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.
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.
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