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WCM Investment Management | Insight | Beach Reads - 3-02 | Welcome to the first Beach Reads of March. As of late, we've had a wild ride in the markets. With the coronavirus dominating headlines, I've tried to include a wide variety of links today, with just one section dedicated to the virus.
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Beach Reads

March 2, 2020

Welcome to the first Beach Reads of March. As of late, we've had a wild ride in the markets. With the coronavirus dominating headlines, I've tried to include a wide variety of links today, with just one section dedicated to the virus. My favorite sections are the first and last - these two address interesting investment themes and different life philosophies. Enjoy!

  • The first section covers three interesting investment themes: network effects, heterogeneous compute, and corporate governance
  • The second section highlights important changes afoot at three different companies
  • The third section features thought pieces on different types of investing (PE vs. Public)
  • The fourth section includes two links on the coronavirus
  • The fifth section is "reflections," with two interesting links on different life philosophies
Conor Deveney

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ABOUT Beach Reads

Welcome to Beach Reads, a collection of interesting links that we at WCM have come across and want to share. The goal of this publication is to engage with a broader audience in order to better ourselves and others. Feel free to email us at insights@wcminvest.com with any thoughts or feedback, and click here to subscribe!

01. Three Investing Themes

When Distribution Trumps Product

This is a solid article from a16z that goes into some of the unique aspects of Bill.com's business model.  Bill.com recently IPO'd in 2019 and has been off to a fantastic start. Start is actually a bit of a misnomer - the company has been in existence for well over a decade and has a large number of SMBs on the platform. This network, according to the author, is key in driving the company's growth. I tend to agree - like any network-based business, Bill.com becomes more valuable as the number of nodes grows and more customers push others to join the platform. This customer-driven virality is key to growth. Interestingly, towards the end of the article, the author makes a point about the potential upside to building out a data business: "The company doesn't feed data back to its customers, which could be beneficial in providing analytics, intelligence, and forecasting tools. With the invoice data it collects across customers, Bill.com could help its customers to understand which suppliers are more or less likely to pay on time and to benchmark against their peers. That data could help customers forecast their AR and AP, create a map of vendors, or even launch a capital lending product." I'm sure Bill.com has plenty of opportunity to grow its core business, but this extra value add seems compelling.

Heterogeneous Compute: The Paradigm Shift No One is Talking About

This article, from a substack blog, examines the current evolution in the semiconductor industry away from Moore's law and towards "heterogeneous compute." In short, Moore's law has been critical in enabling the improvements in things like speed and power consumption. However, over the last couple of years Moore's law has slowed and a common refrain is "Moore's law is dead." According to the author, heterogeneous compute can help sustain improvements in computing through innovations like parallel computing - in a way, maintaining some of the improvements we've become used to from Moor'es law. From the article: "the most striking example of heterogeneous-like compute is the Axx chip line by Apple. Apple's core insight about mobile processors is that while there are a lot of things you do on your phone, at its core there are a few important specialized features that sell them. In the last couple of years that's been better photography. So, they put an ISP (image signal processor)—a specialized chip—to pair with their processor chip to take better photos. This used to stress the hell out of your CPU—remember how hot iPhone 4s got when you took a long video? Specialized chips make the process faster and more energy efficient. That's the power of Heterogeneous Compute." New technologies like 5G, the IoT, and large scale "edge" computing likely all fall under the umbrella of heterogeneous compute and are interesting areas of investment opportunity.

Corp Governance: The Achilles' Heel of "High Quality" Companies

I really enjoyed this article from a former activist investor. In it, the author outlines the importance of good corporate governance and how changes like better oversight over capital allocation and even improved messaging to public equity investors can have a large impact on a company. One of the main points made in the article is that good corporate governance helps align incentives between managers and shareholders - things like concrete performance metrics, vesting, and specific targets help hold management accountable. While this may not seem like rocket science, many companies can do well in spite of poor corporate governance, and then fall apart when fundamentals slow (the author points to Valeant as an example). From the author: "I think the reason [good corporate governance] is not fully appreciated is because the 'value add' of good corporate governance is not clearly attributed in the P&L. It can be hard to quantify the value attributed to good corporate governance. For example, most employees love steady stock returns brought on by sound capital allocation principles, and appreciate clear communication at the top. This creates a lower churn environment where employees know what is expected of them and can buy into the Company's vision. Good corporate governance also attracts thoughtful, long-term orientated shareholders, and improves the talent base as more high-performing talent joins the Company."

02. Corporate Change: M&A and CEOs

What Will LVMH's Tiffany Look Like?

This article, from Business of Fashion, examines the potential strategic benefits of LVMH's proposed acquisition of Tiffany. The two most important changes will likely be 1) getting Tiffany off the quarterly reporting associated with being a public company and 2) helping Tiffany better flesh out its product offering. Regarding the second point: "It is likely LVMH will build out the middle market with more branded collections. Increasing communication on the high quality of Tiffany's diamonds would also be a smart move...calibrating high-end and entry-level offerings is something LVMH does well. Its brands Louis Vuitton and Dior do brisk business in small leather goods and cosmetics without damaging opportunity to sell five-figure clothing and accessories. 'The question is not the price at which we sell items, but whether these items carry the value of the brand' said LVMH's Guiony." I'm curious to see how successful the Tiffany turnaround ends up - it sounds like there is ample opportunity to revitalize and grow the brand.

Meet Bob Chapek, Disney's New CEO

This article, from The Verge, outlines Bob Iger's sudden departure as Disney's CEO and the apparent confusion around the appointment of Bob Chapek as opposed to Kevin Mayer as the next CEO. In short, many thought that Mayer's experience leading the streaming business meant that he would be the most in touch with the future of the company. However, it appears that Chapek's broader experience trumps Mayer's more focused experience. From the article: "Many industry insiders and employees at Disney thought Mayer was the obvious choice for CEO. Some were shocked when Chapek was announced...Mayer, who a Disney executive credits as 'the best person Disney's ever had on the strategy side,' hasn't commented publicly on Chapek's promotion. So why didn't Iger pick Mayer as CEO? The simplest answer is that, while he's an expert in Disney's most high-profile sector, he doesn't have much experience with the rest of the company." While we have yet to see how Chapek will turn out as CEO, questions remain around Iger's sudden resignation. Having said this, there seems to be some comfort given that he will remain as executive chairman.

LSE's $27bn deal for Refinitiv faces heat in Brussels

This article, from the FT, highlights the regulatory obstacles the LSE/Refinitiv deal is already facing. I'm curious what regulators are most concerned about - I wouldn't be surprised if it had something to do with combing some of Refinitiv's assets with the LCH platform. From the article: "The companies have yet to notify competition regulators formally of the deal, a step required to start the review of an acquisition that was acclaimed by the LSE's shareholders when it was announced in August last year. A plan to do so by the start of the month slipped because of the unexpected scrutiny of the deal in the so-called pre-notification phase, according to three people with direct knowledge of the discussions. Few shareholders and analysts anticipated the tie-up would face significant hurdles, with the companies having previously indicated it would close in the second half of the year. However, the LSE and Refinitiv are now gearing up for a protracted legal battle, the people said."

03. PE and Public Investing

Three charts that pierce the private equity hype

Given my role as a public equity investor, I always enjoy seeing comparisons of different approaches (VC, PE, etc.). This may partially be the result of a competitive streak - I hope that public investing adds as much value as any other type of investing. Anyway, this article from the FT compares returns across different investment styles and concludes that the majority of a PE firm's "value creation" is in fact multiple expansion. From the piece: "One of the frequent justifications for private equity is that the model encourages operational excellence. The general partners hire a top-dollar management team, carefully set the incentives, and then watch a business flourish outside of the highly-scrutinised world of public markets. And that is true looking at the above: revenue grows, and margins expand. But what's more true is that if you paid $1.00 for a company in say, 2010, and nothing changed about the business in the time while you were in charge, it would be worth $1.60 when it was sold. A glorious 60 per cent return for doing sweet nothing." While public markets also enjoy multiple expansion, I found this stat staggering.

How Private Equity Became a Beta Play

Yet another article about PE. This one, out of II, includes the thoughts from the author of a McKinsey report that focuses on PE. Instead of zeroing in on what drives returns, I thought I'd share some interesting takes on asset flows: "The number of private equity-owned companies has doubled since 10 years ago, Klempner pointed out, and the number of publicly traded companies is half that of 20 years ago. 'Institutions need to be in private equity if they want exposure to growth companies, regardless of whether they can pick the top managers." This rings true to me - just think about the number of massive, private, late-stage tech companies (e.g. AirBnB). Do fewer companies list because they don't want to deal with the hassle and now have access to easy capital? Will we eventually see the number of publicly traded companies increase again?

04. Coronavirus: COVID-19

You're Likely to Get the Coronavirus

This article, from The Atlantic, is one of the more level-headed takes on the coronvirus, despite the somewhat sensational title. Including comparisons to previous deadly disease outbreaks and comments from a Harvard epidemiologist, this article provides some good context and color on what may be in store in the coming months. From the article: "Lipsitch [the Harvard epidemiologist] predicts that within the coming year, some 40 to 70 percent of people around the world will be infected with the virus that causes COVID-19. But, he clarifies emphatically, this does not mean that all will have severe illnesses...The emerging consensus among epidemiologists is that the most likely outcome of this outbreak is a new seasonal disease—a fifth 'endemic' coronavirus. With the other four, people are not known to develop long-lasting immunity. If this one follows suit, and if the disease continues to be as severe as it is now, 'cold and flu season' could become 'cold and flu and COVID-19 season."

How We're Thinking about Coronavirus

This piece provides an investor's perspective on the coronavirus. From Intrinsic Investing, this article highlights how important the unknowns are around the outbreak and the difficulty associated with understanding what that means for a portfolio: "So what matters is not whether the virus spreads in the EU or in the US, or if Chinese based companies go back to work this week or next month or this summer. What matters is if the Coronavirus fades in its economic relevance over the course of time as all past virus outbreaks have, or if this outbreak is somehow different and the global economy grinds to a halt." This is a pretty binary take on the outcome of coronavirus, which might end up being right. Either it blows over or it doesn't. If it does blow over, then the market will correct. If it doesn't, then we are in for a completely different investing environment - how does one prepare for that?

05. Reflections

Finite and Infinite Games: Two Ways to Play the Game of Life

I liked this post from Farnam Street - in it, the author frames two different philosophies for living life. The first is to approach life as a "finite game" and the second is to approach life as an "infinite game." The difference between the finite and infinite approaches determines what individuals prioritize in life. From the article: "Finite players have to parade around their wealth and status. They need to display the markers of winning they have accumulated so that other players know whom they are dealing with. Infinite players, in contrast, look to the future. Because their goal is to keep the game going, they focus less on what happened, and put more effort into figuring out what's possible. By playing a single, non-repeatable game, they are unconcerned with the maintenance and display of past status. They are more concerned with positioning themselves to deal effectively with whatever challenges come up." The author goes on to detail how infinite players require education, rather than training, to be successful in life. This is because in an endless game, adaptability is important. I think this article may have some parallels to investing.

All about my father: inheriting a lifetime's collection of books

This essay from the FT is an interesting ode to books. In the piece, the author describes his father's ever-growing book collection. After his father's death, the author is left wondering what the point of books is - or at least of collecting information in a disorderly fashion only to eventually abandon it. In reflecting on the role of books, the author makes an interesting point about what exactly a library is: "some may look at this obsessive accumulation as a mania. Why buy so many when you surely have no real hope of reading them all? But that is the point of a library, to have more to discover, to have a stock into which to retreat and retire, a longed-for if mythical future of endless time to read. My father complained towards the end of his life that now he finally had all the time in the world to read, he kept dozing off." In light of this quote, I think it is interesting to consider a library as a physical extension of one's curiosity. The point is not to have clean, orderly books that have all been read. Instead, unread books piled up in a certain chaos reflect the learning process - often meandering and uncertain but ultimately deeply individualistic.


 

Disclaimer: To the extent that Beach Reads discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. The companies and or securities referenced and discussed do not constitute an offer nor recommendation to buy, sell or hold such security, and the information may not be current. The companies identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the companies identified was or will be profitable. Beach Reads does not constitute a recommendation or a statement of opinion, or a report of either of those things and does not, and is not intended, to take into account the particular investment objectives, financial conditions, or needs of individual clients.

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