The collision of two powerful forces—slow economic growth and rapid technological change—is creating exciting investment opportunities.


Todd Crawley: The collision of two powerful forces—slow secular economic growth and rapid technological change—is creating exciting investment opportunities and begs the question, “Are you investing on the right side of change?” I’m Todd Crawley.


Jon Lagerstedt: And I’m Jon Lagerstedt, and this is The Essential Practice podcast.


Todd: This episode’s conversation stems from our Investment Perspectives paper from July 10 entitled, Are you investing on the right side of change? We encourage our listeners to get this report and read more details on the topic we’ll be discussing today. You can get this report by contacting your sales partner here at Wells Fargo Asset Management.


Jon: And we’re excited to say that today we’re talking with one of the authors of the paper—Ozo Jaculewicz, Associate Portfolio Manager and Senior Portfolio Specialist with our Fundamental Growth Equity Team. Welcome to the program, Ozo.


Ozo Jaculewicz: Thank you very much, Todd. Thank you, John.


Todd: To start off the conversation, Ozo, could you let our listeners know why you and your team decided to write about this topic?


Ozo: Absolutely, Todd.


You know, this stemmed from conversations with friends, with relatives, with clients, and the paper was not meant to tackle many of the technical or controversial issues today in investing. It was more driven by a lot of people feeling like the economy’s uneven, feeling like it’s maybe a little sluggish or uncertain, but on the other side, also seeing that the market’s hitting all-time highs.

And just all these conversations, we wanted to try to put a framework to help people think about what’s going on in the world.


Todd: Now to give our audience some context, Ozo, could you share with us some history on the slow pace of economic growth that we’re experiencing today and have been experiencing for nearly all of this current recovery?


Ozo: What we did is we stepped back and really looked back 100 years at the U.S. economy, and there were two major forces that impacted the economy.

One was wars, in particular, World War II and the revolution of industrial capacity out of the war.


And the second was demographics. It was the arrival of the baby boomers and, in particular, the arrival of females aggressively entering the marketplace starting around 1960.


Now we have boomers retiring. The women entering the workplace has sort of evened out a little bit. All of that is compressing this key rocket fuel of economic growth, which is the labor force.


So instead of focusing on sort of the wiggles of economic data or what the Fed may do next month, we zoomed out and said big picture, why is the economy struggling to grow faster than 2%?


The economy used to grow at 3.5% on average in past cycles. We believe there’s going to be a new normal of economic growth closer to 2% and that is what we think investors should expect going forward.


Jon: Ozo, thank you for that education and overview. On the flip side, you pointed out in your paper, the U.S. economy is in a golden age of technological advancement that started with the birth of the internet. And I thought you gave a really interesting analogy in the paper about the internet as a meteor that hit Earth sometime around 1990. Can you elaborate on that?


Ozo: You bet. It’s not all bad news. I know it sounds a little bit like a wet blanket when we talk about slow growth. It’s a super exciting time for innovation, for advancements of technologies.


Really, the arrival of the internet is one of the greatest innovations in business and potentially human history. So for fun, we were talking about it on our team and we came up with this analogy.


Well, when a meteor hits a planet, there’s a ripple effect that happens. So going back 20 plus years, the internet arrived and the first ripple was just the World Wide Web. Remember “You’ve got mail”, streaming music, and just accessing the Internet? Well, that was a big move.


And then we shifted into the next ripple, which is really the digital age. Now roughly 5 billion people have been connected to the internet through their devices. And people, of course, are using that dramatically to stream video, E-commerce is shifting dramatically, using smartphones, the arrival of social media. So that ripple has affected consumers’ lives dramatically.


There’s also a third ripple that we call the software and the cloud ripple. Think of this as more on the business and enterprise side. Moving computing power to the cloud has created really a brand new infrastructure. More and more businesses are shifting their digital technologies and their operations to cloud-based technology, so there’s all kinds of implications that are really exciting in the business world that also eventually will help individuals in their quality of life.


And then lastly, we think that the final ripple is really starting to happen now, which is in the sense that the power of the Internet invades every industry. And now some of our most exciting investment opportunities are coming really in what you might think of more legacy industries: manufacturing, trucking, the energy sector. All of these industries are starting to adopt the power of the internet.


And what’s really exciting is that the pace of change is accelerating. So if you look at the window of time it took for past innovations to reach mass adoption: the telephone took 35 years, TV took over 25 years, now the iPhone reached mass adoption in less than 3 years. So the pace of change is accelerating as the ripples expand out into more parts of the economy, and we think that’s creating exciting opportunities.


Todd: So we have these conflicting forces of slow economic growth and rapid technological change, and somewhere in between there’s an area to potentially capitalize on or, as you put it, invest on the right side of change. What do you mean by that?


Ozo: There is a bifurcation that’s happened in the economy. A really great example are malls.


The decline of malls and the decline of even Blockbuster Video or places like that is a sign of how the economy is dramatically changing and moving towards a digital direction.


If you really sort of break apart the U.S. stock market, you’re going to see a lot of businesses that are on the wrong side of change, the wrong side of that bifurcation. They have slow revenue growth. They have legacy business models. Their brands have sort of lost favor or are a bit out of touch with new consumers.


On the flip side of that, the businesses that are on the right side of change, they have disruptive technology, and they are growing organically. They don’t need a roaring economy. They don’t need a lot of stimulus. They’re harnessing data. Oftentimes, they’re offering products on a subscription basis, usually in the cloud. They have a recurring revenue. And in many cases, they have competitive advantages.


So a really simple question that we ask when we’re looking at companies—if a company has two characteristics, it’ll be on the right side of change in our mind. And that is are they consistently growing customer? And number two, do they have pricing power?


If they have those two traits, that’s a business on the right side of change. And we think the market will continue to reward those particular traits.


Jon: Fantastic. And taking in all this information, Ozo, how can financial advisors work with their clients to help them examine their portfolios so they too can be on the right side of change?


Ozo: Yeah, it’s a great question. How do you implement this if you agree with our viewpoint?


In a sense, what we’re saying is consider scarcity. And any time an asset is scarce, it tends to increase in value. And we’ve done some analysis and we’ve actually tracked the number of businesses globally that can organically grow their top line revenue growth at 8% or higher. This has been in a secular decline.


Roughly half the companies in the equity markets could grow sales at 8%. Now that number is down to 23% at the end of last year. There are simply fewer and fewer companies that can grow sales and grow their businesses organically.


As a result, there is a scarcity premium for those businesses. So I know advisors have been struggling for years about yield and finding sources of dividends and other sources of income for their clients. But if we stay in this environment of fairly low economic growth, these businesses that have dynamic durable secular growing fundamentals are going to remain valuable.


What I would do is try to look at the underlying businesses you own in your equity portfolio and scrutinize, how fast is this business growing? Does it need a lot of lift from stimulus or policy or cyclicality? If it doesn’t, and if it’s a business that’s growing organically, we think you have a very valuable asset.


So that’s what we’re encouraging—just examine carefully what you own, particularly in equities.


Jon: Fantastic, and Ozo, thank you for all your insight today. You can find this paper and more from the Fundamental Growth Equity Team and our other investments teams at


Todd: We hope you’ve learned a lot today on how you can help your clients structure their portfolios to be on the right side of change.  And again, we greatly appreciate you joining the show today, Ozo.


Ozo: My pleasure, Jon and Todd. Thank you very much.


Jon: Absolutely. Until next time, I’m Jon Lagerstedt.


Todd: And I’m Todd Crawley. Thank you for listening to The Essential Practice podcast.


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