Sometimes it’s easy to forget just how disruptive electricity is. Once that first lightbulb went on and its commercial applications spread throughout the economy, so began a technological revolution that continues to reimagine the world today.
Technology constantly builds on ideas that came before. Over time, it can turn something revolutionary like electricity into a standard utility. We are seeing that with the internet, today’s revolutionary technology, because of the innovation it facilitates. When building a diversified investment portfolio, it is important to include exposure where adoption is rising, priming a portfolio to capture the economy’s shifts from old to new.
Accelerating the technology adoption curve
The United States’ path to electrification progressed slowly. Thomas Edison’s first power station on Pearl Street in
Using electricity, technologies including the cell phone and the internet also took time to reach full adoption and are now themselves necessary steppingstones for future technologies.
Establishing the infrastructure to ensure new technologies are accessible and affordable plays a major role in adoption. Digital connectivity is currently the new frontier for the adoption and development of new technologies. As the rate of adoption has accelerated, and as the digital age matures and expands, we expect the pace of technological adoption to further accelerate.
A new kind of infrastructure
We think of the internet and the connectivity it provides as infrastructure, no different than a road, bridge or electric grid. Digital connectivity is the backbone on which future technology is built. Cloud computing, social media, e-commerce, cybersecurity, AI, robotics, big data and so many other disruptive technologies — and investment themes — would not exist without the internet.
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Digital connectivity is essentially a pathway where different technologies intersect. And when they do, new possibilities open up. For example, social media revolutionized how people communicate and how businesses advertise. Utilization is high, but we are potentially still in the early stages of the monetization of these platforms. Subscription services channeled through social media is one such route to monetization that appears to have momentum. Social media payments, or the intersection between social media and fintech, are another growing trend that benefits from greater acceptance of digital payments.
Building portfolios that speak to innovation
When innovation begets innovation, it accelerates adoption and technological advancement. That makes keeping up with innovation a moving target for investment portfolios. Some technologies become ubiquitous, but not all innovations gain the critical mass required to succeed. Diversification is critical, both in terms of companies and themes.
When creating a forward-looking portfolio, it’s important to include several themes that have the potential to travel along the adoption curve at differing paces and provide diversification across multiple sectors, industries and regions. As themes are adopted, economies of scale may be realized, reducing marginal costs and improving profitability. As technologies move along the adoption curve, they have the potential to become increasingly similar to a utility or staple.
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For example, cloud computing and cybersecurity were essential during the pandemic even though they remain relatively early in their adoption. Like the internet, cloud computing is a theme with far-reaching applications and utility-like potential. In the future, computing power could be completely centralized, with cloud-based on-demand access. Content delivery and cloud gaming are two other future-focused examples.
We expect technology-based themes will become a more significant portion of mainstream indexes as themes move along the adoption curve. Thematic equity is a future-focused segment of a client’s portfolio and offers the potential to drive performance deviations from standard benchmarks. Exposure to these structural shifts can add dynamism to a portfolio. It can also spark deeper, more personal conversations between financial advisors and their clients about portfolio construction and how innovation affects their lives. Thematic investing can be a tool that can identify relatable narratives that help investors pursue their long-term investment goals with more clarity.
