Darkest before dawn for UK small caps?
This article first appeared in Professional Adviser on 10 June 2022 Fool me once, shame on you; fool...
While myself and my husband have tried to make sure our children continue their learning via home school, PE lessons via Joe Wicks, and guitar/ballet lessons via Zoom, there is no doubt that screen time has increased in the Slator household.
A new subscription to Netflix has been a godsend for the evenings, and Youtube kids has guaranteed no interruptions when recording the Investing on the Go podcast.
Both of these services are great examples of how, for some companies, the Coronavirus has actually pushed customers in their direction: streaming – as the chart below shows – has been one of the big beneficiaries of lockdown.
As Chris Ford, manager of Smith & Williamson Artificial Intelligence fund, commented: “With so much time to be spent at home, a Netflix subscription now seems perhaps the best value £5.99/month that one can spend. And we suspect there will be very few cancelled subscriptions in the coming weeks. For Netflix, its vast library of fresh content will allow it to continue to entertain customers during lockdown, something that media providers more reliant on sports programming will struggle to do.
“Netflix downloads in Asia saw 28% year on year growth in February, as the virus took hold in that region. And such was the intensity of streaming activity in Europe that the EU had to request Netflix (and other streaming services) to restrict its bandwidth usage for fear of overburdening the network.”
Having to ‘fight’ the family and their multiple devises for home internet bandwidth, I can sympathise with this. According to Andrew Greenup, co-manager of First State Global Listed Infrastructure fund, internet usage is in fact up some 30%-80% at different times of the day. But this also means that mobile towers – a 9% sector holding in his fund – are infrastructure assets that are seeing unprecedented demand.
Streaming services aren’t the only online activities that are seeing vastly increased demand. Gaming is up too – as we also know only too well at home, having to listen to one-sided (usually shouted) conversations from our son every night, when he plays Fortnite with his friends.
In fact, sales of the latest video games have smashed records as millions are stuck at home. And there are plenty of Elite Rated funds tapping into this theme – in particular UK smaller companies, where many of these companies reside.
TB Amati UK Smaller Companies fund owns Sumo Group*. The company offers end-to-end services to the video games industry and beyond – from visual concept design and pre-production, through to development, user-interface design, marketing and post-release support. It is seeing the benefits of the demand explosion.
T. Rowe Price European Smaller Companies fund has both Team 17 (the British video game developer and publisher based in Wakefield) and Codemasters in its top ten holdings*.
Unicorn UK Smaller Companies also owns Codemasters*. The video gaming company based in Southam owns the rights to the F1 game and is benefiting from the new F1 Esports Virtual Grand Prix series. It features a number of current F1 drivers and has been created to enable fans to continue watching Formula 1 races virtually, replacing every postponed Grand Prix event.
Marlborough Special Situations manager Giles Hargreaves, commented recently that “Social distancing and a lack of recreational alternatives could be a boon for gambling and gaming companies, and we have added to Gamesys and Frontier Developments (the video game developer).” Gamesys is known for its online bingo and casino games, with a range of brands including Jackpotjoy and Virgin Games.
Away from the UK, Brown Advisory Global Leaders managers say that: “More time at home has been a tailwind for both Electronic Arts and Tencent, as people entertain themselves with digital gaming.” Tencent boasts substantial holdings in a number of publishers and developers across the sector, including Riot Games, Activision Blizzard, Ubisoft and Epic Games. Entertain Arts (you’ll recognise the ‘EA’ logo on games boxes) is one of the biggest gaming companies in the Americas and Europe and has brands such as FIFA and Battlefield in its range.
Its rival Activision Blizzard is owned by Smith & Williamson Artificial Intelligence. Chris Ford commented: “It has the benefit of being able to continue to generate new content through the period of social distancing. While many games developers are now working from home, their ability to generate new code, artwork and gameplay is largely undiminished. In prior recessions, US gaming software revenues have grown: in 2001 by 9%, and in 2008 by 24%. When Activision launched its new Battle Royale game Warzone in March, some six million people played it in the first 24 hours.”
Hermes Global Emerging Markets SMID Equity holds NC Soft, a Korean online gaming software developer that has a hit PC title ‘Lineage’ (an online role-playing video game in which a very large number of people participate simultaneously) and a successful following for its mobile offering ‘L2M’. “The company is benefitting from users staying at home due to the outbreak, and longer time spent on L2M by each player, which increased 40% month-on-month in March – 55% higher usage time than that of a competing game,” the fund manager said.
And finally, Baillie Gifford Japan Trust owns Mixi. Manager Matthew Brett said: “It’s an internet company that follows a ninja-like tradition of Japanese tech: after a spectacular strike, wait in the shadows until written off – then strike again.” Mixi’s first incarnation was as a social networking site, then Facebook came along. It rebooted as a game developer, with smash hit Monster Strike.
Its next big idea is gaming for Japan’s biggest growth market: its senior citizens. Mixi wants to help the swelling ranks of Japan’s elderly lead independent lives with an app that enables them to track gains in strength from exercise – combined with the fun of mobile gaming.
Can’t wait to tell Grandma Slator about it…
*Source: fund fact sheet, 31 March 2020