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Facebook's biggest asset, user data, are now potentially its biggest liability

Chief executives don’t need Alexa letting out a loud, creepy laugh on their Echo speaker to lose sleep over technology. The recurring nightmare of Amazon is enough to make business leaders and investors wake up in a cold sweat.

It’s not just a bad dream. Jeff Bezos, the tech world’s disrupter-in-chief, is constantly looking for inefficient markets to shake up.

But this week, the focus has switched to how the tech world itself could be disrupted by tougher regulation.

Facebook faces investigations on multiple fronts after revelations that data on 50m users were improperly harvested. Arguably the company’s biggest asset, user data, are now potentially its biggest liability, as privacy concerns mount and its shares come under pressure.

The big tech companies — referred to collectively as the Faangs (Facebook, Amazon, Apple, Netflix and Google) — have dominated the current bull run, but how their sky-high valuations could be dented by regulatory “tech-lash” is not the only worry for investors.

Spotting the next big thing (think cryptocurrencies here) is a constant preoccupation. And how can you hedge your portfolio against tech-related disruption?

Veteran fund manager Nick Train, of the Lindsell Train Funds and the Finsbury Growth and Income Trust, isn’t worried about Brexit, Russia or President Trump. But he does lose sleep over Asos, the online fashion retailer founded in 2002, which recently leapfrogged high street stalwart Marks and Spencer in terms of market capitalisation.

The speed of technological change is threatening many business models, but tech can also be a great enabler. So when devising your investment strategy, there is a lot to consider.

Take automation, used by multiple industries to cut costs (humans) in order to improve margins and create efficiencies. Yet, in many cases, scant regard is given to the customer experience.

When considering potential threats to a business model, investors need to evaluate this experience — and the end customer could be consumers, the government, or other businesses.

Arguably, at the heart of Facebook’s problem is the fact that it lost sight of what was in the best interests of its customers.

David Coombs, multi-asset manager at Rathbones, talks about the “murder of the middle”. It is becoming increasingly important to offer a premium or specialised service or product, or cheap and excellent execution. Anywhere in the middle and you could be toast.

Just look at how mid-range restaurants are being eaten alive. If chains don’t offer good value or something special, consumers won’t fork out. It’s called the “experience economy” for good reason. People might think of Apple as a product-first technology company, but in truth it is a hybrid that seamlessly combines the best of both product and service.

It is also worth keeping an eye on “tech-flation”. The perceived wisdom is that technology is, by its very nature, deflationary. Automation and the relentless substitution of man for machine has kept a lid on wages and, by extension, inflation.

Yet technology aids price discovery — and this can work both ways. On the one hand, online retailers with a much lower cost base than their high street counterparts can offer consumers cheaper fashion. But returning to the employment example, websites such as LinkedIn and Glassdoor mean today’s workers have a lot more data that can be used at the wage negotiation table.

Technology has also democratised investing and lowered fees. The golden investment rule of “buy what you know” stands the test of time, yet how many passive investors truly know what’s going on beneath the bonnet of their ETF?

The allure of passives is understandable. Forget about owning a slice of one business. Stock picking is overcomplicated, old fashioned and expensive. You can do it much cheaper with a data scientist and an algorithm.

However, exchange traded funds are fairly new investment vehicles, and market cycles tend to be long. ETFs have grown hugely in scale, but they haven’t been around for long enough to be tested against different market scenarios.

There is also a growing question mark over how passive funds are impacting the efficient allocation of capital. Any investor will tell you that once a trend is in the headlines the smart money will have already moved on.

But what happens when algorithms and rules-based vehicles are driving that consensus? Could the relentless march of passives be making the market less efficient? My colleague, Paras Anand, Fidelity’s chief investment officer for equities in Europe, puts it rather eloquently: “This is what happens when the wisdom of crowds is replaced by the oscillations of dumb money.”

In all other aspects of modern life, technology is making life simpler, easier and cheaper. But if markets are becoming fundamentally less efficient, the path to value realisation will become steeper, meaning the investors of tomorrow will have to wait more patiently for returns. That is something that should keep you awake at night.

Maike Currie is an investment director at Fidelity International. The views expressed are personal. Email: maike.currie@fil.com. Twitter: @MaikeCurrie

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