UY Scuti is one of the largest stars in the known universe. It is 1700 times the size of our Sun. Such large stars are rare but they grow in size quickly and have relatively short lifespans. When these stars run out of fuel, the gravitational pull of the dense core far exceeds the outward force from the nuclear fusion at the center. In a split second these mega stars explode in a spectacular fashion. The result is one of the biggest cosmic fireworks in the universe, called a Supernova.
The investment world also has a few super massive corporations today. The similarities with these large stars are striking. To many observers, much like the massive stars, such companies look wonderfully positioned with strong growth rates. What’s bubbling beneath this glowing surface, however, is usually a precarious balance between rising risks at the core and growth at the surface that likely will be incrementally harder to come by.
Facebook (Meta)*, Apple, Microsoft, Amazon and Google (Alphabet) are among the largest global companies by market capitalization and profits. Let’s call them FAMAG. FAMAG’s market capitalization equals approximately 40% of U.S. GDP and FAMAG generates about 15% of U.S. corporate profits.1 However, FAMAG only pays an average effective tax rate of 13% compared to the 21% corporate tax rate of the U.S.1 Their profits have mostly benefitted a small set of shareholders, founders and management. Inequality in America has now surpassed even the gilded age of the late 1800s. Back then, 2% of the population owned a third of America’s wealth.2 Today just the top 1% controls a similar share of America’s wealth.3
FAMAG’s dominance is a result of admirable innovation, technology leadership and long-term vision. Taking a disproportionate share of wallet from customers and suppliers, acquiring competitors and making gargantuan buybacks has, in our view, helped power their growth. FAMAG spent US$473 billion buying back shares in the last five years.1
Large stars and corporations are exceptions not the rule. Only a few grow beyond a certain size and they swallow anything that comes in their way. Between 2010 – 2019, FAMAG acquired 819 small companies that were below threshold reporting requirements4. Such acquisitions fly under the radar of regulatory scrutiny.
Each of these companies have platforms with more than a billion daily users. Microsoft has more than 75 million enterprise customers5. Amazon garnered over 40% of all e-commerce online retail sales in the US in 20206. Most businesses and individuals have little choice but to become or remain a customer, user or a supplier to these companies. This gives them more user data resulting in a virtuous circle, codified as “the network effect” in management lexicon. Data privacy and security is a huge challenge and regulators have barely scratched the surface in addressing this issue.
FAMAGs have become the engine rooms of society and not just the economy. The above data points in isolation might not pose a risk but viewed collectively should make any government nervous. It seems a question of when, not if, governments will act to check their power. Lina M. Khan, recently appointed chair of the Federal Trade Commission (FTC) is keen to make the anti-trust framework relevant for the 21st century. It is early days but the intent and direction of travel seems clear.
* For illustrative purposes only. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and Stewart Investors does not necessarily maintain positions in such companies. Any fund or stock mentioned in this presentation does not constitute any offer or inducement to enter into any investment activity nor is it a recommendation to purchase or sell any security.
** Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon First Sentier Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and First Sentier Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.
The information contained within this material is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this material.
This material has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and not necessarily views of FSI. Such views may change over time. This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this material without obtaining specific professional advice. The information in this material may not be reproduced in whole or in part or circulated without the prior consent of FSI. This material shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
In Hong Kong, this material is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this material is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors, FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B), FSSA Investment Managers (registration number 53314080C), Stewart Investors (registration number 53310114W), Realindex Investments (registration number 53472532E) and Igneo Infrastructure Partners (registration number 53447928J) are the business divisions of First Sentier Investors (Singapore).
First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.
MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.