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Digital is Eating the World Seeking Companies on the Correct Side of the Divide
Doug Rao Portfolio Manager
Dematerialization Using less to produce more
Use of third party names, marks or logos is purely for illustrative purposes and does not imply any association between any third party and Janus Henderson Investors, nor any endorsement or recommendation by or of any third party. Unless stated otherwise, trademarks are the exclusive property of their respective owners. 2
Is the Growth Trade Over? S&P 500® growth vs. value 80% 4.5 S&P 500 ® Growth Index S&P 500 ® Value Index
4.0
Growth of 1
Cumulative Outperformance
Calendar Year Returns Growth
Value
3.5
2009
31.6%
21.2%
3.0
2010
15.0%
15.1%
2.5
2011
4.7%
-0.5%
2012
14.6%
17.7%
2013
32.8%
32.0%
2014
14.9%
12.4%
2015
5.5%
-3.1%
2016
6.9%
17.4%
2017
27.4%
15.4%
2.0 1.5 1.0 0.5 Dec-17
Dec-16
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
0.0
Source: Morningstar, Inc., as of 12/31/17. Past performance is no guarantee of future results. S&P 500® Growth Index reflects the performance of U.S. large cap growth equities. S&P 500® Value Index reflects the performance of U.S. large cap value equities. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment.
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Will it Continue? In periods of disruption, past is not prologue “The horse is here to stay but the automobile is only a novelty – a fad.” President of the Michigan Savings Bank in 1903, advising Henry Ford’s lawyer, Horace Rackham, not to invest in the Ford Motor Company Piccadilly Circus, London
c. 1900
Piccadilly Circus, London
c. 1912
The opinions are as of 6/22/18 and are subject to change without notice. Janus Henderson may have a business relationship with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Investing involves risk, including the possible loss of principal and fluctuation of value.
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Moore’s Law In 1965, Gordon Moore predicted that chip capacity, i.e., the number of transistors on a chip, would double every 18-24 months. This prediction has proven more or less accurate over the past 53 years …despite repeated calls for its demise.
“Incredible shrinking transistor nears its ultimate limit: The laws of physics.” New York Times
1997
2000
“The End of Moore’s Law. Given the state of today’s technology, chips can only get so small.” Slate Magazine
2005
“The End of Moore’s Law? The current economic boom is likely due to increases in computing speed and decreases in price. Now there are good reasons to think that the party may be ending.” MIT Technology Review
2016 “After a glorious 50 years, Moore’s Law is running out of steam.” The Economist
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Moore’s Law 1
1
2
3
4
1 5 9 13
2 6 10 14
3 7 11 15
4 8 12 16
Chess Example “As legend has it, when chess was invented in sixth century India, the inventor was given an audience with the emperor. When asked to name his reward, the inventor said he would like just one grain of rice for the first square of the chessboard, and double that number for each succeeding square…”
?
? Source: http://www.michiganfuture.org/01/2017/chessboards-and-rice/
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Moore’s Law At square 32, how many grains of rice does the emperor owe the inventor?
?
4.3 billion grains of rice!
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Moore’s Law
On square 64, the last square on the chess board, how many grains of rice does the emperor owe the inventor?
?
18,446,744,073,709,600,000 Eighteen quintrillion grains of rice!
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Moore’s Law 1 grain of rice. 0.2 inches long.
1965
13.6 thousand miles of rice. ~2018
Enough rice to stretch halfway around the world!
1
58 trillion miles of rice.
Enough rice to wrap around the world 2.3 billion times.
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Growth in Mobile Devices “ Cellular phones will absolutely not replace local wire systems.” - Marty Cooper, inventor of cellular telephone in 1981 Global Population vs. Mobile Phone Subscriptions
Mobile phone subscriptions have grown at ~23% Compound Annual Growth Rate (CAGR) while population has grown at a 1.3% CAGR
Billions
Global Mobile Phone Subscriptions 8 7 6 5 4 3 2 1 -0
1995
1998
2001 Global Population
2004
2007
2010
2013
2016
Mobile Cellular Subscriptions
Source: World Bank, as of December 2016.
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E-commerce Penetration Still Low Growth in U.S. Retail E-commerce
Total Sales
14%
Share of Total Retail Commerce
$600
12%
$500
10%
$400
8%
$300
6%
$200
4%
$100
2%
$0
Market Share
Sales in Billions
$700
0% 2016
2017
2018E
2019E
2020E
2021E
Source: Statista, estimates as of 12/31/17.
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Retail Consumers Preferring Online Convenience Amazon (AMZN) vs. Walmart (WMT) AMZN has shown faster growth and higher margins than WMT Total Revenue
300
Nike Reviews Distribution Strategy
Fortune
… And is close to catching WMT on a total sales basis Revenue as a % of total U.S. retail sales Projected
Walmart
Billions ($USD)
250
12 %
“Nike held firm year after year when Amazon executives returned to Beaverton…while the meetings were friendly, Nike was clear. It had no plans to add the online retail giant as a distribution partner.”
Amazon - $223B
First 20 years of growth for WMT and AMZN after each hit $1B in sales
200 150
9 Walmart $131B
Fortune
Nike CEO
6
June 2017
December 2017
3
“Nike confirms it will sell directly on Amazon.”
“We’re extending our pilot with Amazon…it’s going well.”
Amazon
100 50
0
0 Y0
Y5
Y10
Y15
Source: Cowen and Company, Janus Henderson Research as of December 2017. Note: 1.) $131B in 1998 is worth ~$196B today. 2.) Using Gross Merchandise Value (GMV) for AMZN. As of 6/30/18, Janus Henderson Forty Fund holdings include: Amazon.com Inc 6.62%, Nike Inc 2.63%, and Walmart 0.00%. Holdings are subject to change.
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Cash & Check Being Disintermediated Spend is Shifting from Physical to Digital
1 Conversion of Cash
Total Global Retail Spend
2 o Cash and check replacement
Shift to Digital
o Growth in digital o New form factors
CAGR
Physical
91%
85%
3 Expanding Access
Digital
9% 2016
15%
20%
4 o o o o
New acceptance points Internet of Things Commercial Geographic expansion
PCE Growth
2020E
Source: Visa, as of 12/31/17.
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Payments in China Going mobile at light speed
Starbucks (SBUX) & Mobile
Mobile Payments
China
$10T 8
Starbucks launches mobile payments in the U.S.
Homeless in
Mobile Payments ($ Trillion) USA China
2011
accept mobile
2016
payment 6
SBUX launches mobile payments in China in December
4
Mobile accounts for
2 0
Tithe in China 2012
2013
2014
2015
2016
20% of all payments in the U.S.
Mobile accounts
2017
for 40% of all payments in China
with mobile
payment
Source: Wall Street Journal, Starbucks Company Reports, Andreessen Horowitz, December 2017. As of 6/30/18, Janus Henderson Forty Fund holdings include: Starbucks Corp 1.97%. Holdings are subject to change.
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Rise of Online Travel Bookings Growth in Online Travel Penetration $400
16% Penetration Rate
$300
14%
$200
12%
$100
10%
$0
Market Share
Revenue in Billions
Online Travel Booking
8% 2016
2017E
2018E
2019E
2020E
2021E
2022E
Source: Statista, estimates as of December 2017.
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Advertising, Shift from Print to Digital Internet eats print ads: Google & Facebook eat digital
Global Advertising Revenue
Change in Dollars (1999-2021E)
$200
350 Print
Google
Facebook
Other Internet
$155
300
$150
250
$87
$100
200
Billions
Revenue in Billions ($)
$171
150
$50
$19
$0
100
Total
Print
-$50
50
-$100
0
Google
Facebook
Other Internet
-$90
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 -$150
Source: Magna Global as of June 2017, Projected 2017-2021. As of 6/30/18, Janus Henderson Forty Fund holdings include: Facebook Inc 3.75%. Holdings are subject to change.
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eSports Overtake Traditional Sports eSports Have the Lowest Revenue per Unique Viewer… 350
326
Unique Views (Millions)
250
60
200
100
50 $47
118
40
$38 115 133
79
$34
30 20
50
Revenue per Viewer ($)
70
150
CBS Super Bowl 50 (2016)
111.9M
80
$76
300
90
…Despite Having Comparable Viewership to Other Sports
LoL World Championship (2015)
36M
CBS Thanksgiving Day (2015)
32.5M
Twitch ESL Cologne (2015)
27M
NBC Rio Olympics (2016 Avg)
25.4M
NBC Sunday Football (2015 Avg)
22.5M
ABC NBA Finals (2016)
20.3M
10 $3
0 NHL
MLB
eSports
Unique Viewers (mm)
Source: Company Reports, Barclays Research, as of 2016.
0 NBA
NFL
Revenue / Viewer
0
50 100 Viewership (Millions)
150
Source: Twitch, Nielsen, NFL Press Release, as of 2016.
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Move to Cloud, Still Early Innings 900
30%
Total Infrastructure & Software Spend Public Cloud Services Spend
800
Cloud Market Share
25%
600
20%
500 15% 400 300
Market Share
IT Spend ($ Billions)
700
10%
200 5% 100 0
0% 2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Source: FactSet, as of 12/31/17.
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Autos, Reaching a Tipping Point Powering up demand for electric vehicles (EVs) EVs to Grow at 15% CAGR and Amount to 60% of Deliveries by 2050
EV Battery Pack Price Forecast
Unit Share of Automotive Sales
100%
$/kWh 400 Mainstream
80%
350 300
60%
250 40%
Best in class
200 150
20%
100
~$100/kWh = ICE cost parity
2025E
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016
0 2015
2050E
2048E
2046E
2044E
2042E
2040E
ICE
2014
Hybrids
2038E
2036E
2034E
2032E
2030E
2028E
PHEV
50
2013
BEV
2026E
2024E
2022E
2020E
2018E
2016
2014
2012
0%
Source: Alliance Bernstein as of December 2017. BEV – Battery Electric Vehicle. PHEV – Plug-in Hybrid Electric Vehicle. ICE – Internal Combustion Engine.
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Declining Battery Prices Spur Demand for EVs Every time the global supply of batteries doubles, price drops 19%
Battery Prices $/kWh
The council’s 20year prediction was proven incorrect within 5 years.
$1,000
“Over the next 20 years, we felt that a 50 percent reduction in battery costs would take place.” - Michael Ramage, Former U.S. Dept. of Energy National Research Council Chair, 2009 Report
$750
$500
$250 Battery Price Forecast $0 2010
2015
2020
2025
2030
Source: Bloomberg New Energy Finance as of June 2017, http://www.nytimes.com/2009/12/15/business/15hybrid.html
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So What’s Next?
2018
21
A Transformation in Health Care? The Operating Theater of Tomorrow?
Individualized Medical Care of Tomorrow? Cost per genome
A doctor of tomorrow?
Source: Welcome Images, Intuitive Surgical, National Human Genome Research Institute, as of July 2017.
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AI, Autonomous Driving and Blockchain “J.P. Morgan’s Jamie Dimon May Hate Bitcoin, but He Loves Blockchain.” - WSJ, Oct. 2017
“Facebook CEO Mark Zuckerberg announced he plans to study cryptocurrencies.” - Facebook, January, 5 2018 “J.P. Morgan’s Jamie Dimon May Hate Bitcoin, but He Loves Blockchain.” - WSJ, Oct. 2017 “How blockchains could change the world.” - McKinsey, May 2016
1
Artificial Intelligence
2
Autonomous Driving
3
Blockchain
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“
The big ideas in business are often very obvious, but it’s very hard to maintain a firm grasp of the obvious at all times.” - Jeff Bezos
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Tech Sector Outperformance Where to now? P/E Multiple
Cap Weighted Performance Total Returns
12/31/13
12/29/17
Change in Multiple
Change in NTM EPS Est.
S&P 500 Information Technology Sector
88.3%
16.8x
21.3x
26.8%
48.5%
Top 1500 U.S. stocks by cap size
48.5%
16.2x
19.0x
17.3%
26.5%
Relative (Tech – Mkt)
39.8%
9.4%
22.0%
(December 2013 December 2017)
P/E Multiple
Equal Weighted Performance Total Returns
12/31/13
12/29/17
Change in Multiple
Change in NTM EPS Est.
S&P 500 Information Technology Sector
61.5%
19.5x
19.3x
-1.0%
63.2%
Top 1500 U.S stocks by cap size
39.8%
17.9x
18.9x
5.7%
32.2%
Relative (Tech – Mkt)
21.8%
-6.8%
31.0%
(December 2013 December 2017)
Source: Alliance Bernstein, as of 12/31/17. NTM EPS – Next Twelve Months Earnings Per Share Estimate. Price-to-Earnings (P/E) Ratio measures share price compared to earnings per share for a stock or stocks in a portfolio.
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Durable and Competitively Advantaged Business Models
Brand
Technology
Sustainable Competitive Advantages
Distribution
Network Effect
Cost Structure
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Characteristics – Forty Fund As of June 30, 2018 Top Holdings (28.95% of Fund)
(%)
Sector Breakdown (%)
Forty Fund
Russell 1000® Growth Index
Mastercard Inc
6.23
Information Technology
43.16
41.55
Amazon.com Inc
6.22
Consumer Discretionary
15.40
17.93
Health Care
14.60
13.37
Microsoft Corp
5.71
Financials
9.81
4.44
Alphabet Inc
5.70
Industrials
5.79
11.87
Salesforce.com Inc
5.09
Materials
4.76
1.80
Real Estate
3.53
2.16
Cash & Equivalents
2.95
‒
Forty Fund
Russell 1000® Growth Index
39
542
Weighted Average Market Cap
$245.9B
$275.7B
Median Market Cap
$83.3B
$12.1B
Active Share
67.16%
–
Characteristics Number of Securities
Holdings are subject to change without notice. For a complete list of holdings as of the most recent publicly available disclosure period, visit janushenderson.com/info. Sector weights based on GICS. Active Share represents the portion of portfolio holdings that differ from an index. Active share is not an indicator of past or future performance. Higher active share may present increased risk of volatility and does not protect against loss.
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Characteristics – Forty Fund General Characteristics Inception Date 5/1/97
Primary Benchmark Russell 1000® Growth Index
Fund Assets $12.5B (as of 6/30/18)
Peer Group Category Morningstar Large Growth
Investment Style High-conviction large-cap growth equities
Weight in Top Five Holdings 28.95% (as of 6/30/18)
Typical Investment Guidelines and Risk Parameters Holdings Range 30 – 40
Expected Tracking Error Range 300 – 700 bps
Expected Turnover 20% – 40%
Beta 0.85 – 1.15
Max Position Size 8.0% (2.5% – 3.0% core weight)
Liquidity Max of 20% of 10 day average daily volume
Target Market Cap Range Up to 70% of the portfolio > $15 billion Actual results may vary, and the information should not be considered or relied upon as a performance guarantee. Russell 1000® Growth Index reflects the performance of U.S. large-cap equities with higher price-to-book ratios and higher forecasted growth values. Beta measures the volatility of a security or portfolio relative to an index. Less than one means lower volatility than the index; more than one means greater volatility. Tracking Error is the divergence between the price behavior of an investment and an index. Turnover is a measure of portfolio trading activity. Higher turnover may indicate higher transaction costs and vice versa. The fund is classified as “nondiversified”, meaning it has the ability to take larger positions in a smaller number of issuers than a “diversified” fund. Nondiversified funds may experience greater price volatility.
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Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0434 or download the file from janushenderson.com/info. Read it carefully before you invest or send money. Investing involves market risk and it is possible to lose money by investing. Investment return and value will fluctuate in response to issuer, political, market and economic developments, which can affect a single issuer, issuers within an industry, economic sector or geographic region, or the market as a whole. Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole. Janus Henderson is a trademark of Janus Henderson Investors. © Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC. Janus Henderson Distributors C-0718-18522 10-15-18
199-44-417609 07-18
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