Speaking to attendees at the Morningstar Individual Investor Conference 2017 in Sydney last week, Hamish Douglass, the Magellan co-founder and portfolio manager, shared some interesting views. They have been encapsulated here by Glenn Freeman, senior editor at Morningstar Australia.
He referenced Warren Buffett and Charlie Munger in a video clip exchange between the two.
Munger: A lot of great businesses aren't quite so great as they used to be--the packaged good businesses like Procter & Gamble, and [automotive company] General Motors, are all weaker than they used to be at their peak ... GM once loomed over the economy like a colossus [but] the world changes, and we can't make a portfolio change every time something is a little less advantaged than it used to be.
Buffett: But you have to think a lot of the time about whether there is something that is really changing the game--that's true for all the things we own, and we'll be wrong sometimes, sometimes we'll be late ... it's not that we're not cognisant of threats, but assessing the probabilities of those threats being minor, major, or life-threatening is a tough game, but that's what makes our job interesting.
Technology disruption
Douglass looked at some of the industries and businesses that are being most disrupted by technology, with Google, Amazon, Facebook, and companies like them emerging as the new, multi-industry behemoths.
From the decline of newspapers and other forms of printed publications, leading to a huge drop-off in advertising revenues for these businesses, he says "the digitisation of news has created a whole new level of measurability."
"We believe that the television advertising business model is the next one to fall ... I think we've got two big factors going on," Douglass says. He refers here to the rise of streaming video on demand services, like Netflix and Amazon, which between them are spending "enormous amounts of money on content creation ... $10 billion between them in 2017."
"With a massive battle going on between the television and movie networks, Apple and Netflix ... may steal some very valuable viewers."
As the audience volumes of traditional television and movie distributors shrink, their advertising appeal reduces, at the same time as the cost of producing content increases in line with inflation.
The second factor is the advent of new video advertising platforms, particularly Facebook and YouTube. "I would argue that a huge amount of the revenues that are currently in television and pay television are going to end up going to YouTube and Facebook ... and this is incredibly targeted advertising because they know so much about their audiences," he says.
Bricks-and-mortar retailing is another business model that is being massively disrupted, particularly by Amazon, the second-largest global retailer with an estimated $245 billion in annual sales revenue.
Douglass refers to the numerous innovations Amazon has made across its value chain, from the warehouse floors--where it deploys around 45,000 robots for efficiency improvements--to its two-hour delivery schedule. The latter is made possible by its huge stores of user data, online ordering functionality, and rapidly rising internet connectivity of household appliances (the "internet of things").
The company's growth within this space is underpinned by its expansion of Amazon Fresh, its fresh food retailing business, and the multi-billion-dollar acquisition of Whole Foods in the U.S.
Geopolitical tension and economics
Overlaying these largely technology-driven innovations within the global economic environment, Douglass also discusses the role of global central banks.
"Interest rates are effectively gravity in the investing world. When rates are low, gravity is light and valuations go up, prices go up; when rates are higher, gravity is heavier and valuations come down. We're near a fundamental change at the moment, where central banks are talking about a major increase in interest rates," Douglass says.
He speaks in the context of a rapidly changing and tenuous geopolitical environment, including the potential escalation towards a conflict in North Korea, a possible U.S. trade war with China, Brexit, and other potential events in Europe.
"Over the next four years [Janet Yellen, Mario Draghi, and Donald Trump] want to start changing tack on monetary policy, but whether that happens is going to depend on geopolitical events ... if we have a war between the US and North Korea, central banks are not going to start changing their interest rates ... if there is a trade war with China, if there's a major event in Europe, central banks there would also back away," he says.
Regardless of whether interest rates kick up significantly in the shorter term, Douglass believes interest rates are set to be lower for longer.
"But if we don't have a war with Korea and some of these geopolitical evens, within 12 months, we're going to have a significant amount of upward pressure on rates ... as fund managers, we have to navigate around that over the next two to four years," he says.
"I would argue, in the long-term, with what we're seeing with technology, is that we're going to have more and more deflationary effects in the world ... I think we're going to have a lower long-term interest rate view."
This post initially appeared in Morningstar.com.au
