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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 conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
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 but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material.
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.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced 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.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
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This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval or other steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG). Our investment team operates under the trading name of Stewart Investors which is part of the First Sentier Investors Group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
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To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document 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.
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