer of work experience with a stockbroker in Aberdeen.
I say “work” but to be honest this was not something that anyone there did much of. The two partners tended to disappear after lunch and judging by their tans they spent more time on the golf course than in the office. Whilst there, one of my jobs was to produce valuations of client share portfolios. This was before computers so it involved getting the FT and detailing the shares held, price and valuation in a ledger which was then typed up by a secretary.
In those days owning shares was definitely not widespread. It was before the government started their privatisation of nationalised companies and any clients that I saw coming into the office would most definitely have been described as “old money” and they were obviously very happy to pay through the nose for the privilege.
I remember that banks, BP and Marks and Spencer were in virtually every portfolio and when I asked one of the partners why he said it was because these were suitable for “widows and orphans” as they were safe and would always give a decent return. Ironically, owning bank shares in 2008 probably created a few widows and orphans as well!
Now a lot has happened since then, the demise of the liquid lunch and a lower handicap amongst them. But given the pace of change and the disruptive technologies that are being dreamt up by the brains in Silicon Valley I wonder how many companies shares would be regarded this way today?
High street stores? The internet has already changed the way we shop and Amazon’s latest plans which include leaving parcels in the boot of your car and using drones to deliver more quickly suggest this still has a long way to go. Ikea are also trialling robots that will build any furniture you buy from them.
Car manufacturers? Who knows how we will be transported in the coming years as not only driverless cars are on the horizon but a number of non-car companies are developing flying cars that can take off and land vertically. Also it has been predicted that owning a car will be unnecessary and like “Boris Bikes” you will just use one whenever you need it.
The world is changing at such a pace that it is likely many facets of our lives will be unrecognisable in the next couple of decades and no doubt some of the leading companies at that time have not even been started yet.
How anyone that manages their own share portfolio and expects to keep up with these changes is beyond me. No wonder people are buying index funds as to be honest this would be better than trying to do this on your own. However the downside of tracking an index is that as well as including companies that adapt and succeed in the future it also includes those that become extinct.
More and more of the fund managers we meet emphasise the team they have behind them when it comes to running their funds. Increasingly these include people with a range of engineering and scientific backgrounds rather than purely financial. The reason being that this broad skill set enables them to better understand the challenges facing a business and also have a more meaningful conversation with the companies when it comes to future plans and threats.
We have always believed that a quality manager will outperform an index and I am more and more convinced this will be the case as the pace of change heats up in the future. It may be more expensive than buying a tracker fund or doing it yourself, but I am sure in the long run investors will regard it as money well spent.