The trends that may require a shift in investment strategy.
A version of this article originally appeared on our US site, Fool.com.
If you're a long-term investor (which the research shows leads to better returns), then you'll care about the significant changes occurring in the coming decades. You can probably guess a few of the changes already:
- Population growth driving demand for scarcer resources
- Increasing demand for physical infrastructure due to urbanisation
- Growing middle classes demanding quality goods
But what do these changes mean for investing? Inflection Point Capital Management, a boutique firm focusing on sustainable investments, gives an overview (link opens PDF file) of the situation and what to look for in companies positioned to benefit from these structural moves. And it brings up the question: should an investor alter his or her investment style to take into account these "tectonic shifts"?
First, let's delve into what the successful companies of the future will focus on.
Given a world with more costly resources, companies that offer more efficient products will be winners. Inflection Point highlights Otis Elevators, a subsidiary of United Technologies (NYSE: UTX.US), for its Gen2 elevator. This elevator "uses up to 75% less energy than conventional elevators" and is also the fastest-selling product in Otis' history. Think of it as the iPhone of elevators.
Another example Inflection Point discusses is Navistar (NYSE: NAV.US), the truck and engine maker that partnered with EcoMotors to develop a new type of engine. The opposed-piston, opposed-cylinder engine uses half as many parts as a conventional engine, making it lighter and smaller, and includes technology that improves efficiency and fuel economy.
Of course, companies that improve their own efficiency will also be better positioned for increasingly scarcer resources. For example, reductions in packaging can both cut costs and win good press. In 2011, Procter & Gamble (NYSE: PG.US) concentrated its laundry detergents, like Tide, to allow for smaller packaging for the same number of laundry loads.
A wealthier world
Additionally, companies that can grab early market share in emerging markets should be able to reap the expected gains in income. Just as in the US for a multitude of products, "one study found that the market leader in 1925 remained the number-one or number-two player for the rest of the century". Establishing dominance in new countries does take skill -- to understand the culture, develop the appropriate products and make the new market profitable.
One example of successful entry into new markets is SABMiller, which had to change its production process in order to incorporate local ingredients in Africa. The local ingredients allowed for lower prices that were more in line with consumers' incomes -- and won the company increased market share. SABMiller can capitalize on its dominance in the African markets and be the biggest winner when selling to a more prosperous Africa in the future.
Income on the other end of the spectrum will also increase, meaning new luxury consumers in markets like China. As Inflection Point writes, "China's upper middle class accounts for about 12% of the luxury-goods market, but that share is expected to grow to 22% by 2015". The current sellers of luxury goods will have to increasingly cater to a larger market, and companies like Coach (NYSE: COH.US), who can give luxury at competitive prices, will greatly benefit. Proof of this is Coach's 60% sales growth in China in the last quarter, with "double-digit comparable location sales."
A new strategy
Do these coming economic and demographic shifts require a new investment strategy? I don't believe so, because a solid investment strategy already selects well-positioned companies. Continuing to focus on stellar management and sound businesses should guide an investor to the companies taking advantage of new markets and protecting themselves from any future resource scarcity. And most often, these companies operate efficiently and sustainably.
If you're reviewing your portfolio and a company doesn't appear to be setting itself up for future gains, it might be a red flag to sell.
Warren Buffett buys a British blue chip! Read this special report -- "The One UK Share That Warren Buffett Loves" -- while it's still free and available.
Further investment opportunities: