When looking for shares in which to invest, it is — in my personal opinion — crucial to find good companies that can afford to take a long-term view. This should enable them to invest properly in developing new services and products — a process that may take a number of years.
Coming up with something new is hard, especially once a company gets to a certain size. One industry where innovation has been at a premium is banking. Today we see the rise of mobile banking, often led by emerging markets such as those in Africa.
Arguably, however, if you discount the impact of changes in telecommunications technology, banking in its most basic form remains the same today as it was 100 years ago. Banks have sought to grow less through innovation than through increasing market share via acquisitions.
Sweden’s Handelsbanken is one newish player making inroads into the UK. It has attempted to set itself apart by promoting its “traditional” service and reviving the relationship between the customer and bank manager. It does well in customer satisfaction surveys.
In industries such as retail and media, the internet has created big risks for long-established business models. It has also created enormous opportunities. That said, as once-nimble technology companies such as Amazon and Google grow into big monolithic distributors, how do they stay ahead in such a fast-changing environment?
One of the key strengths that might be looked for when assessing whether to invest in a company is how easy it is to replicate what the company does. Investors will want to know what the barriers are to entry — the “economic moat”, as Warren Buffett put it, that will defend the company’s revenues over the long term.
Often companies operating in a niche area benefiting from long-term trends will have greater visibility of future earnings. For example, Novo Nordisk, one of the nominees in the Boldness in Business Corporate Responsibility/Environment category, makes drugs for patients with diabetes, a condition that is on the global rise thanks to changes in eating habits and lifestyles.
It is rare to find companies that can stay in business without adapting. Often those in niche areas are already highly innovative and have built a market-leading product. Mobileye and Xeros are good examples. Such technology could capitalise on the increasing focus on resource efficiency by government and business.
New industries continue to present opportunities for companies and entrepreneurs to innovate. For example, both biotechnology and clean energy development have prompted a big drive for technological advance. Advances in robotics are driving change in a number of industries, including the automotives sector.
In the post-financial crisis developed world, many companies have simply been content to survive and repair their balance sheets. Instead of creating something new, they have often sold more of the same thing into new markets or adapted to changing demographics in their own countries.
It is rare to find companies that can stay in business without adapting
Where this has not been possible, some companies have engaged in financial engineering, such as buying back their own shares and returning cash to shareholders, or merging with and acquiring other businesses. Even innovative giant Apple recently launched a bond issue in order to return cash to shareholders, albeit in order to do so in a tax-efficient manner.
Such activity has often been undertaken not to grow but to neutralise competition and often this is driven by short-termism, namely pressure from shareholders to produce short-term returns. This can simply discourage companies from listing in the first place.
The long-term perspective is the key one and the fruit of that — in terms of the products and services developed by companies — is what will help them stay ahead of the competition. Of course, that is easy to say, harder to do and even tougher to spot as an investor.