Global Alpha Research Agenda

The area which resulted in the most material portfolio changes from last year’s agenda was transformative healthcare. We made five new purchases for the portfolio over the year, including Illumina (gene sequencing), Abiomed (miniature heart pumps), Novocure (novel cancer treatment), Teladoc (remote medical services) and Sysmex (diagnostics). We also increased investments in developing markets following our search for structural winners with the ability to shrug off concerns relating to trade wars and slowing economic growth. These activities included additions to Prudential (life insurance) and Alibaba (ecommerce and cloud computing), while we also purchased new positions in Reliance Industries (Indian petrochemicals, telecoms and retail) and Brilliance (BMW’s Chinese joint venture). 

The digitising of news, social interaction, gaming, retail, TV, music and films has been a helpful tailwind to a significant proportion of the portfolio over recent years. New business models offering near unlimited choice, with ever-increasing convenience, have taken significant share from slower-moving incumbents. This year we plan to test how far we are through this revolution. Will maturity dull the growth outlook for businesses such as Facebook, Tencent (owned through Naspers) and Netflix? Might excess supply and growing competition for our time hurt their prospects? Which companies still have the greatest opportunities?

We believe that there are some early indications that excess choice could lead to paralysis. In ecommerce, 25 per cent of Amazon Prime day shoppers reported being ‘overwhelmed’ by the number of product offerings in a 2019 study. When there are over 100,000 listings for something as simple as coat hangers, one can see their point. Similarly in media, an average of a billion hours of YouTube content is watched globally every day. This would take 100,000 years to watch in one sitting. And do many of us realistically do more than just scratch the surface of our Netflix subscriptions?

One helpful way to think about these evolving dynamics across a wide variety of industries is through the lens of companies battling for the limited time and attention of consumers. What happens when there are too many products to buy, too much music to listen to, too many films to watch and too many games to play? There are now so many reviews to help with product and media decision making that they may be contributing to this overabundance. How will consumer behaviour change in the face of this? What will be the impact of new consumer interfaces such as virtual home assistants? What’s the right way for businesses to adapt to retain their attention?

Our early working hypothesis is that business will have to adapt to retain customer attention. Superior distribution and choice may be little more than competitive ‘table stakes’ in retaining the attention of consumers. Instead, the quality of content, superior customer service, exceptional recommendation engines, trust and media curation become the ways to compete and standout. Our suspicion is that from a consumer perspective, simplicity will rule. Delivering this will be complex, but it is where the battle will be won.

We believe that there are some early indications that excess choice could lead to paralysis. 

The Global Alpha portfolio has meaningful exposure to the growth of the cloud-based software industry, particularly holdings such as Alibaba, Amazon and Microsoft which are providing infrastructure and services at a large scale. The explosive demand for these offerings has surpassed even our own optimism as entrepreneurial start-ups and incumbent enterprises alike have adopted these services. 

There are three major questions relating to this industry which we will seek to address in the year ahead. The first relates to where we might be within the adoption curve for cloud services. This is important as the now large revenues and impressive margin profiles of businesses, such as Amazon Web Services (AWS) and Microsoft  (Azure), are also accompanied by large market capitalisations. Our core thesis has been that we remain early in the ‘S-curve’ and that large businesses are only now starting to shift mission critical workloads to the cloud, implying that very high levels of capital investment are fully justified. We would like to deepen our conviction here. The second closely-related question is the ultimate level of profitability that we can expect from these companies. The provision of value-added services has enabled AWS to deliver operating margins above 20 per cent. Can we expect this level of profitability to persist? Will only the largest scale players deliver in this way? Could this profitability increase even further? 

Finally, as AWS and others provide more and more tools and services, what is the long-term outlook for the specialist cloud providers (such as Salesforce, Dropbox, etc.) of today? Can these providers continue to thrive as part of a broader cloud-based ecosystem, working collaboratively with the likes of AWS and Azure? Or is it near inevitable that they will be out-competed by the largest-scale players in the market, whose ability to sell integrated product bundles is supported by vast innovation budgets? Again, this feels important given the valuations awarded to many companies operating in this area.

In previous agendas, we’ve shared with you efforts we’ve made to improve our own processes. In 2020 we intend to spend time refining the way in which we use mental models. A mental model is a simplified big idea. A good mental model is akin to a map, in that it takes a complex reality and distils it down to its core essence. A map with a scale of one foot to one foot would be as big as the world and therefore of no use in simplifying what is important. Using mental models from different industries and academic disciplines can bring new insights and cognitive diversity to bear on a problem. Looking at the question in multiple dimensions allows us to understand and identify the variables that will govern any changing situation.

Indeed, the pace of change itself can be thought about using a mental model. One model which we have found particularly valuable within our work is the concept of pace layering, first introduced by the writer Stewart Brand. This model is based on the principle that there are different ‘layers’ within society and economies, from fashion and commerce at the top, down through infrastructure, governance and culture, all the way to nature at the bottom. The layers at the top are the most rapidly changing, and those at the bottom are the slower moving, but ultimately most powerful. Brand’s work has materially influenced our thinking on platform businesses such as Amazon and Google. We would argue that these companies have penetrated through the commerce layer and become ‘infrastructure’, affording them far deeper competitive moats. Whether they will ultimately be constrained by ‘governance’ (regulation) remains an open debate.

We commit to spending time identifying the big ideas from multiple academic disciplines, investigating their relevance for investors and understanding their limitations. If we deepen our bank of mental tools and the knowledge of how to wield them properly, we can think more rationally about the world and the direction of its structural changes. The ultimate goals are to make better initial decisions, have broader context and think critically about what other people are telling us. We look forward to sharing those we believe to be the most impactful.

*Adapted from 'The Clock of the Long Now', Stewart Brand, 1999.

The views expressed in this article are those of the Global Alpha investment managers and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in February 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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