Loomis Sayles’ Growth Equity Strategies Team’s patient, long-term approach is described here by Hollie Briggs, as she expands on the team’s thinking around Amazon as a long-term portfolio holding.
Companies like Amazon, Alphabet and Facebook are holdings we see in many portfolios today, so how do you differentiate yours from the pack?
Even if stock holdings in the FANGs – Facebook, Amazon, Netflix and Google – are ubiquitous today, it’s not only a matter of what you own, but when you’ve owned it – and how you’ve owned it. Consider, for example, how many managers held any of these companies in their portfolios for the last ten years?
Well, last year we did the analysis to understand the data behind that statement. To help tell the story around it, let’s look at Amazon as a stock holding.
We’ve been managing our large cap growth strategy since 1 July 2006. We looked at all the data from that point to end of May 2017. Of all the open-ended funds, 4,192 funds have held Amazon at some point or another during that timeframe. Of those managers, how many held it the entire time, like we have? The answer is 61 managers – or 1.5%. And their median position size? Just 1%. Our median position size has been 6%.
The fact that Amazon is a top holding – and that is has been a top contributor to our portfolio performance – is not down to luck. It is the result of an active, informed – and differentiated – decision.
The analysis was performed on the ten companies we’ve held in the large cap growth strategy since inception, which, as at the end of June 2018, now has a 12-year track record. We also did this analysis on the three companies we’ve owned since IPO in the large cap growth strategy. Interestingly, the ratio of the outcomes that I mentioned for Amazon is similar for these companies too.
What is it about these companies that allows you to hold them for so long?
The starting point for our research process is always to identify high-quality businesses. And by that we mean companies with high barriers to entry.
If you are unable to keep your competitors at bay, your ability to protect and extend your market share and your profitability is at risk. So that’s our starting point. In fact, if a company doesn’t meet our high-quality characteristics, we don’t’ care how fast it’s growing or how cheap it might be – we won’t buy it.
Second, is the search for sustainable growth. This comes from secular drivers of growth – the structural changes in the way we live our lives or conduct our business that are not going to stop in five years or even ten years. These are long-term drivers of growth. Examples would be the shift from bricks and mortar retail to online retail, or the shift from traditional advertising to online advertising.
We then look at this in the context of the high-quality businesses themselves. A company’s ability to capture the secular growth is directly tied to their quality characteristics.
We consider growth in the context of the addressable market. So, if we think of Amazon again, for example, it’s total addressable market is some $15 trillion in retail spending globally.
The penetration of online today is about 10% of that global retail spending. Twelve years ago when we bought Amazon for our portfolio, it was closer to 3%. So we’ve had 12 years of superior growth - quarter over quarter, year on year – and the needle on the penetration has gone from just 3% to 10%.
Our patient, long-term focus means we’re able to take advantage of the myopic view of short-term investors and capture the value in the long run.
Is there much growth left in a company like Amazon?
We believe so. First, Amazon has strong and sustainable competitive advantages that would be difficult for competitors to replicate. And the secular growth driver for Amazon – the shift from traditional bricks and mortar retail to online retail and e-commerce spending – is not going to be fully realised in the next five or even ten years.
Amazon offers millions of products – sold by Amazon or by third parties – with the value proposition of selection, price and convenience. While Amazon represents about 20% of e-commerce retail, that market share translates to less than 2% of the $15 trillion global retail market.
We believe the long-term secular transition to e-commerce is still in its early stages of growth. Over the next decade, we expect e-commerce spending can exceed 20% of the global retail market. E-commerce and related businesses account for approximately 81% of Amazon revenues.
Amazon’s AWS business possesses sustainable competitive advantages, such as its massive scale. It has over one million customers and has exceeded a $20 billion annual revenue run-rate. We believe AWS can grow in excess of 20% annually over our investment horizon.
Given that AWS margins are structurally higher than Amazon’s overall e-commerce business, we think the operating profit potential can approach 50% of the company’s core e-commerce opportunity.
And in terms of valuation, we believe the assumptions embedded in Amazon’s current stock price show a lack of appreciation for the company’s significant long-term growth opportunities and the sustainability of its business model. Amazon shares are trading at a significant discount to our estimate of its intrinsic value and offer a compelling reward-to-risk opportunity.
To hear more about the long-term approach of the Growth Equities Strategy Team at Loomis Sayles, watch the videos here: https://www.im.natixis.com/uk/portfolio-construction/loomis-sayles-growth-equity-strategy-update
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