Part of Netwealth's portfolio construction webinar series - Theo Maas & Sam Stobart from Arnhem Investment Management presented to an audience on 18th November 2016 and shared their thoughts on why investors should consider looking beyond Apple stocks when thinking of investing globally.
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Disclaimer
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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090
569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared
without taking into account the objectives, financial situation or needs of any individual. The information provided is not
intended to be a substitute for professional financial product advice and you should determine its appropriateness having
regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from
Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any
Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no
person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any
loss suffered by any person arising from reliance on this information.
4. | Netwealth
Meet today’s speakers
Theo Maas
Portfolio Manager Global SMA
Arnhem Investment Management
theo.maas@arnhem.com.au
4
Sam Stobart
Head of Distribution
Arnhem Investment Management
sam.stobart@arnhem.com.au
5. Agenda
www.arnhem.com.au 5
1. Growth investing and the importance of industries
2. The Apple iPhone food chain
3. Micro industries: The good, the bad and the ugly
4. Arnhem Global SMA’s
5. Q & A
7. Growth Investing
www.arnhem.com.au 7
• Where value investors might look for bad news they
think will improve, growth investors look for good
news they think will get better
• Growth investors focus on the future potential of a
company
The argument:
That superior long-term equity performance is driven by
above-average, sustainable earnings growth
8. Growth Investing
www.arnhem.com.au 8
But what about the Industry?
Industry structure and a company’s relative position within that
industry are critical determinants of that performance
9. The Importance of Industry
www.arnhem.com.au 9
Would you want to be involved in the
airline industry?
Would you want to be involved in the Retail Industry?
10. “What industry did you say?”
www.arnhem.com.au 10
“Consumer Discretionary”
• Auto Parts & Equipment, Tires & Rubber, Automobile Manufacturers, Automotive
Retail
• Home Furnishings, Homebuilding, Household Appliances, Home Improvement Retail,
• Leisure Products, Apparel, Accessories & Luxury Goods, Footwear, Textiles,
• Casinos & Gaming, Hotels, Resorts & Cruise Lines, Leisure Facilities, Restaurants,
• Advertising, Broadcasting Cable & Satellite, Movies & Entertainment, Publishing,
• Catalogue Retail, Internet Retail, Department Stores, Apparel Retail,
• Computer & Electronics Retail
11. True diversification is achieved globally
www.arnhem.com.au 11
The Information Technology sector is just 1.3% of
the S&P/ASX 200 index and limited to Software
and Data Processing
But where are IT Services, Hardware,
Communications Equipment and Semiconductors?
Information Technology is a broad ranged sector
which needs to be dissected to be truly
understood
Micro Industries are Arnhem’s preferred basic unit
of analysis
1.3%
15.3%
ASX200 World Ex-Aus
IT Benchmark Weights
Source: Bloomberg 31 October 2016
13. The Apple iPhone Food chain
www.arnhem.com.au 13
● Apple has had a colourful history to become the largest
company in the world with a market cap of US$600bn+
● From the launch of the first iMac in 1998 to the watershed
moment of the iPhone launch in 2007, the company has
become the bellwether in the technology sector
● Apple has hundreds of suppliers: 346 in China, 290 in Asia
ex-China, 85 in The Americas and 45 in EMEA
● Ranging from the design at Apple HQ in Cupertino to the
final assembly at Foxconn in Shenzhen
● There are 22 different chips in an iPhone 6 (e.g. Processor,
DRAM, Flash, Power Amplifier, LTE Modem, RF Transceiver,
Audio, GPS, Gyroscope/Accelerometer)
16. iPhone related micro industries
www.arnhem.com.au 16
Micro Industry Companies Arnhem View
Semiconductor: Design & IP
Limited number of players, no capex required,
visibility of revenues. ++
Mobile Apps
Fast growing, but very competitive. Apple,
Google and Facebook gatekeepers. +
Semiconductor Equipment
Industry structure rapidly improving due to
M&A. Lithography market highest conviction. +
Displays Commoditised with high capex intensity. -
Smartphones
Increasing competition from China,
replacement cycles lenghtening. -
Silicon Wafers Limited added value, buyer power strong. -
Silica Sand Highly commoditised industry. --
Semiconductor: Memory Commoditised with high capex intensity. --
17. Semiconductor: Design & IP
www.arnhem.com.au 17
• These industry players are the designers of
semiconductors
• Capital light, not involved in fabrication
• Revenue model based on licenses and royalties, related
to the number of chips sold that includes the design
• High barriers to entry given patent portfolios and limited
talent pool
• Arnhem had exposure through UK based ARM Holdings,
which was bought in July at a 45% premium by Japanese
Softbank
No current position in our portfolios
In 2015, more than 15 billion ARM-based chips
were sold. To date, more than 86bn chips based
on an ARM-design were shipped. ARM gets about
4 to 5 pence (GBP) for each chip.
18. Mobile Apps
www.arnhem.com.au 18
• High growth industry, with low barriers to entry
• Competition from traditional players (console and PC
games), but new start-ups emerge every day
• Gatekeepers Apple (App Store) and Google (Google Play)
take 30% of the revenues generated
• Need to get to scale and repeatable content (franchises
like Candy Crush or Angry Birds)
We have a position in Activision Blizzard. Through the
acquisition of King Digital it is now one of the biggest
players in mobile apps.
In 2015 US consumers played (and watched others
play) Activision game content for 42bn hours. That is
similar to Netflix, but around 4x the national
viewership of all major sports combined.
19. Semiconductor Equipment
www.arnhem.com.au 19
• Highly specialised market dominated by a handful of
players globally. ‘Moore’s Law’ is in their hands
• Cyclical growth industry dependent on capex budget in
the chip industry
• Very high barriers to entry, given the unique nature of
most technologies
We have a position in ASML, the market leader in
lithography which is the most critical step in making a chip
ASML’s Lithography machines are highly complex
and very expensive. The current generation sells for
around 25m EUR. The new generation (EUV or
Extreme Ultra Violet) will sell for 100m EUR each.
20. Displays
www.arnhem.com.au 20
• High volume market with very high capex intensity.
Economies of scale determine your competitive position
as customers like Apple and Samsung demand tens of
millions of units at the lowest price
• Hard to differentiate as technology cycles are relatively
long (LCD, LED, OLED)
• Market is dominated by Asian players (Samsung, LG,
Sony)
• Characterised by low margin & low ROI
No current position in our portfolios
The “new new” thing in smartphone displays will
be flexible OLED (Organic Light-emitting Diode)
screens, which do not need any backlight (great
contrast, saves battery life) and will be wafer thin
and bendable in any shape.
21. Smartphones
www.arnhem.com.au 21
• The smart phone industry is dominated by two
platforms: IOS (Apple) and Android (Samsung, HTC, LG,
Xiaomi, Huawei). IOS is losing share against Android.
Windows, Blackberry and Symbian (Nokia) have all
disappeared.
• Replacement cycles are lengthening (from less than 2
years to 2 – 3 years), due to lack of innovation
• Competition from Chinese vendors (Huawei, Xiaomi) is
intensifying
No current position in our portfolios
The new Xiaomi Mi Mix phone showcases how
far the Chinese manufacturers have come. With a
6.4-inch ‘edge-to-edge’, 16 megapixel camera
and designed by Philippe Starck, it sells for half
the price of an iPhone or an exploding Samsung.
22. Silica Sand
www.arnhem.com.au 22
• The most commoditised micro industry in the whole food
chain (it literally is sand). While you can’t make silica sand
in your kitchen, it’s not rocket science and hence typically
part of a building material company
• Shares the same problem with the silicon wafer industry
in terms of customer concentration, hence is a price taker
not setter
• It is one of the cheapest input costs in making a chip, so
most wafer manufacturers are not worried who supplies
them
No current position in our portfolios
Sand is the building block for silicon to create
chips. You do need pure sand, called silica sand
and the process involves heating it to 2,000
degrees Celsius before transforming it to silicon.
23. Silicon Wafers
www.arnhem.com.au 23
• Hopelessly commoditised industry with just a handful of
dominant (mainly Asian) players. Economies of scale
rule.
• Differentiation is very difficult; the product specifications
vary little and technological innovation (such as going
from 8 to 12-inch wafers) happens once every 15-20
years.
• Customer base (the big chip players like Intel and TSMC)
is very concentrated and does not help bargaining power
No current position in our portfolios
Once you have pulled a cylinder shaped ingot from
silicon, you can slice thin discs or wafers from it. The
thinner the better with the most common diameters
being 4, 8 and 12-inch.
24. Semiconductor: Memory
www.arnhem.com.au 24
• The worst of two worlds: highly commoditised and very
capital intensive. Due to this, the industry is very cyclical.
The industry is dominated by a handful of players
(Samsung, Micron, Hynix).
• Two dominating products: DRAM and NAND Flash. Both
essential parts of any PC, notebook or smartphone.
• While demand for data capacity is growing rapidly,
price/GB is coming down just as rapidly.
• High barriers to entry (capital intensity is very high).
No current position in our portfolios
Samsung’s latest chip-making plant (fab) will be
located south of Seoul and ready in 2H17 and will be
specialising in NAND Flash. The budget for this fab
is USD$14.7bn (the GDP of Jamaica).
25. Apple: A great company, not a great stock
www.arnhem.com.au 25
• Apple’s profitability is very (70%+) dependent on the iPhone
• The smartphone industry is very competitive with high
returns attracting new entrants (China)
• Smartphone replacement cycles are lengthening (2 years +)
due to lack of innovation
• New products (Watch, Car) or Services (iCloud) are not
material enough to compensate
• The big pile of cash (US$250bn) will not be used
productively (tax repatriation, lack of M&A)
• With Revenue/EPS going backwards (10% in FY2016), AAPL
has ‘value trap’ written all over it
27. Arnhem’s SMA Solutions
www.arnhem.com.au 27
Arnhem Global SMA’s; Arnhem Australia+ and Arnhem Global Growth, are designed specifically to
deliver true equities diversification to Australian investor portfolios
Global
Equities
Growth
Australian
Equities
Franked
income
Global
Equities
Growth
Arnhem Australia+
Balanced Exposure
Arnhem Global
Growth
Complementary Exposure
Income and growth portfolio designed for pre-retiree,
transition to retirement and pension investors who need to
balance income requirements with longer term capital growth
demands.
The Australian equity component targets a 4% gross yield.
Growth portfolio designed for investors with
an existing direct Australian equity portfolio.
Provides capital growth potential with genuine
equities diversification.
28. Arnhem Global SMA Characteristics
www.arnhem.com.au 28
Arnhem Global SMA portfolios are high conviction, low turnover and hold 15 – 30 high quality stocks.
The portfolios provide genuine equities diversification by investing in high growth industries and
companies not available in Australia.
0% 2% 4% 6% 8% 10% 12% 14%
ASX200
MSCI World ExAus
Arnhem Australia +
Arnhem Global Growth
3 Year expected EPS growth
Source: Bloomberg, as at 31 October 2016
29. Performance
www.arnhem.com.au 29
Arnhem Australia+
Performance (Gross) 1 Month 3 Months 1 Year YTD 2016
Inception
1.1.2015
Arnhem Australia+ -2.61% -3.69% 0.25% -0.52% 10.42%
S&P/ASX 200 Acc. -2.15% -3.20% 6.11% 4.00% 6.67%
Outperformance -0.46% -0.48% -5.86% -4.53% 3.75%
Arnhem Global Growth
Performance (Gross) 1 Month 3 Months 1 Year YTD 2016
Inception
1.1.2015
Arnhem Global Growth -1.77% -4.14% -6.68% -3.05% 15.34%
MSCI World ex-Australia
(Net AUD) -1.22% -1.58% -5.28% -0.94% 10.27%
Outperformance -0.55% -2.56% -1.40% -2.11% 5.07%
Source: Arnhem. Gross performance with dividends reinvested as at 31 October 2016. The respective model performance has been calculated using the 1 January 2015 Model portfolio positions. Any model portfolio that
commenced on a date other than the one specified may hold different positions and will experience different returns which may be better or worse than the Arnhem model referenced above
100
110
120
130
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Performance since inception
Arnhem Global Growth
90
95
100
105
110
115
120
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Performance since inception
Arnhem Australia+
31. Disclaimer
www.arnhem.com.au 31
This presentation may not be copied or distributed or passed on, directly or indirectly, to any person without the express consent of Arnhem Investment
Management Pty Limited ABN 17 129 606 775, AFSL 332484 (Arnhem). This presentation is produced for general information only and shall not constitute an
offer to sell or any type of solicitation or form the basis of or be relied upon in connection with any contract or commitment whatsoever or be taken as
investment advice. You should seek your own professional advice in relation to investments in the funds presented.
In New Zealand, Arnhem is an exempt provider under the Financial Advisers Act 2008 that is permitted to provide financial adviser services to wholesale
clients as overseas financial advisers as it does not have places of business, and does not provide any financial adviser services to retail clients. In New Zealand
this document is only being provided to institutional investors whose principal business is in the investment of money or persons who, in the course of, and
for the purpose of their business habitually invest money, or are wealthy and experienced in investing money or are experienced in the industry or business to
which the securities relate, or are otherwise not members of the public for the purposes of the Securities Act 1978.
The information contained in this presentation has been compiled to furnish you with an opportunity to examine and evaluate the funds mentioned. Arnhem
has not considered the specific investment objectives, financial position or needs of any specific recipient. While great care has been taken to ensure that the
information is accurate, Arnhem, to the extent permitted by law, disclaims all responsibility and liability for any omission, error, or inaccuracy in the
information or any action taken in reliance on the information and also for any inaccuracy in the information contained in the presentation which has been
provided by third parties. Past performance is not necessarily indicative of future performance.
32. Thank you
Disclaimer
This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090
569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared
without taking into account the objectives, financial situation or needs of any individual. The information provided is not
intended to be a substitute for professional financial product advice and you should determine its appropriateness
having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained
from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in
any Netwealth product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate),
no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for
any loss suffered by any person arising from reliance on this information.
