The inflection point from COVID-19 in our global society is likely to lead to an increasing need for innovative technologies that allow for more contactless interactions, advanced medicine, digital connectivity, and intelligent infrastructure. While some of these trends were in place before the pandemic, their trajectory will likely be amplified – with the potential for new themes and industries to emerge as behaviors evolve in a post-pandemic world. We discussed the implications for portfolios in our most recent midyear outlook.
The increasing number of options investors have to participate in these next-generation trends (NextGen trends) is one of the reasons that we developed a framework for classification as the first step in due diligence. Once you define a NextGen trends universe, it’s important to understand the construction approaches within a certain exposure.
In this blog, I will use the SPDR S&P Kensho New Economies Composite (KOMP) – a strategy that seeks to offer exposure to firms identified as innovative or disruptive and driving growth within a new economy – as an example of a broad-based innovative strategy and of how construction choices can make an impact; I will also explore the role KOMP can play in today’s portfolios.
Aren’t the FAANGs enough?
Given the prominence of certain mega-cap technology-oriented firms (i.e., FAANG stocks: Facebook, Apple, Amazon, Netflix and Google) in terms of market share and recent performance, a lot of investor conversations related to harnessing disruption are centered on why a portfolio does not need anything else — and this narrative is quite pervasive. However, it is a misguided view on how to participate in the sea change we are witnessing, as disruption happens throughout and further down the cap spectrum.
To illustrate this point, the chart below depicts the number and percentage of stocks up over 50% and 100% in KOMP as well as the S&P 500® Index. The performance is for both year to date and since the market bottom (03/23/2020) – when the realization of a new world order was starting to become clearer. As shown, 4% of the stocks in KOMP are up over 100% year to date, versus zero in the S&P 500 — a startling feat for the innovation-focused strategy, given the March market drawdown. And since the market bottom, those numbers are even greater.