The economy is still in slow-growth mode.
So investors need to focus on identifying companies that are marketplace disrupters, says David Hollond, CIO of U.S. growth equity, mid- and small-cap, at American Century Investments. He manages the Renaissance U.S. Equity Growth Fund.
These are companies that make large, existing markets more efficient using innovative business models or technologies, he adds.
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In the travel booking industry, for example, people no longer have to call travel agents, airlines, hotels and car rental companies before going on vacation. Doing so was “time consuming and inefficient,” says Hollond, and people could never be sure they were getting the best prices.
Using online providers—such as Priceline, Expedia and Hotwire—people can now “look at all their options [after] typing in their preferences. [They] can do this at any time of the day and anywhere” due to the increased use of mobile devices, he adds.
On Priceline, in particular, Hollond says consumers can also bid on things such as hotel rooms. Say he’s going to mid-town Manhattan with his family or he wants to stay near Times Square, he adds. “As long as a hotel is above a certain quality level, such as four stars or higher, I [might be] indifferent to which hotel I stay in.” If that’s the case, he could use Priceline to bid on an available room in the area.
People can save 40% to 60% off of the usual price of rooms, for example, if hotels choose to accept their offers, he adds. The business model is advantageous since it helps “drive [the website’s] earnings,” and since customers feel they’re able to get a deal and book their trips efficiently.
“The hotel is [also] happy because they’re generating incremental earnings over the long term by allowing companies such as Priceline to manage a portion of their unsold inventory,” says Hollond. These kinds of technology are considered disruptive since they change consumers’ purchasing behaviours.
The problem is it’s hard to predict what kinds of technology or companies will emerge, says Hollond. But “we’re in a sweet spot right now,” and many opportunities are connected to social networking and the growing acceptance of online transactions.
Often, investment opportunities arise in niche but large-scale industries, he adds. And it’s usually smaller companies that find ways to boost those industries and cater to consumers.
Along with the travel industry, the real estate industry is also becoming more efficient. That’s because people can now “look at listings online and on mobile devices,” says Hollond. People are using their smartphones to look up houses as they drive around to look at them, for example, and they also search for agents online.