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Old world vs new world investing – what are the investments of the future?

16 December 2020 in ESG investing, Investing
cracked earth from climate change  - investments of the future

When we invest, we are effectively making a bet on the future and we do this in two different ways:

  1. ‘Old world’ investing looks backwards at past trends and track records to try and predict how companies might perform in the future. 
  2. ‘New world’ investing looks forwards, trying to spot future trends and the companies that will benefit. In other words, the investments of the future.

ESG investing fits into the ‘new world’ category as it mainly focuses on newer companies that themselves are looking into the future. This article explains why new world investing has gained traction in recent years, and encourages you, as an investor, to perhaps think a little more openly and futuristically about where you invest.

What do we mean by old world and new world investments?

Consider two investors who are offered two different companies to invest in. Company A is a bank that’s been around for 30 years. Twenty years ago it was profitable, but it has struggled to make money over the past decade, so the market is pessimistic about its future and gives the company a low valuation. It can even be trading for less than its intrinsic or book value, because of being underestimated. It’s a classic ‘value investment’.   

Company B makes batteries for electric vehicles. It’s only been around for a few years and is developing batteries that can be used cheaply in a wide range of vehicles. The market is excited about its future and gives it a high valuation as investors expect it can grow at a faster rate than the overall economy, other industry segments or its competitors. It’s called a ‘growth investment’.

Which would you buy? You probably expect an answer like “it depends” but the current sentiment here is to avoid the old world and company A. Betting on the new world is a smart strategy, yet investors tend not to be very good at it – after all, the future is difficult to forecast and predicting it always carries a degree of risk.  

Likely trends for investments of the future

But while humans aren’t great at predicting specific events (weather, sporting events, even pandemics), we are good at forecasting more general trends. Ten years ago, it was becoming clear we were going to be conducting a lot more of our daily lives online, both work and leisure. So, it wasn’t a big leap to guess we would be ordering more stuff online (e-commerce), paying for that stuff instantly (digital payments) and talking to our friends about what we have bought (social media). Returns over the past decade in FAANGs* stocks like Amazon, Paypal and Facebook have been incredible.  

New world investing – how ESG (environmental, social, governance) fits in the picture… 

Investing is about making a bet on what the future will look like. Sustainable – or ESG – investing takes this a step further and says companies solving a particular environmental or social problem are going to be more valuable than the ones causing it. So, we bet on electric vehicles and think the petrol car might have had its day. Sustainable investing is about making sensible predictions about where the world is headed and the companies best suited to thrive there. It’s inherently focused on transformative technologies solving problems and there is not always a precedent to fall back on. 

We think companies that can help the world transition to a lower carbon future and those that can transform our societies and improve our standards of living, could be the market darlings of the future.  

Old world investing and how events have shaped it 

The classic value investor is a fan of the rear-view mirror approach, looking for opportunities based on what a company has done. While all investing requires us to anticipate what might happen in the future, this is about buying 'old world' companies cheaply in the hope the market sits up and realises their true worth. They might have had their day, but plenty of fund managers are advocates of this style, Warren Buffet being the most famous. Obviously, Buffet and a lot of other investors had a great deal of success with value investing.  

But it came under a lot of pressure in the pandemic and it has widened the gap between value and growth, which now stands at an all-time high, mirroring the extremes we saw back at the end of the dotcom boom. When the bubble burst, the gap between value and growth narrowed once more.

We don’t think value investing is dead – it has just changed and the pandemic was an accelerant. Traditional value companies have not been doing well during the coronavirus crisis and value investing has been the riskier strategy – just look at what’s happened to the big value stocks in the FTSE 100 Index, the oil majors and the banks and the drying up of company dividends. Income investors haven’t known what has hit them.

The investors that have done best are those that look at how the world is changing and recognise what this means in terms of new world investing. They imagine how we will be living in the future and the types of companies that will be part of that. That is one of the reasons ESG has done so well in recent years – investors realise we need to protect our planet and the companies that will help us do that are the ones that will flourish.  

Moving forwards

Nowadays, as investment managers we need to really be able to analyse a company, its market and how it sits amongst its competitors. We need to do our groundwork – think about the investment themes that will be big in the coming years and the different companies that operate in those sectors. We need to have an eye for detail and an open mind. Can you imagine being an investor sat in a room when Airbnb founders made their first pitch, 10 years ago “we are envisaging a world where people rent out their spare rooms for other people to go on holiday!” That must have taken a leap of faith. But those investors could obviously understand that vision.  

The beauty of this approach is you don’t need to find the next Tesla. There is no pressure to find the 2030 equivalent of Peleton or Zoom. Using funds to access these themes is an excellent way to get exposure to a basket of companies that are exposed to a particular sustainable trend.  

ESG investment funds are those that look to the future and put companies that deliver societal and environmental benefits at the heart of their investment strategies. The idea with funds like these is that you capture tomorrow’s Tesla by buying a range of companies in that space. 

The tug of war between the old world and the new is one that will continue to happen in investing. Value investing and growth investing will always exist. And in some economic climates, one will do well, while the other lags. As always in investing, it’s about the timing.

With our discretionary Portfolio Management Service, our investment experts will act on your behalf to seek out the investments of the future that most closely reflect your values, future plans and attitude to risk, and deliver competitive returns.

*FAANG is an acronym that refers to the stocks of five prominent American technology companies: Meta (formerly known as Facebook), Amazon, Apple, Netflix; and Alphabet (formerly known as Google).

Find this useful? Read more about ESG investing:

To find out more about new world investing, arrange a complimentary consultation with an investment manager now.

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If you are new to wealth management and would like to learn how this can benefit you, we can put you in touch with our team of experts that can help.  

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

This is not a recommendation to invest or disinvest in any of the companies, funds, themes or sectors mentioned. They are included for illustrative purposes only.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Photo of Patrick Thomas

Patrick Thomas

Head of ESG Portfolio Management

Patrick set up and is responsible for our range of environmental, social and governance (ESG) portfolios. Patrick chairs the ESG Committee. He also sits on the firm’s Portfolio Construction Committee, Fund Selection Committee and Alternatives Committee. He specialises in managing investment portfolios for intermediaries, trusts, charities and pension funds, specialising in discretionary mandates.

Patrick is a chartered Wealth Manager and a Chartered Fellow of the CISI. 

020 7523 4988

Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.

Investment involves risk and is not suitable for everyone.