Jeremy Gleeson, Digital Economy Portfolio Manager
Can you please introduce the Digital Economy strategy?
Even though it feels like e-commerce has been around for a long time, just 14% of global retail sales are transacted online.1 This percentage seems very low to us and, in our view, should allow for many years of double-digit growth in the future. We believe this growth is underpinned by two main drivers:
- Firstly, demographics: while millennials don’t have the same spending power as older generations, they have been very good teachers to their parents and grandparents, and are now hitting their peak spending years. Secondly, technology: with the global adoption of smartphones, consumers are becoming ever more connected and have the perfect tool to make informed purchase decisions 24/7.
- Within the Digital Economy strategy, we look for companies that facilitate different parts of the online consumer journey, which we refer to as the ‘4 D’s’: ‘Discovery’, which describes the key channels that companies use to attract customers with targeted and personalised digital advertising; ‘Decision’ focuses on companies involved in the decision-making process, which are dominated by online disruptive firms taking market share from traditional businesses; ‘Delivery’, which is key as consumers look for secure payments and fast shipping; and ‘Data & Enablers’, which provide the crucial technology support and services to develop companies’ digital presence via various channels and devices.
How would you define your investment process?
- Our approach is to identify companies that have long-term, multi-year growth themes with sizeable addressable opportunities. We therefore believe it is important to ensure that we distinguish between niches or fads, and themes.
- At the core of this lies our investment approach of active, fundamental, bottom-up stock selection. As such, we spend a lot of time actively engaging with management teams, both of the companies in which we are already invested, and where we see potential investment opportunities. Moreover, this also involves meeting with suppliers and competitors in order to have a good understanding of the end-market environment.
- We are market-cap agnostic: some of the companies in which we invest may be smaller, ‘pure play’ businesses, while others may be larger companies that have growing exposure to the theme.
- We take a long-term investment approach when analysing companies and their outlook – typically a 3-5-year view, which translates into a relatively low turnover strategy.
Where do you see opportunities following the COVID-19 crisis?
- Things have changed dramatically since the outbreak of COVID-19, although we believe that the momentum of growth of companies within the digital economy was already in place prior to the pandemic – with such businesses well-placed to support a rise in demand for e-commerce, people staying at home, and a widespread need for remote working.
- German software company TeamViewer provides tools to enable employees to maintain a degree of team cohesion and enabling them to collaborate more effectively, as do video conferencing solutions provided by specialists such as Atlassian and Zoom Video.2
- Opening up company networks for employee access has also created a rising need for cybersecurity solutions, provided by firms such as ProofPoint and ZScaler.
- We have seen a huge increase in stay-at-home entertainment through online content providers like Netflix, or video game companies like Activision Blizzard.
- E-commerce has played a big part, with global e-commerce leaders Amazon and Alibaba demonstrating their ability to upscale at a time when demand for online retail services has increased significantly; meanwhile, Ocado, a UK online grocery retailer has been growing domestically, and internationally with its foreign partners.
- Fintech firms have also been large beneficiaries as more transactions take place online, with firms such as PayPal reporting increased activity during this period.
- The biggest change we made within the strategy was to reduce exposure to online travel agencies, due to the restrictive measures in place during the crisis.
How do you consider valuations when looking at the theme’s growth potential?
- When considering investment opportunities, we feel it is important to undertake a qualitative screen first before looking at valuations. The risk of doing the opposite is that you could end up with a low-quality basket of opportunities. In my view, high-quality growth companies will always likely trade on a premium compared to their peers.
- At present, we feel this is a challenging time to get a true reflection as to how companies are being valued. Taking a longer-term view, we believe many of the challenges such businesses are addressing are larger now than they were a few years ago, and feel this has been accelerated due to COVID-19. As such, valuations could look even more attractive now than pre-crisis.
Do you think M&A activity will likely accelerate?
- When looking at companies, our approach focuses on whether a company can essentially stand on its own two feet, both in the near term and long term. We have noticed that, over time, the best-quality companies are typically acquired first, as larger firms look to buy smaller firms and perhaps pay a premium when doing so.
- Right now, it is difficult to tell whether M&A activity will be higher or lower this year, compared to previous years.
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