When an airplane hits turbulence, it seeks a new altitude. One without turbulence. Even better, one with tailwinds.
Now, COVID has certainly injected turbulence rarely seen in history. But is this turbulence universal? Is every sector of the economy under threat?
A little-known investment fund is proving there are opportunities for those willing to seek new altitudes. The Scottish Mortgage Investment Trust PLC has year-to-date returns of 55%, versus 7.1% for its peers.
How has it thrived when so many investors and companies are struggling?
Though the fund still carries its historical name, it long ago diversified away from mortgages. More recently, it has focused investments in a few sectors poised to do well through, and thanks to, the COVID crisis. It is now one of the largest shareholders of Tesla, for example. It has similarly invested heavily into “stay-at-home” companies including Amazon, Alibaba, Netflix, and the food-delivery service Delivery Hero SE.
Investors vs. businesses
Now, investors have an easier time pivoting to a new altitude than businesses do. For example, while I was studying finance at Wharton two decades ago, a professor of an options class I attended showed that one can replicate the return of any industry by buying and selling a few options. If you want to get into the mining business, you could invest millions and years in starting a company. Or, you could sell a put option and buy a call option in mining company stocks, artificially replicating the returns of owning a mining company. You essentially can set up a mining company with two trades, in a few minutes.
Operating businesses have more moving parts to manage and will naturally take longer to adjust their altitudes. You may need to redesign your products, train your salesforce to sell to a new customer segment, spin off parts of your business, build new capabilities, and shift human resources. But as the Scottish Mortgage Investment Trust proves, the payoff of the effort can be huge.
5 steps to find your new altitude
Here are five steps you can take to find a new altitude and position your business ahead of COVID tailwinds:
- Take an inventory of your unique assets: You have preferred access to tangible and intangible assets. Tangible assets might include special production machinery, talent, or physical spaces. Intangibles include unique capabilities, brand(s), and your culture.
- Create a list of potential tailwinds: Assume that the COVID will continue to impact our global industries through 2021 and into 2022. Consider which sectors are likely to thrive in an environment characterized by remote working, contactless delivery, and heightened sensitivity to risk.
- Identify target areas: Score each potential tailwind area by the degree to which your unique assets (from Step 1) could give you an advantage. You can do this by creating a matrix with your unique assets listed as columns and tailwind areas as rows. Score each box on a scale of 1-10, then add up the scores to identify the most attractive tailwind areas for you (see example below).
- Think through what it would take to begin reengineering your business to pursue the new opportunity area: You will find some relatively easy to pursue (in terms of time, effort, and cost) and others that will require more effort, of course.
- Finally, pick the opportunity areas you want to pursue and initiate your transformation: Soon you will feel the ease and speed of flying with tailwinds, while your competitors struggle with turbulence.
Here is a sanitized example for a food company I am on the advisory board of: