Silicon Valley is so yesterday, according to PGIM research.
The “investment opportunity set is no longer just about the traditional tech sector, such as Silicon Valley startups,” said Taimur Hyat, chief strategy officer at PGIM — Prudential Financial’s $1.2 trillion investment management businesses — in an interview with Institutional Investor. Instead, “it’s about how technology affects the entire economy, from energy companies to real estate, consumer payments, media, and transport. How companies will use things.”
Advances in artificial intelligence, for example, had previously been locked up in Silicon Valley. “But now we’re seeing real change as they are adopted through the real economy,” said Hyat, who co-authored a report on this thesis.
“Beyond specific sectors and asset classes, technological disruption can impact the fundamental nature of how portfolio-wide opportunities and risks are assessed,” according to the report. “We believe the current wave of technological change will reshape how chief investment officers evaluate the risks and rewards of investing in companies at risk of tech-driven disruption, the investment strategies and vehicles they choose, how they assess their in-house teams and external managers, and how technological, regulatory, and political risk are increasingly interconnected.”
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PGIM pointed to the 1990s as a road map. Between 1995 to 2000, companies that produced information technology represented about 60 percent of productivity growth. From 2000 to 2007, firms in outside industries began adopting the new technologies. Those two categories — tech firms and those that leveraged their advances — contributed about 90 percent of productivity growth over that period. “We may very well see a similar story play out,” PGIM predicted in its report, which came out Wednesday.
For portfolio managers, Hyat said, “You’ve got to position your entire portfolio for obsolescence risk.” said Hyat. “The price of a taxi medallion was $1.3 million at its peak a few years ago. Now it’s less than $200,000. That’s a pretty major example of obsolescence risk.”
The 500 million parking spaces in the U.S. — many in prime real estate — are likewise highly exposed, Hyat said. “What will happen when autonomous cars take hold? We’ll see dramatic effects on whether the parking spot is needed.”
Investors should bet on firms that can leverage network effects, PGIM advised, seeing the phenomenon as a new barrier to entry. Other qualities to look for include disproportionate spending on research and development, and a track record of acquiring innovative companies.
