Benji Dawes, co-manager of the Premier Miton UK Growth Fund, answers a range of questions regarding the outlook for UK markets and highlights what he believes to be a pocket of innovation for the future.
How do you think about investing in change?
Change is a crucial ingredient to consider. The tension that’s created when a system is in flux, is often where the value is created. Great companies are often pushing against the status quo. The phrase “Value exists where there is tension” is an axiom amongst brand marketers, because by creating tension you push consumers towards action. Think about Nike telling us to Just Do It. Tension is uncomfortable, it’s affronting, and it creates winners and losers.
When you look at the UK stock market, what opportunities do you see to invest in change?
The UK stock market is viewed as a collection of “old world” industries; companies not associated with being at the vanguard of change. This is an unfair characterisation, in my view. The UK stock market is a rich and diverse place, with many innovative companies. We invest in a number of these.
But the FTSE 100 Index is made up of “old world” companies that do not affect change in the world.
Are you sure? Think about the big under-currents driving change in the world today. Some that come to mind for me include a growing health burden, climate change, energy transitions, connectivity and conflict. Does the FTSE 100 Index not have companies addressing these big drivers of change? Think about the UK’s large energy companies, its world leading pharmaceutical companies, and its engineering leadership in both industrial and defence areas.
Surely you aren’t saying Shell and BP are catalysts for change?
Energy is an area undergoing seismic change, on a global scale. Shell is a much maligned company, given its emissions profile, but it has made huge progress in committing to reduce its carbon footprint, in part by investing heavily in renewable technologies and the electric transport network. Shell, and BP too, both major constituents of the FTSE 100 Index, responded decisively to the conflict in Ukraine by cutting their ties to Russia, writing down their assets there and showing how they are willing to put principal before profit. I’m not arguing these companies are wonderful global citizens, but we all must play the hand we are dealt, and the steps they are taking to change are encouraging, in my view.
Which industry going through change do you think presents the greatest opportunity for investment in the UK?
There are lots. One that stands out for me is video gaming. There are under-currents of change happening there. In fact, I’d go so far as to call this the Ragnarok era for the industry.
What do you mean by that?
In Norse mythology, Ragnarok was the great uprising of the giants against the Gods. It was the Armageddon of the first age. A chaotic and bloody battle ensued, and the “old world” order was destroyed, with almost all of the Gods and giants killed or transformed. When we look at the video games industry today, we see eerily similar dynamics at play. The Gods of the industry are the incumbent console and game developers and publishers. These are iconic companies like Activision Blizzard, Take Two Interactive, Sony and Nintendo. It’s today’s tech giants who want to come and upend the world order; Microsoft, Google, Meta and Amazon. I’d even include Chinese Tencent, which owns EPIC Games, in that club.
How do these tech titans plan to attack the video games industry?
Their plan is centred around developing streaming platforms they think they can use to draw in gamers. They are jostling to become the Netflix or Disney+ of the games arena. The problem they have is that they don’t have the weapons to win the fight. The key weapon here is content, and by content I mean established games that players know and love. This is what is necessary to draw players in and get them to sign up to their subscription platforms. However, they are starting to address this. Microsoft struck a huge blow by bidding to acquire Activision Blizzard in January, for seventy billion dollars in cash. This was a huge move, and, if it is allowed, gives Microsoft access and control over enduring franchise content such as Call of Duty. The battle has commenced.
So if the “first age” of gaming is coming to an end, what do you think the second age will look like?
To be clear, we’ve had a number of “ages” in video games. They’ve been around since Atari and others brought us arcade games in the eighties. To your question, the beauty of investing is that we are making assumptions about an uncertain future. It is not about gaining certainty, but investing in companies that are well placed to adapt to a changing world. The revolution is underway. Tencent owned EPIC Games, run by founder Tim Sweeney, already has its own game development engine, plus great content such as Fortnite, as well as a publishing label. Facebook has respawned as Meta. Next generation consoles are due shortly from PlayStation and Xbox, and augmented reality (AR) games are (finally) arriving. New models, using blockchain, and even “Earn-as-you-Play” formats, are being experimented with, so things will evolve and emerge that haven’t yet been envisaged, using and building on existing technology. It’s a fascinating time for the industry.
Are there ways to invest in this change in the UK stock market?
Absolutely. We are very lucky to have a number of video game content owners in the UK. Companies like Team17, TinyBuild, Frontier Developments and Devolver. These companies own the Intellectual Property that the giants want access to themselves. These are small companies relative to the grand scale of Meta and Microsoft, but they hold the keys to the players’ engagement, and that is crucial. The UK has a long history of developing successful video game content. Games like Lara Croft Tomb Raider, Worms and even Grand Theft Auto are British designs. And we’ve seen UK developers acquired already, in recent years. Codemasters and Sumo Digital, both of which the Premier Miton UK Growth Fund owned, were taken over by foreign game giants.
What about growth? The industry saw a step up during covid, but won’t that fade?
After a huge step up in the past two years, industry analysts Newzoo project further growth in 2022 with revenue of $196.8bn forecast and player numbers breaching 3.2bn. Despite the delays to next-gen console supply due to component supply issues, and major AAA game launch delays, the boost of increased live-services is supporting growth.
With innovative new hardware, including augmented reality, coming in future years, and access to multiple platforms such as cloud and mobile, the game experience is ever increasing, with scope to draw in even more players over time.