As we move forward we would like to provide you with more details about our portfolio. We prefer to discuss individual positions close to the time of harvest. We do this to avoid a common pitfall that humans tend to fall into while analyzing complex situations: commitment and consistency. To say it another way, once an individual announces publicly his position on a topic it is very hard for him to change his mind even in the face of opposing evidence. In fact, this trait is so strong and pervasive that people tend to only look for additional information that confirms their stated position and ignore any additional information that doesn’t (confirmation bias)1.Read more
That said, after harvest we will start to regularly write to you some examples of individual investments we realized and how we assessed the investment opportunity supported by our research. To give you some examples of the wide range of opportunities we currently see in the world we created the following table that illustrates some of the secular changes we are following and investing in. The last column provides a sense of how much runway left we see on each of these trends. As you will see there is still plenty of secular opportunity ahead of us.
Electronification of classified ads
A vast majority of real estate and car leads are coming to sellers through online classifieds. This proportion has increased steadily over the past few years. Online classifieds in a particular geography tend to be dominated by a single player that attracts most of the buyers and sellers in that market.
European players report up to 2/3 of the classified market is still offline
Online retail growth
Online retailers offer consumers wider assortments at very competitive and transparent prices. As shipping costs decrease and speed of delivery accelerates, more and more, consumers are opting to make their non-urgent purchases through on-line retailers.
Online retail penetration of total consumer shopping spend in the developed world ranges from low single digits (South Europe) to low teens (UK and US).
Electronification of Payments
Credit and Debit cards offer consumers the benefits of security from theft, rewards and access to their funds on the internet and around the world. Credit and Debit volume transaction have for decades grown at high single digit rates of growth and are expected to continue for several years.
More than 80% of transactions around the world are still made with cash and checks.
Disintermediation of mainline banks
A higher proportion of borrowers are choosing to borrow directly from the capital markets by issuing bonds rather than obtaining loans from banks. By cutting the banks, borrowers are able to receive better terms and lower cost of funds.
In Europe, bond issuance is responsible for only 20% of debt financing and rising. Bond issuance in the US is responsible for about 50% of debt financing.
Electronic travel distribution
The availability of real time airline and hotel information online has empowered consumers to make and book their own plans and put pressure on the travel agency industry. The internet has also allowed for the online distribution and issuance of tickets which allows the same ticket to be offered in different channels and optimizes the revenue for each event.
Approximately 38% of worldwide travel booking is now done online instead of through an agent.
Shift of Health Care burden to consumers
In North America the escalating cost of Health Care is leading insurers to offer high deductible plans. This shifts more of the expense onto the consumer. To soften this transition, employers can setup Health Savings Accounts (HSAs) which allow employees to earn cash and invest it tax free. Employees can also use it to pay for healthcare expenses tax free.
Currently there are only about $30Bn invested in HSAs and the market is expected to mature at $600 Bn to $1,000 Bn.
Shift from Defined Benefit to Defined Contribution pensions
The US has led this transition with the launch of legislation for 401(k) plans in 1978. In Europe this transition is still ahead with the UK being the first mover. This transition allows firms with strong customer offerings for tax wrapper to significantly increase their assets under administration.
In the UK only 32% of pension assets are in Defined Contribution assets vs more than 60% in the US. In the rest of Europe the percentage is less than 10%.
Professionalization of convenience stores
In North America and parts of Europe convenience stores are still dominated by mom-and-pop stores. Large professional convenience chains are now in the process of consolidating this sector through both building new stores and acquiring existing ones. Acquisitions tend to come at low multiples and chains are able to extract significant synergies from procurement and better assortment options.
In the US the top 10 convenience retail operators (including the only 2 with national presence) have only about 17.5% of total market stores.
Shift of computing to the cloud
Companies and startups are increasingly moving a higher proportion of their IT investment to the cloud to lower costs, increase flexibility and reinforce redundancy of resources.
Spend on cloud computing is reportedly growing at 19.4% to $256 Bn in 2018 vs. global IT spending of $3.5+ Tn.
Growth of Fast Fashion Apparel retail
Fast-fashion model is proving to be a more responsive and resilient model to serve consumers in the fashion business. Fast Fashion players are able to offer a higher number of collections (up to 25) during the year by reducing the design-to-shop time. Fast fashion players are also able to increase the percentage of in-season buying to quickly replenish items that are selling fast.
1 If you are interested in learning more about this topic and additional examples of how our brain can trick us, I strongly recommend the book “Influence” by Robert Cialdini. In the US you can buy it on Amazon on: https://www.amazon.com/Influence-Psychology-Persuasion-Robert-Cialdini/dp/006124189X