Investing in the age of disruption

If nothing else it’s a rather remarkable string of random events — all occurring in the space of a few hours.

At a luncheon organized by Sionna Investment Managers and held in Toronto on Tuesday, three portfolio managers from the institutional investment firm were asked what steps they had taken to protect Sionna’s assets against the disrupters, those companies with new business models that threaten the established order.

Particular mention was made of fintech and blockchain (with their consequences for the banks’ branch networks and the way services are provided); of energy development; and of electric and driverless cars (with their implications for the car companies, parts producers and the insurers.)

Apart from a general awareness of the trends and of being underweight the banks, it seems not that much can be done: the trends will unfold, only some of which will be successful. And the banks will adapt, in part, by absorbing what the newcomers are offering. The banks, which have faced threats in the past, are expected to remain l dominant players. And in Canada, it doesn’t pay to bet against the banks, a protected industry.

“Some of the threats (to the financial sector) really haven’t played out in the way people had expected,” said Mel Mariampillai, when citing the example of PayPal — which was supposed to disrupt Visa, MasterCard and American Express — and online banking. In both cases, the newcomers have obtained market share but in no way have they achieved dominance.

A similar path is expected for driverless cars, with the full concept decades away because of the need to overcome numerous obstacles, including regulatory and technological. “We think we will eventually get there (but) it’s going to take some time before we see these vehicles change the complexion of the fleet,” noted fellow portfolio manager, Dave Britton.

There was a consensus: in the meantime back those management teams that are taking steps to diversify their own operations and be in a position to profit from the activities of the disrupters.

Specific mention was made of Intact Financial Corp. the country’s largest provider of home, auto and business insurance — but whose business could be affected by the introduction of automatic emergency braking on motor vehicles — a near-term risk.

“As the frequency of accidents come down, there is going to be pressure on premiums. The top line growth of the insurers isn’t going to be (what it would be) without that technology,” added Britton, noting that about half of Intact’s business is personal and autos.

Sionna has a large stake in Intact, in part because the insurer has a pro-active management team. Intact will “offset” the declines in personal auto premiums by “growing” in the emerging areas of the insurance industry. One such example is the “commercial ride-sharing insurance policy,” Intact entered into with Uber Canada.

A few hours later, Intact was itself in the news. After the markets closed, the former ING Canada announced a deal. It would buy, for US$1.7 billion, the specialty insurer, OneBeacon Insurance Group, Ltd. The deal marks Intact’s entry into the U.S. market. Intact said the transaction would bolster its existing Canadian business.