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Clyde Roussow

Competitive edge

26 April 2017

In his quest for income, Clyde Rossouw of Investec Asset Management seeks out companies with strong competitive advantage and strong, sustainable business models.

It is a fact of life that, however well it is regulated, the market rarely offers all companies a perfectly level playing field. Moreover, as companies become increasingly adept at what they do, they can legitimately tilt the field still further in their favour – although some sectors provide better opportunities than others.

Clyde Rossouw of Investec Asset Management, manager of the St. James’s Place Worldwide Income fund that was launched at the end of last year, has made companies with strong competitive advantages a particular focus, especially those in business sectors with high barriers to entry. These corporate advantages are usually hard to replicate and, partly in consequence, the companies concerned often hold dominant positions in the market. If they manage to avoid significant leverage, then such companies are more interesting still.

“Among ‘quality’ businesses, we most like those that are highly cash-generative and able to generate sustainably high returns on capital with strong, free cash flow support,” says Rossouw. “We believe that the income generated by this type of quality company is more durable and faster-growing than other sources of equity income.”

Travel dividend

In November 2016, Rossouw purchased a holding in Amadeus, a leading transaction processor for the travel and tourism industry. Amadeus acts as an intermediary between travel providers, like airlines and tour operators, and travel vendors, such as travel agencies and media companies. In 2016, Amadeus processed around 595 million travel agent bookings.

The company has hitched its wagon to a global industry that is already following a strong trajectory. Travel and tourism accounts for 10% of global GDP and the industry is predicted to grow by almost 4% a year to 2019, according to the World Travel and Tourism Council.1

Yet Amadeus’s competitive advantages are of equal importance. The company has developed an extensive network that is extremely difficult to replicate, and clients must pay high switching costs to change provider, since they use Amadeus terminals. Moreover, a look at its books makes clear that its finances are relatively secure.

“The business has strong and sustainable cash flow, as the majority of revenues are transactional,” says Rossouw. “Sales are linked to global travel volumes, rather than to aggregate travel spending, which keeps earnings resilient. The transactional nature of its revenues also ensures that earnings are not correlated to the cyclicality of the profitability of the airline industry.”

Game on

Yet if increasing numbers like to travel, others still prefer to remain at home on the sofa – and find very different ways to spend their money. The Investec team owns shares in Activision Blizzard, one of the world’s leading video game developers.

“We believe it has the best track record of maximising long-term profits from existing game franchises,” says Rossouw. “This is within a global industry that is forecast to grow at around 5% a year up to 2020.2

Rossouw believes Activision is particularly strong across the console and PC gaming subsectors, areas in which the barriers to entry are immense due to the capital required for developing games and for employing large development teams.

It has some significant games in its collection, among them Call of Duty, the most successful video franchise of the past 20 years, World of Warcraft, and Skylanders. Moreover, in late 2015 it acquired several more, among them Candy Crush and Pet Rescue, when it acquired King Digital Entertainment. Daily active users play King Digital’s games for an average of 34 minutes per day.3

Rossouw argues that its user base provides resilient revenues, providing the company with plenty of potential to further monetise mobile users. Moreover, he sees prudence at the top.

“The company’s management team boasts a strong record of successful capital allocation and members remain significant shareholders in the business,” says Rossouw. “Plus the company has a strong pipeline of new gaming franchises, with the successful launch of Overwatch in 2016 – the fastest game to reach over 25 million users in Blizzard’s 25-year history.”

 

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. 

The opinions expressed are those of Clyde Rossouw of Investec Asset Management as of `April 2017 and are subject to change at any time due to changes in market or economic conditions.  This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy.  The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.

1 https://www.wttc.org/-/media/files/reports/economic-impact-research/regions-2017/world2017.pdf
2 PricewaterhouseCoopers: http://www.pwc.com/us/outlook
3 Activision Blizzard, February 2017

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