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How new corporate models are disrupting asset allocation

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Global investment manager PGIM has published new research highlighting long-term investment implications of three new types of companies emerging to dominate today’s market.

The asset manager says new corporate models that are light on physical capital, leverage technology and network effects to aggressively dominate markets, and are dedicated to a broader social purpose are reshaping the corporate landscape globally.

These models will be critical in determining winners and losers for years to come according to research by PGIM, the $US1.3 trillion global investment management business of Prudential Financial.

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In its report, The Future Means Business: The investment implications of transformative new corporate models, PGIM argues that the evolution of these “weightless,” “superstar” and “purposeful” firms—driven by disruptive technologies, winner-takes-all markets and environmental and social concerns – requires new approaches to asset allocation, valuation, risk models and investment frameworks.

“Firms are now evolving more rapidly and radically than ever before, with profound implications for their growth, profitability and returns,” PGIM chief operating officer Taimur Hyat said. “We believe these new corporate models overlap, are often mutually reinforcing and cannot be ignored by any company seeking to innovate, grow, or avoid obsolescence risk. Even traditional ‘brick and mortar’ firms with storied histories will need to consider how they respond.”

The paper draws on insights from more than two dozen PGIM investment professionals in fixed income, real estate, private debt, quantitative equity, fundamental equity, and alternatives, as well as a survey of over 300 public and private companies in the US, Germany and China that reveals the changing nature of the 21st-century company.

“These changes matter immensely to long-term investors, given over half of a typical institutional portfolio is comprised of corporate holdings,” Mr Hyat said. 

Among the research findings are:

“Weightless” companies are on the rise

Intangible assets are surging, even across traditional capital-heavy industries. Almost 60 per cent of firms in PGIM’s survey said intangible assets had grown in importance over the last three years – with more than 80 per cent of Chinese firms believing intangible assets would become even more critical over the next three years.

The adoption of new labor-light, tech-forward business models is apparent in Australia, with companies such as Airtasker and Freelancer thriving in the new gig economy. Dramatic shifts in both employer and employee preferences have also altered the landscape for commercial office space, with the emergence of flexible workspace providers such as Workspace 365.

Superstar “kill zones” are expanding

The PGIM report highlights that “superstar” corporations have learned to leverage technology, proprietary data and global networks to dominate markets.

“They effectively create ‘kill zones’ around their area of dominance, buying out competitors and startups to shut down challenger products or assimilate new capabilities,” Mr Hyat said. 

Recent research from the Australian government illustrates the rise of superstar firms in Australia; for example, the combined market share of Wesfarmers and Woolworths increased from around 30 per cent of total retail trade in 2001 to peak at approximately 40 per cent in 2013.

Purposeful firms are becoming agents of social change                                        

Two out of every five companies surveyed globally by PGIM – and well over half surveyed in Germany – said they now balance profit maximisation with the potentially broader goals of other stakeholders, especially employees, customers and country. Today, the global Fortune 500 spend three times as much annually on corporate social responsibility as the combined development and humanitarian aid spending by the United Nations Development Programme (UNDP) and the United Nations Children’s Fund (UNICEF).

In an environment where customers, employees, investors, and regulators are holding companies accountable to wider community values well beyond quarterly earnings, Australian companies such as Koala, Biome Eco Stores and Australian Ethical are increasingly positioning themselves as agents of social change.

According to PGIM, these transformations force investors to re-evaluate public-private allocations.

“Weightless companies are staying private for longer, driven by lower capital requirements, a lower fixed-cost base, and easy access to the glut of late-stage private capital,” Mr Hyat said. 

He suggested investors adjust risk models to appropriately evaluate intangible-driven firms: “Mispricing of credit risk by ratings agencies can potentially create opportunities in both public and private debt markets for savvy investors.”

The asset manager noted that it is critical to develop an investment framework to identify next-generation national superstars.

“With rising concentration, fewer new entrants and expanding ‘kill zones,’ successful investors will need to identify potential superstars with strong staying power relatively early on,” Mr Hyat said. 

PGIM president and CEO David Hunt said the transforming corporate landscape can have a powerful impact – both positive and negative – on our world.

“For example, while weightless firms have led to greater use of remote-work arrangements and the emergence of flexible co-working spaces, their labor-light approach has contributed to a hollowing out of middle-income occupations in the US investors and other stakeholders will need to be nimble enough to capture the benefits of these new models while navigating the risks.”

For more, visit the microsite for “The Future Means Business: The investment implications of transformative new corporate models,” the latest in PGIM’s Megatrends series.

PGIM, the global asset management business of Prudential Financial, had $US1.3 trillion in assets under management as of 30 June 2019. Prudential Financial, Inc of the US is not affiliated with Prudential plc, which is headquartered in the UK.

 

How new corporate models are disrupting asset allocation
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James Mitchell

James Mitchell

James Mitchell is the editor of the Wealth and Wellness suite of platforms at Momentum Media including Investor Daily, ifa, Fintech Business, Adviser Innovation and Wellness Daily.

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