The rise of the computer gaming industry, the tightening of food regulation and the death of the brand are among some of the biggest themes set to power markets over the long term, according to Rathbone’s Will McIntosh Whyte (pictured below)).
The assistant manager, who works alongside FE Alpha Manager David Coombs across the firm’s multi-asset portfolios, said it is important to see through short-term market noise or ‘issues du jour’ when building a portfolio set to stand the test of time.
This mindset has worked well for the funds over the years. For instance, their five crown-rated Rathbone Strategic Growth Portfolio has returned 52.94 per cent compared to its average peer and CPI + 5% benchmark’s respective returns of 46.56 and 36.73 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
In the below article, McIntosh Whyte discusses three drivers which have impacted the positioning of Rathbones’ multi-asset portfolios and why he believes they are sustainable over the long term.
The rise of computer gaming 
Coombs and McIntosh Whyte created a bespoke ‘basket’ of computer gaming equities at the end of last year.
Comprising eight stocks, the bespoke fund is already up 70 per cent. However, the managers believe the sector has much further to run over the long term.
“According to data, fewer people are going to the cinema because it’s becoming more expensive, McIntosh Whyte said.
“It’s not just millennials sitting at home playing games, either. If you look at six-to-11 year-olds, two-thirds say gaming is their primary form of entertainment. But your average gamer is actually 35, so it’s more of a broad spectrum than people think. This is why this market area is so large.”
Not only do games appeal to a widening demographic, the assistant manager said the industry is benefitting from the rise of digitalisation, as consumers can now download games online.
Given that costs involved with downloading a game rather than distributing it are much lower, he said revenues are now more attractive from a margin perspective.
“We don’t know a huge amount about individual games – we don’t play them but we recognise the strength of this theme,” McIntosh Whyte explained. “So, we decided to build a structured product by speaking to the sell-side about a variety of different stocks in the space that they like.
“We bought EA Sports, Activision Blizzard who have Call of Duty. Some 12 months ago, Call of Duty’s monthly user base was bigger than Spotify, Netflix and Twitter combined. We also have Ubisoft, Nintendo and DeNA which operates on the logistics side, among others.”
Further down the line, the assistant manager believes the rise of virtual reality will also bolster returns made in the sector.
“We think it is a strong theme which is starting to get picked up more and more by wider investors,” he added.
The death of the brand
The rise of Amazon and its impact on consumer stocks has been a hot discussion topic among investors over recent years.
For Coombs and McIntosh Whyte, one of their biggest concerns is the ability to read reviews of products online and compare prices, meaning consumers have more confidence to buy unbranded items.
“If you go and buy batteries online, you can look at both Duracell products and Amazon’s option. Then you have all these customer reviews saying ‘these last just as long as Duracell batteries and they’re absolutely fine’,” McIntosh Whyte said.
“Of course they’re half the price, so what is that Duracell brand worth any more? You buy batteries for two reasons: one just to make sure that they don’t burst and one is that they don’t run out after two hours.
“You bought Duracell because you believed in the brand but, as people move online, they buy more and more of their basics online. So, when you’re searching Amazon, you can suddenly find alternatives with really strong customer reviews.”
McIntosh Whyte said there are some products that are more susceptible to this trend than others. With the likes of Colgate toothpaste, for instance, it is a product with goes into consumers’ mouths and, because of this, he said they are more likely to remain loyal to the brand as they are familiar with the taste and conscious of the importance of oral hygiene.
“We’re still trying to work out where the potential weak points are,” he continued. “Is it kitchen towels, is it dishwasher tablets? Because ultimately, you don’t care if your dishwasher tablet is a Finish tablet or not, you just want to make sure it cleans your dishwasher. That’s another product that is quite expensive.
“These basics tend to be the products that people buy online. If you talk to people about their consumption habits, people buy less fresh vegetables and meat online because they like to feel and see it, but what people will do is buy the products they know are going to turn up as expected.”
Food testing
McIntosh Whyte said there are several drivers in place which will benefit food testing companies over the long term.
As such, the multi-asset team has exposure to Eurofins, which is a Luxembourg-headquartered group of laboratories that provides testing services to food and consumer product industries.
The assistant manager said: “If you think about the horse meat scandal, people are very wary about what goes into their food now. You have long supply chains and people now want to know what is in that supply chain.
“Companies can test it for themselves, but would they want to do that? Going forwards, we think more companies are going to want to outsource it because it takes away any third-party litigation.
“We think consumers are much more interested in what’s in their food. Interestingly, an analyst told me there are very few food standard laws in the US surrounding whether you can claim a certain food is good for you. We wonder if that’s something that could change which would force companies to do more testing.”
Given the rise in obesity in the developed world, McIntosh Whyte said health concerns will also force more and more consumers to buy food based on their ingredients.
“These themes are not yet baked into numbers but we think, if it takes off, it will provide an interesting growth element,” he added.