Amid widespread technological disruption, the challenge for portfolio managers is identifying the winners avoiding the losers, says Jim Hall, chief investment officer of Calgary-based Mawer Investment Management Ltd. "Trying to pick winners is very difficult," says Hall. "There is often only one winner in 100 but all 100 are priced to succeed."
Innovation is rapidly changing the world of telecommunications, the Internet and e-commerce, says Hall, who co-manages Mawer Global Equity and Mawer International Equity, both Gold-rated funds. As shown by companies like Uber Technologies Inc., an online transportation service, and Airbnb, a website for lodging, online innovators can shake up the competitive landscape. "Through the application of technology innovation, their growth is stealing business from other companies."
Despite advantageous positioning, the winning formula for an innovative enterprise can change. For example, Hall says, a company that was worth billions of dollars could be worth only $10 million two years later if somebody comes up with something even better. "It happens that fast."
Looking back at major technological change over centuries, there are numerous examples of old methods of providing goods and services becoming obsolete--for example, the impact of electricity on water mills, or the impact of the automobile on horse-drawn delivery. "On and on, these major technological changes put people, companies and entire industries out of business," says Hall. "Unemployment rises, but ultimately it turns over and society benefits. You have higher asset utilization and an eventual shift of disrupted resources to higher value-added areas."
In recent years, technological disruption has occurred in the oil industry with the advent of hydraulic fracturing, or fracking. The adverse consequences, says Hall, included huge hype and a build-out of fracking operations, followed by a surge in the supply of oil. Other disruptions lie ahead for the energy sector, Hall says. "I'm watching the development of batteries and storage in alternative areas such as solar or wind. That's a potential disruptor if a storage solution is found."
In retail, with the rise of e-commerce, developers of malls and other shopping locations may face disruption because of reduced demand for retail space. However, warehouse and industrial space may see rising demand. Citing China as an example of a country where there has been a significant shift to online shopping, Hall said avoiding investments in mall owners is one way to avoid losses when investing in China.
Hall says the best strategy to take advantage of technological disruption is to own a variety of different industries that may benefit from the new technologies, and then divest some of the losers. Out of 10 promising investments, he says, eight will produce average returns, one will be a huge winner, and one will be a huge loser.
In positioning the mandates, "what I'm learning," says Hall, "is our ability to predict how things are going to turn out is very, very limited. So the best strategy is to have a foot in the defensive camp, a foot in the optimistic camp, and make sure you're not overexposed in one or the other scenario."
Among the successful established companies that have benefited from innovation in e-commerce are credit card giant 
Visa Inc. (V); Tencent Holdings Ltd. (TCTZF), an Internet and e-commerce service in China; and the online retailer Amazon.com Inc. (AMZN). They are well-positioned in terms of enabling consumers to shop and obtain information conveniently. "It's such a better mousetrap," says Hall. "In a nutshell, they're providing valuable service and a product that people want and are willing to pay for. That's a formula for success at any time."
In the online information world, Hall thinks search engine Google, the flagship operation of the renamed Alphabet Inc. (GOOGL), is particularly well-positioned. "I'm in my 40s and I remember being in university and it took forever to find information for a research paper," says Hall, who holds Alphabet in Mawer Global Equity. "Now I can find anything at my desk and I can find it anywhere in the world. I'm more than happy to pay for that."
