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Why ‘blue chip’ and ‘quality’ companies are under attack

27 September 2017

Disruptive companies pose a threat to the well-established incumbents, says Margaret Lawson, manager of the SVM UK Growth Fund

The calm of overall market progress doesn’t seem to match current turmoil. In recent weeks, we’ve seen a number of well-known companies, including FTSE 100’s Provident Financial, Dixons Carphone and WPP, catching investors by surprise as they delivered poor trading updates and reported major challenges to their business models.

In this era of disruption, many highly regarded businesses are open to attack by new entrants. Labels like ‘blue-chip’ and ‘quality’ don’t recognise the potential for long-established incumbents to simply fail to adapt.

But it’s not just the arrival of new technology that’s changing the rules of the game. Shifting consumer preferences and a lack of respect for brands among millennials are also putting the traditional players at risk. Many of these challenged businesses are in the consumer and financial services sectors, but disruption is now starting to break out all over.

Passive and benchmark-hugging investors will not benefit from disruption, as the index primarily captures yesterday’s economy. Fundamental analysis to understand the opportunities and risks in specific business models is key.

Some businesses, such as Sophos in cybersecurity software, are riding strong growth trends with relatively little effective competition.

There are also businesses whose disruption is not driven by technology at all; just opportunity, changing tastes and first mover advantage. Fevertree Drinks, which is capitalising on the resurgence in the market for gin, is the prime example of this.

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