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Or is your current investment portfolio idling like the frog in boiling water?
Craig Shepherd, Chief Investment Officer, First Samuel.
The speed at which innovation is developing signposts the need to adapt to changing conditions.
This is as true in the investment world as in, for example, the medical world.
In the medical world, innovation has caused so many of its parts to adapt to changing conditions, with many winners. For example, the wide-ranging health improvements from the first generation of glucagon-like peptide-1 (GLP-1) receptor agonists.
In the investment world, at First Samuel, we consider that the best way to capture innovation is to invest in equities (ie, shares). As an investment for long term wealth generation, companies (represented by equities) can adapt to changing conditions driven by innovation. This contrasts with static investments, such as property.
Consider two other examples of changing conditions that affect investment returns: property taxes in Victoria and the rapid uptake of AI. The former is driven by government policy, the latter by innovation.
Are your investments avoiding yesterday’s fashions (eg, investment property)? Are they generating long term wealth through capturing innovation (eg, medical innovation or AI)?
Or are they idling like a frog in water brought to the boil?
Speculative offerings
Our experience is that medical professionals are at the forefront of being offered high risk investments.
The claim to advantage is the benefits of genuine financial productivity or innovation, but we know this lasts only so long, if at all. The only advantage of these investments is the hope that someone else will buy at a higher price.
For example, when interest rates were near zero, scattergun approaches to investment worked well. And unproductive companies with wild ideas, many in IT or biotechnology, worked just as well as companies with actual sales and profits.
During the cheap money era, stakes in private equity firms, the latest Initial Public Offering, or a single-idea managed fund may have found their way into your portfolio.
But now, conditions have changed.
Today’s challenge
A range of long-held beliefs appears to be compromised. Future innovation and, hence, wealth creation may come from vastly different portfolio types than in the last 20 years.
It is crucial that investors quickly assess these changes. The urgency stems not from the changes themselves, but from the possibility that the market has already been fundamentally reshaped.
For example, from an investor’s perspective, the opportunity of Ozempic (first generation GLP-1 receptor agonist) has almost already passed us by.
Property and taxes
For two decades, until the outbreak of COVID-19, property investors benefited from declining interest rates. Property investment was supported by enthusiastic banks, negative gearing, light taxation at the state level; and relatively light regulation.
Now, investors face not only increased property taxes, especially in budget-constrained states such as Victoria, but also regulatory burdens (and costs), borrowing limits, differential interest rates, Self Managed Superannuation Fund contribution limits, and softening prices.
In Melbourne, our analysis suggests that someone selling in December 2024 a median residential investment property that they invested in in 2017 would only have a net return of around 3% per annum. An investment in the Australian share market over the same period returned 8.6% per annum.
Changes in tax policy will arguably result in permanent changes to the investment returns for an entire class of investment.
Searching for innovation
Where could productivity growth come from in the future, and why do we suspect it is enough to power equities for the coming decade?
We offer two innovative examples that may have already begun to drive transformation: significant changes in obesity levels through new drugs, and the efficiency benefits of commercially deployed AI.
This is not to say that anything is solved at this point, nor is the statement designed to minimise the risks associated with both.
Instead, we note that should either or both occur; your portfolios must today be positioned for a productivity improvement.
AI winners
The winners from AI in the first round to 2030 are likely to be existing business that invest in the emerging data and processing requirements that AI demands.
The critical issue is to own existing businesses that have the capability to quickly adapt.
Do you own these types of companies, or ones that have great stories from the era of cheap money?
GLP-1 receptor agonist winners
Similarly, with the rapid uptake of just the first generation of GLP-1 receptor agonists worldwide, we note the discussions around their inclusion in the UK’s National Health Service program and being provided more broadly in our Pharmaceutical Benefits Scheme.
Consider, for example, clinical trial information on Retatrutide, which noted a step change in positive patient outcomes. An obesity study demonstrated weight reductions of up to 24%.
The point here is not to analyse the efficacy of GLP-1 receptor agonists. We are investors, not scientists. Rather it is to note the results of innovation and consider the possible investment implications.
The possible second stage productivity benefits from a decrease in obesity include reductions in a range of addictive behaviours, including spending, gambling, smoking as well as reduced food intake.
The issue for investors isn’t only what you need to invest in directly. Critical impacts are possible in a range of existing investments you may already have. Some of these investments, such as alcohol or smoking investments, are already seeing social change.
Does your portfolio still contain high levels of investment in food companies, gambling companies or alcoholic beverage manufacturers or retailers?
Assessing productivity potential
For investors, the critical requirement is to constantly assess the productivity possibilities of investments, both existing and potential. Of course, this has to be put into context with your risk appetite and how much you plan on investing.
The key isn’t to guess the changed conditions from the next big thing in biotechnology or to find the AI business that shines the brightest. Nor to ponder those from changes in government policy.
Rather, the key is to continually assess, on a portfolio-wide basis, your portfolio’s capacity to benefit from productivity and innovation in all its forms. And to avoid the negative impacts of policy changes.
To hold a portfolio with low-productivity potential is equivalent to a frog remaining in boiling water.
Navigating the investment opportunities of medical innovation and AI requires expert guidance. So too does identifying outdated fashions, such as some property investments.
Don’t risk falling behind. Take control of your financial future and grow your wealth: get in touch with First Samuel. Book an obligation-free consultation today. Or learn more about what we do.
The statements or opinions expressed in this article reflect the views of the authors and do not necessarily represent the official policy of the AMA, the MJA or InSight+ unless so stated.