Newsletter: Published Tuesday, 25 September 2018.
- Integrated Research.
Busy week at Spaceship:
- We successfully rotated JD.com, Intel, ImpediMed and Integrated Research out of the Spaceship Universe Portfolio and we detail why that is below;
- The blog got a bit of a rejig (check it out, some good stories are coming in);
- And we’ve launched a new PDS (Universe, Index) that reflects changes in when we issue units and calculate unit prices.
We also interviewed the head of investment solutions at State Street about his tips on building wealth. They're pretty frank and don't beat about the bush.
That's part of our Real Money Talk series, which is humming along nicely here.
Also, because I'm a barrel of laughs, I thoroughly enjoyed reading an academic paper that shows money managers who own powerful sports cars take on more investment risk but don't deliver higher returns.
Not exactly a groundbreaking idea...
...but given we’re all about steadily building wealth over time at Spaceship, somehow it’s rather satisfying to see the assumption about flashiness and unnecessary risk reflected in some hard data.
Apparently, those attracted to higher horsepower and higher torque were "sensation seekers". They trade more frequently, actively, unconventionally and prefer lottery-like stocks. And they generally don't outperform the market.
Minivans > McLarens, it seems.
Anyway, the article is here if you’re the type to read academic papers on things. It includes some very pleasurable sentences and some gentle mocking.
Removed from Spaceship Universe Portfolio
JD.com: competition concerns
JD.com considers itself an "asset heavy" e-commerce business with a focus on infrastructure and logistics.
As Spaceship sees it, the problem with JD.com's business is it's losing out sharply to competition. From above it has Alibaba, the largest e-commerce platform in China steadily snapping up customers and spreading its payment and cloud businesses.
From below, JD.com has new Chinese e-commerce competitor Pinduoduo fast gathering up market share at an incredible rate.
Pinduoduo IPO’d in the United States on 26 July 2018 and has managed to build up 300 million active buyers in three years. That’s phenomenal growth and shows just how dynamic the Chinese technology market is, given Pinduoduo's customer numbers exploded very quickly.
Pinduoduo also differentiates itself by targeting third-tier and fourth-tier cities in China by offering a comprehensive selection of modestly priced products and allows shoppers to further lower the price by promoting the platform through social media group buying.
Pinduoduo and JD are both owned by Tencent but Pinduoduo seems to be more successfully leveraging their traffic.
The JD.com founder, Richard Liu Qiangdong, was also arrested in Minnesota in the United States in August on a rape accusation. He was released the next day and returned to China but local authorities are yet to complete their investigation.
Intel: can only service itself.
Intel is the only remaining substantial integrated computer chip business; which means it both designs and manufactures its own chips.
The problem with this is, Intel seems to be losing market share and growth opportunities to its competitors, such as Taiwan Semiconductor and Advanced Micro Devices (AMD).
These other companies don't have to do both parts: AMD can design chips and focus on innovation, Taiwan Semiconductor can manufacture them at an enormous scale and then both businesses can sell to anyone in the world (like Apple).
Intel, on the other hand, can only manufacture and sell its own designs.
Also, as at 17 September, 2018, the weighting of shares in computer chip businesses (ie Intel, Nvida, TSM and Samsung) in the global portion of the Spaceship Universe Portfolio was around 10% and we thought that the portfolio might be too heavily exposed.
So we've sold shares in Intel, and have reduced the weighting of shares in computer chip businesses to 7.5% (which reflects the target weighting of 2.5% in each of Intel, Nvida and TSM).
Intel is still a good business, but given they are only manufacturing for themselves, they can’t compete as ferociously and we don’t think they are innovating new products at the same rate as their competitors.
ImpediMed: market cap slide.
ImpediMed develops medical devices that measure tissue and fluid components of the body, and is based in Brisbane.
Unfortunately, the market capitalisation (what the public market thinks a company is worth) slipped below $150 million during the quarter and the stock remains fairly volatile (meaning we aren’t comfortable the market capitalisation will remain steadily above that figure).
The Spaceship Universe Portfolio has investability requirements to hold companies with a market capitalisation greater than $150 million at entry and when the portfolio is rebalanced, so we’ve removed ImpediMed from the portfolio.
Integrated Research: not cloudy enough.
Integrated Research develops systems for really busy communication businesses, who have enormous and complicated systems.
They can isolate and manage unified communications, video conferencing, payments and contact centres.
Spaceship thinks that the problem with this Sydney-based business is, its software is used to monitor older technology and products, from providers like Cisco. These older businesses are not benefitting enough from the global trend of ‘most things happening in the cloud’.
As such, it seems that Integrated Research isn’t growing fast enough. Spaceship believes tech companies need to keep growing and when they don’t, they may lose their moats.
Integrated Research’s low growth means there isn't a particularly powerful network effect and as such, we aren’t comfortable with keeping it in the Spaceship Universe Portfolio.
Feel free to read about how Spaceship picks shares at any time!
The Spaceship Universe Portfolio invest in Alibaba and Taiwan Semiconductor.
The Spaceship Index Portfolio invest in Alibaba, Cisco and Taiwan Semiconductor.
We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments.
However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.