July's UK inflation figures provided more evidence of the growing importance of computer games sales, which were among the biggest factors driving the first rise in the consumer price index in eight months.
They also underlined the changing dynamics of the industry, which historically has been heavily weighted towards the Christmas period.
‘Historically, revenues from gaming were quite unpredictable with the majority coming in the fourth quarter when parents put video games under the Christmas tree,’ said Jack Neele, Citywire AA-rated manager of the Robeco Global Consumer Trends Equities fund. While Neele's £1.9 billion fund is based in Luxembourg, it is available to UK investors.
‘Digital downloads have made that a thing of the past, while removing the need to revenue share with retailers to sell the games,' he added.
More consistent revenue streams are among the sector's attractions for Neele, who held Japan's Nintendo (7974.T) and US games developers Electronic Arts (EA.O) and Activison Blizzard (ATVI.O) in his portfolio at the time of the latest annual report.
Train holds 6.2% of his Lindsell Train (LTI) investment trust in Nintendo, while Lindsell has an 8.8% position in his Lindsell Train Japanese Equity fund. The company also makes up 4.9% of the Lindsell Train Global Equity fund, managed by both.
Rathbone Global Opportunities manager James Thomson meanwhile holds both Electronic Arts and Activision Blizzard, with the latter also a feature of the Smith & Williamson Artificial Intelligence fund.
Neele also highlighted the computer games sector's opportunities to deliver additional revenues beyond the initial purchase of a game.
'There are many more ways to monetise games, from advertising to selling virtual items,' he said.
For example, in Fortnite (pictured), a free-to-download game developed by Epic Games, users can buy ‘V-Bucks’, which can be used change the visual appearance of their character or get a ‘battle pass’ to fast-track their performance.
‘Because these are virtual there’s a 100% profit margin for the game manufacturer,’ said Neele.
Shift to digital
Neele (pictured) aims to capitalise on the drivers of spending among the world’s 7.6 billion consumers. The shift to digital accounts for 35-40% of the fund (34% at present) and is one of three lasting consumer trends that the fund invests in.
Some of the world’s biggest technology companies are among its 55 holdings. Amazon (AMZN.O), Google owner Alphabet (GOOGL.O) ad Netflix (NLFX.O) all feature, although Facebook (FB.O) is notably absent, having been sold by Neele and fellow Citywire AA-rated manager Richard Speetjens earlier this year.
That proved an opportune move for the pair: shares in the social media giant slumped 19% on 26 July after it revealed slowing user growth as privacy regulations led to a surprise drop in European users.
The share price plunge wiped $120 billion (£94.4 billion) from the value of the company in the largest one-day hit in corporate history and reverberated around Silicon Valley, sparking a slump across the tech sector.
Neele still regards large technology stocks as ‘structural winners’. ‘We still like the majority of the big tech platforms; their growth record is unprecedented,’ he said.
Social media is an area that Neele is cautious about given regulatory headwinds, but otherwise he is upbeat about sectors like e-commerce amid a ‘retail apocalypse’ on the high street and new growth areas for the big platforms like cloud computing, virtual reality and artificial intelligence.
‘The shift to digital is secular in nature – it’s happening independent of the economic cycle. If the economy slows down a little bit, consumers aren’t going to go back to shopping on the high street,’ he said.
‘We own a lot of e-commerce retailers and those with scale. We own a lot of the streaming businesses that are so popular with millennials – there are no more video stores and very few music shops; it’s all become digital.’
Digital music is reinventing an industry that had been in decline. Global recorded music revenues grew for the third consecutive year in 2017 to reach $17.4 billion, up 8% on $16 billion in 2016, according to MIDiA Research.
Streaming revenues drove that growth, rising 39% to $7.4 billion, or 43% of all revenues – offsetting declines from legacy formats, like downloads and physical albums.
The growth in the middle classes in emerging markets like India and China and consumer loyalty towards strong brands are the fund’s other big themes.
The appeal of brands gives the fund a bit of ballast, given the riskier nature of technology and emerging markets stocks. This typically commands around a third of assets, and currently stands at 39% of the fund.
‘Consumers tend to pursue healthier lifestyles these days and are buying sportswear and making better food choices,’ said Neele.
‘Producers of organic and natural foods are doing very well in that respect, as are companies like Nike (NKE.N) and Adidas (ADSGn.DE). We like the branded sports goods retailers which have this omni-channel combination of selling through department stores, their own retail outlets and their own online shops.’
The emerging market consumer commands the smallest allocation, at 24% of the fund, given that it is the most cyclical of the trends the fund invests in.
Neele accesses this theme directly in companies listed in emerging markets and indirectly through western companies that have a lot of exposure to emerging markets.
Direct holdings include companies like Kweichow Moutai Co (600519.SS), maker of the Chinese grain alcohol baijiu, which is experiencing blistering demand, and Avenue Supermarts (AVEU.NS), which operates DMart, India’s leading grocer. Its shares rose 11% in July after it reported first quarter revenue growth of 27% and profits growth of 43%.