An Ecommerce Review: should investors worry about negative tech headlines?
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An Ecommerce Review: should investors worry about negative tech headlines?

A Closer Look at Market Volatility and Sector Rotation:

The first quarter of 2018 has been a volatile period for the markets as a whole, with the technology sector seldom out of the headlines, and seeing some capital rotate out of the sector. The reasons for this market volatility are well known with the US administration’s protectionist behaviour risking a trade war with China. Similarly, the apparent sector rotation out of tech stocks has clear catalysts including the Facebook/Cambridge Analytica travails, Trump’s comments relating to Amazon, and antitrust worries.

However, taking a more measured and in-depth look we see that headlines have served to heighten tensions which have not translated into a material underperformance of the tech sector. The global equity market (MSCI World Index) and US stock market (S&P 500) are down -1.8% and -1.2% year to date, while the NASDAQ (a common proxy index for US tech) is up +2.3%. This serves to illustrate that while technology stocks have led in terms of negative headlines they have also, counter intuitively, led in performance. Even looking at the last month’s performance the NASDAQ retreated -2.7% against the S&P500 decline of -1.9%, only an 0.8% percentage point underperformance. This shows that the reality of performance is at odds with the sometimes-panicked nature of the front pages relating to the tech sector.

Ecommerce Continues to Outperform:

The Ecommerce Fund has outperformed in both periods returning +6.5% year to date and declining only -1.6% over the last month, with implementation of rigorous investment disciplines the key determinant in the Fund’s performance. Taking a Growth At a Reasonable Price (GARP) approach to stock selection ensures that the Fund does not invest in overly hyped, expensive companies that are unable to generate positive cashflows; characteristics which have performed poorly recently. Instead, the Fund looks to select companies with proven business models, positive cashflows and reasonable valuations, as evidenced by the portfolio’s average forward free cashflow yield of 4.3%, with earnings forecast to grow by 18% in 2018 (source: Bloomberg consensus).

The Fund also takes a diverse risk-based approached to portfolio construction, with position sizing determined by a stock’s risk (volatility) ensuring that large positions are not accumulated in the most volatile investments, serving to limit risk and protect the Fund in the event of market downturns. The Ecommerce Megatrend is a multi-decade global phenomenon that extends beyond geographies and sectors. To invest successfully in Ecommerce a diverse portfolio is not just an advantage but a prerequisite. As a result, the Fund’s holdings extend far beyond the technology sector, meaning the performance of the Fund is subject to multiple drivers beyond those that dictate the performance of the NASDAQ.

graph 0504 ecommerce


The aforementioned investment disciplines combined with the vigour of the Ecommerce Megatrend have yielded strong fundamental performance of the Fund’s holdings. In the last quarter 80% of company beat market consensus expectations on sales growth, and surprised on earnings by 5%. This is the 11th straight quarter that the Fund’s companies have outperformed market expectations.

The Effect of Facebook’s Big Data Woes:

The Facebook/Cambridge Analytica debacle has served to illustrate the analytical and commercial power of big data, even going so far as to underline the competitive advantages that large/artificial intelligence business models have. However, this is not the massive revelation that the old media (who detest the new media companies, which are “eating their breakfast, lunch and dinner”) suggest, as most users of ‘free’ platforms are aware that the price they pay for access is their data. The use of this data for political purposes has, perhaps rightly, raised concerns. While this may cause some users to drop their accounts or restrict their data it is unlikely to change the long-term earnings power of big data driven companies – though on an individual company level we expect restructuring at Facebook (which the Fund no longer holds) to hurt time spent on the platform and margins through 2018. However, the bigger risk is the use of the current negative news cycle to push through new regulations, with the current US administration unlikely to protect their global champions. We view that the recent sectorial decline has served at least partially to discount this risk while the portfolio is well positioned, having only a very modest allocation towards the FANGS at c.9%.

*All performance figures in USD as of 29.03.2018 unless otherwise stated. Ecommerce performance USD I-Class.

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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.