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How can investors better understand the impact of change, and what it means for portfolios?

Stockmarkets currently seem driven by hopes and fears on trade, central bank policy and coronavirus. But underneath, getting much less attention, is a single persistent theme. Disruption is not new – so no headlines – but has a huge impact on investment returns. The threat of upheaval is often played down by the incumbents – the big FTSE 100 companies typically talk of business as usual. Challengers are seen as small and unimportant. How can investors better understand the impact of change, and what it means for portfolios?

Successful businesses can now stay private for longer - with ample private equity finance, up to the size of £5bn and more. Fewer of these big disruptive growth stories are to be found in the FTSE 100. Certainly, the UK’s 20 largest listed businesses are typically oil majors, legacy banks, mining and big pharma. Much stronger sales growth is to be found in the FTSE Mid 250 and in some of tomorrow’s winning strategies that are as yet unlisted. It is in these stories, outside the FTSE 100, where the future is to be found.

Investors should keep abreast of innovation; some of these new strategies can scale-up rapidly and will soon challenge big legacy businesses. Finance and retail are particularly vulnerable. But the only clear sign that a FTSE 100 business model has broken-down may be when it falls out of the Index, as with Marks & Spencer in 2019. A dividend cut and capital raise was a delayed response to disruption. Investors need to understand the impact on established businesses of new business models and emerging technologies. The FTSE 100 does not appear to capture the dynamism of the UK economy, shown by many of its mid-cap businesses.