CONTRIBUTORS
Matthew Moberg
Portfolio Manager,
Franklin Equity Group
United States
Preview
“We strive to live at the intersection where new ideas can make great long-term investments.” This quote remains as relevant today as it was when we first published it in 2018. I like it because it says something complex, simply. It supports active management and also implies an absence.
Certainly, we look to invest in companies that implement new ideas that yield great long-term returns. However, on the other side of the same coin, we find it equally important to avoid investments in technologies that are changing the world, but in fact, do not yield a meaningful return over the long term. We are often asked this in the form of a question, but not in the framework I just outlined. Instead, it comes with questions such as, “What do you think about 3-D printing?” or “What do you think of Linux?” or “De-Fi?” or the most common one recently, “What do you think of blockchain?” When I try to explain that these may be wonderful technologies but might not make great equity investments,1 I feel that the answer leaves the questioner a bit—well—disappointed.
In this paper, we draw a historical analogy of intermodal containerization and compare it to another technology we think could change the world but may not make a great investment: blockchain. We chose these two innovations because they are likely the most impactful examples of this phenomenon in the 20th and 21st centuries (so far) respectively. Of course, when speaking of the future, all caveats apply. Our mind is always open to new ideas and updating previous ideas in response to new evidence. We are humble. We are not dogmatic. We are rational. In writing this paper, we hope to satisfy some of the questioners who, over the years, may have left feeling a bit confused by our lack of enthusiasm for some of the popular technologies in the press.
Identifying these new technologies and their monetization potential is relevant. When investing in innovation, failing fast is important. It is certainly true that what we do own drives investment performance more than what we do not own; however, it is also important to avoid the shiny objects along the way that can be tempting but ultimately empty. The story of disruptive technologies teaches us that great ideas take time to find their most impactful business model. It is also common that the mismatch between sentiment and monetization can be wide. Nevertheless, history also proves that innovation regardless of its monetization, will continue to transform our society and economy. We hope you enjoy the paper.
Key takeaways
- Disruptive technologies follow a hype cycle, which is a reminder that world-changing ideas need time to realize their most impactful business model.
- Shipping container innovation revolutionized global trade through its simple operational efficiency. Massively deflated shipping costs brought about by containerization, while disruptive to the industry, benefited the entire world.
- Containerization shows how a new idea can create significant value for society (by reducing the friction of global trade) even if there is no lasting “pure play” investment in container innovations.
- Blockchain may change the world, but the technology has failed to provide investment opportunities commensurate with its impact, much like history demonstrated with containerization.
Read the full paper to learn more.
Endnotes
- In the context of this paper, we are considering investment opportunities only within our asset class of publicly traded equities. We consider cryptocurrencies, blockchain tokens and other digital assets to be an entirely separate asset class that Franklin Templeton has termed “Frontier Risk Alternatives.” The investment suitability and value analysis of Frontier Risk Alternatives is outside of the scope of this paper.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations.
Active management does not ensure gains or protect against market declines.
The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Past performance does not guarantee future results.