The ‘Triple Disruptive Threat’ Facing Your Blue-Chip Shares

The goal of every investor should be to seek the highest returns while minimising risk.

The first part of that equation is easy: the high returns are why we invest in the share market in the first place.

We want the best returns for our money, and shares have historically provided that outlet.

In fact, according to AMP Capital’s chief economist Dr Shane Oliver, Australian shares grew an average 11.9% per annum between 1900 and 2014, compared to 6% for bonds and 4.8% for cash.

On face value, that mightn’t sound like a great difference.

Yet according to Dr Oliver, $1 invested in shares back in 1900 was worth$398,420 in 2014 (assuming it was left untouched) thanks to the power of compounding, compared to just $750 for bonds and $216 for shares…

It’s a BIG difference.

The second part of the equation seems pretty straightforward, as well.

Successful investing over the long-term is just as much (if not more so) about avoiding the losers as it is picking the winners.

What could possibly be safer than the country’s blue chip stocks!?

Indeed, many investors are of the belief they should build their portfolios around solid, blue chip shares.

And why wouldn’t they? That’s what they’ve long been taught and, to be fair, that strategy has yielded some pretty impressive returns in years gone by.

But such a strategy hasn’t worked most recently – the last 12 months or so – and it’s not guaranteed to work in the future.

Consider this from The Australian Financial Review on Monday (emphasis added):

The sharemarket’s lumbering blue chip companies face a triple disruptive threat that will erode their dominance and forever alter the Australian sharemarket index.”

That’s the opinion of analysts at BlackRock, which is the world’s largest money manager with more than $6.4 trillion of assets under management.

Indeed, the firm even went so far as to title its presentation to financial advisers “Australia’s complacent oligopolies”.

That doesn’t sound so promising…

So, what were those so-called ‘triple disruptive threats’, exactly?

Well, first there was technology, as well as regulatory headwinds.

Indeed, the analysts at BlackRock even went so far as to say that Telstra Corporation Ltd (ASX: TLS) was “perhaps the most exposedto these threats.

Now, personally I think Telstra is actually trading at a reasonable price today and, with its 5.9% fully franked dividend yield, could actually be a decent prospect for long-term investors.

Indeed, it has continued to grow its mobile customer base, and is expanding into a number of high-growth fields such as e-Health.

But, as BlackRock highlighted, there are threats.

For starters, it will need to stay ahead of the game and continue growing – especially with Optus and Vodafone starting to turn a corner.

The rise of other players such as TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) is another risk.

Before we get too caught up on Telstra though, there are other companies in a similar boat, including the Big Four Banks.

It’s worth noting that BlackRock argued that the banks “are not guilty of being complacent”, according to The AFR.

Still, they’re going to have to continue spending big on technology to defend their positions against the likes of Apple and Google – two of the technology powerhouses muscling in on so many industries.

They’re also at risk of regulatory headwinds from the Australian Prudential Regulation Authority, or APRA.

In response to soaring house prices and intensifying competition for new loan customers, APRA is forcing the banks to hold more capital.

That will almost certainly impact their earnings potential and could hinder their ability to maintain their current dividends to shareholders.

It seems Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) are most at risk in that regard…

The final threat noted by BlackRock was that of Australia’s growing population.

In many ways, this is a great thing. A growing population can be great for our economy’s long-term prospects, while it can directly benefit so many industries.

But it mightn’t be such a good thing for Woolworths Limited (ASX: WOW)

Poor managerial decisions are at least part of the reason behind Woolies’ woes, but the retailer has also been caught flat-footed by international rivals Aldi and Costco.

Recognising our booming population – and the potential to make a killing from it – these discount retailers have begun to expand Down Under, stealing precious market share from Woolworths – and that trend only looks set to continue.

Of course, this is a risk for Wesfarmers Ltd (ASX: WES) as well, although Coles is in a far stronger position that Woolworths right now.

Meanwhile, Wesfarmers also has the likes of Bunnings Warehouse and Officeworks in its arsenal.

Now, I’m not saying that you should eliminate your exposure to Australia’s blue chips.

Although their best days are mostly behind them, some still offer value for investors who are focused on the long-term.

For instance, I like Wesfarmers and think it could still make for a good long-term investment…

So could many of the other blue chips, for that matter, but only when purchased for the right price.

Instead, what I am saying is that investors need to open themselves up to opportunities outside the typical blue chips – being the banks or the miners, or even the retailers.

Where should you look?

The goal of every investor should be to seek the highest returns while minimising risk.

While many investors assume they can get that from the traditional blue chips, it is becoming increasingly clear that is simply not the case – not all the time, at least.

Instead, investors should be looking for companies with a certain set of characteristics.

Firstly, the company needs to be able to weather economic downturns… It’s one thing to thrive in a booming market but that won’t matter much if it crumbles at the first sign of trouble.

It also needs to offer a quality product – one that offers value to customers and society at large.

And, ideally, it should also pay a nice sustainable dividend yield, with the capacity to grow over time.

One company that I think fits the bill is Transurban Group (ASX: TCL).

An owner and operator of toll roads in Australia and the United States, this is a company whose assets people rely on every day to get to and from their destination.

Rather than becoming irrelevant through technological advances or a growing population, this company should benefit from both trends, helping it to grow in the long-run.

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