Digital disruption is not only changing the way businesses operate but is also changing customers’ behaviours and expectations, according to Polar Capital’s Ben Rogoff.
The co-manager of the five FE Crown-rated Polar Capital Global Technology fund said digital companies’ ability to provide personalised services and to deliver goods to customer’s doorstep are influencing what people expect, and therefore putting pressure on other businesses.
UK e-commerce sales 2008-2016
Source: Office for National Statistics
“In North America there are 100 million people using Amazon Prime. If you are a Wholefood and a Prime customer there, you can now expect delivery to your house within two hours,” he said.
“What companies like Amazon, Facebook and Google are doing is changing our expectations and therefore changing our behaviour.”
As such, the manager believes it will soon become normal to expect food or other goods to be delivered “in two hours after putting an order”, a fact that puts pressure on those businesses that are unable to do that or that don’t have the scale to deliver anything similar to that.
Rogoff, who has been co-managing the $2.2bn fund since 2003, said he has seen how the world is moving towards greater personalisation, with people wanting to pay for customisation and tech companies having to come up with ideas on how to monetise digital content.
“The world is moving this way: you are either a £1 coffee maker or you sell a highly personalised coffee [or whatever it is] and you can get £4 for it,” he pointed out.
One example of personalised products provider, the manager said, is Swedish entertainment company Spotify. Last June the digital platform surpassed 140 million active users and has seen its subscribers rise from 500,000 back in 2010 to 70 million today.
He added: “With tech, the only rule constantly is that prices fall, the winners are usually faced with the horrible fact which is they can’t grow volumes anymore and prices still fall.
“And you end up in this difficult situation when winning companies have to either use all their free cashflow or to reinvent themselves; and the winners reinvent themselves.”
Another digital product he holds in his portfolios that embodies the personalised-content feature that increasingly differentiates the tech winners, Rogoff said, is the free co-op video game Fortnite.
Fortnite is developed by Epic Games, creator of unreal engine, a commercially available game engine which powers their internally developed video games. In 2012, Chinese multinational Tencent acquired a 40 per cent stake in the video games developer for $330m.
“Fortnite is a real example of content type. What is interesting is that the game is free; you used to buy things but now you can download this game and use it to play and socialise with your friends,” Rogoff explained.
“My children love it and the game is peaking off: there are 45 million people using it over the world. It is also the most watched game in YouTube history.
“The reason it’s peaking off is because they came up with the idea of monetising it by selling different skins for the different avatars in the game.
He added: “It is the same principle as action man and Barbie: I give you a doll and then you buy a costume for it.
“This is turning out to be extremely profitable, it is an incredible new way of monetising digital content.”
In the quest to identify the winning stocks, for both the fund and his Polar Capital Technology Trust, Rogoff highlighted valuation is one of the last things he looks at.
As such, the team’s investment process aims to identify companies offering new, disruptive technologies. They do so by combining thematic analysis to identify the growth areas of the industry, with bottom up analysis. Valuation comes second.
“I don’t understand why people look at valuation first, it is like walking into a shop without a penny and asking: ‘what can I buy?’” he said
“For me, it is about identifying key winners and then stablishing whether [or not] the valuations can work for them,” he explained.
Rogoff highlighted both the macroeconomic backdrop and the fundamentals are looking good for the sector and that he remains positive in his outlook.
“The tech sector is peaking up, it is a very normal P/E [price-to-earnings] expansion,” he said. “It is also the only sector in the US market with cash in its balance sheets.
“The environment is also picking up for the macro perspective and the companies are using the tax wind forces to reinvest in their businesses in order to stay off the threat that Amazon epitomises: that the world is going digital.”
He said software, that used to be a tool, is now the fine end of real businesses, adding: “If you don’t have a working application you won’t sell anything.”
“If you don’t have a way to access Facebook’s platform you are not be able to advertise your product.”
With the social media giant trading at the lowest multiple ever, he said valuations for tech companies such as Facebook and Google look fine and added the gap between the ‘winners’ and the ‘losers’ has now narrowed.
“Back in 2016 we had a very weird period where in was very difficult to buy ‘winners’ at the same price as ‘losers’ but today I think that is very manageable,” he explained.
Performance of fund over 5yrs
Source: FE Analytics
Over the last five years, Polar Capital Global Technology has delivered a 160.53 per cent total return compared with a 122.23 per cent gain for the average fund in the IA Technology & Telecommunications sector.
The fund has an ongoing charges figure (OCF) of 1.16 per cent.