The technology sector is in the midst of a generational platform shift as customers transition toward mobile and cloud computing. The disruption caused by this transition has far-reaching consequences for both tech companies and investors seeking to gain exposure to the sector. As managers of our technology strategy, we believe we are in the middle innings of this shift, and that's when the secular headwinds are most dangerous. Based on previous platform shifts, many established companies - the ones that rode the wave of personal computers and software - are likely to get left behind. In fact, we categorize about one-quarter of the MSCI All Country World Information Technology (ACWI IT) Index as legacy companies, with the majority of these structurally challenged.
Yet, these are the companies that many technology investors unknowingly have disproportionate exposure to when accessing the sector through passive strategies. Benchmarks, by their nature, are weighted toward yesterday's winners. By tethering their portfolio weights to a backward-looking benchmark, passive investors are essentially placing a bet that the successful tech companies of the past will also be successful in the future.
The likelihood of so-called legacy companies effectively transforming their businesses to meet the demands of tomorrow's marketplace is remote, especially given the intensity of the current disruption. Rather than assume the existing landscape remains intact, investors must deduce what the dominant ecosystems will be in three to five years. This requires deep fundamental research, with the goal of identifying which disruptors will become the large caps of tomorrow.
Using history as our guide, we believe that few companies tend to successfully navigate these platform shifts. Identifying those that have the greatest chance of reinventing themselves and those most likely to get left behind is where active management can provide a competitive advantage over passive strategies. An active manager can take advantage of this disruption by using methods unavailable in passive vehicles. The most important thing we can do is choose not to invest in challenged companies. We can also overweight fast-growing disruptors, which could become acquisition targets for struggling incumbents looking to remain relevant.
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First published on Bloomberg View on 05/29/2017
Reprinted with permission. The opinions expressed are those of the authors and do not necessarily reflect the views of others in Janus' organization.