The approach of the Global Equity Team around Frank Schwarz is to look for global companies that have the highest potential for growth over the long-term, i.e. seven or more years. Their focus are not short-term sector rotations and leave to the side smaller and short-lived fluctuations in the stock markets. Instead, they research which structural trends are likely to shape the future and, thus, which companies are likely to be the frontrunners promoting and developing these trends. Three such important trends are e-commerce, digital advertising and artificial intelligence (AI).
The global growth rate of e-commerce for 2018 is estimated to be 21 percent. The two biggest companies are Amazon in the US and Alibaba in China. Amazon’s penetration in the US is currently 42% of online sales and 4% of retail sales. This makes it the number one platform worldwide (except in China). Both firms are constantly developing their product range and use data to react to new developments and trends in order to consolidate their position as industry leaders.
Amazon’s overall net revenue in 2017 was almost 178 bn USD, up from almost 136 bn USD in 2016. While Amazon has a range of products such as advertising, Amazon Web Services, and the Amazon Echo, in 2017, the majority of its net revenues were generated through online retail product sales. It is estimated that its projected valuation for 2019 will be 7 times the Gross Operating Profit and 2.5 times of sales revenue.
Alibaba already had a penetration of 80% of the Chinese e-commerce in 2014 and 10% of all retail. In 2017 its gross merchandising value grew by 22% to 547 bn USD in China. Its high growth rate is expected to continue over the next years as it continues to expand its retail, cloud and financial business.
In 2016, digital advertising revenue surpassed TV ad revenue for the first time. In the first six months of 2017 alone digital advertising grew by 23 percent YoY to 40 bn USD. Social media advertising grew by 37 percent to 9.5 bn USD. The social network giant Facebook, one of the two biggest digital advertising providers worldwide, generated 40.7 bn USD of revenue in 2017 compared to 27.6 bn USD in 2016. Facebook now has a total of 2.1 bn users, WhatsApp 1.5 bn, Messenger 1.3 bn and Instagram 0.8 bn – the latter is growing at the fastest rate.
The social network company Tencent in China, well known for its messaging service WeChat, also has a fast growing online advertising business. In 2017, it reported a 61 percent rise in third-quarter sales, online advertising revenue increased by 48% and this growth rate is likely to continue as it gets more of the market share.
Another trend that is increasingly establishing itself as a long-term fundamental is AI. While the worldwide AI chips revenue was 3.2 bn USD in 2016, it is expected to rise to almost 90 bn USD by 2025.
Nvidia, known as a manufacturer of graphics cards originally designed for gaming only, has diversified into AI-optimized computer chips which are now are now also available for data centers, a fast growing part of the business. The revenue of data centers accounted for roughly 20.8% in the last quarter of 2017 (compared to 13.6% one year before) meaning the business grew by 104% YoY based on the last quarter of 2017. It is believed that these high growth rates will continue.
Keyence is a key player in artificial intelligence and robotics producing advanced automation sensors as well as bar-code readers and digital microscopes. It is benefiting hugely from industrial-automation boom as well as from the Internet of Things’ need for sensors and connectivity. It is also a producer of 3-D vision systems, a sector that is growing at a rate of 30% a year. Its revenues rose by almost 22% over 2017 and net income grew by 30%.
Structural trends that grow at these or comparable rates are the reasons for the choice of this approach to achieve attractive returns for investors, which has resulted in an alpha of 51% against the MSCI World Index since inception of the MainFirst Global Equities Fund C on 1 March 2013.
 *MainFirst Global Equities Fund C, ISIN: LU0864710602, as at 31.01.2018.
 Source: Bloomberg