Finding opportunities in a digital world

Flexibility is vital for investing in sectors undergoing rapid change, where relative newcomers can replace incumbents in record time. Technology has dramatically altered consumer behaviour in recent years, with an ever-increasing share of spending now happening online.

The Invesco Global Consumer Trends Fund offers exposure to a wide variety of businesses within the consumer sector. Some of them are fairly traditional, but around 69% of our portfolio consists of holdings that we believe could benefit from a shift towards a more digital lifestyle. The pandemic forced societal changes around the globe, which only helped to accelerate our adoption of a digital lifestyle. As governments issued orders nearly overnight, people scrambled to find new ways of doing what they’d normally do – albeit confined to their own four walls. And more often than not, the solution was digital.

Luxury shopping: the digital frontier

Translating a luxury experience that a customer can receive in a high-end store has always been hard to replicate online. No knowledgeable associate provides with you with individualized attention; no glass of champagne materializes in front of your screen as you drop a product into your virtual shopping basket. That is probably why consumers used to prefer buying luxury goods in person, despite shifting much of their convenience purchases online: when people shop for high-end goods, they’re not just buying a product – they are buying an experience.

With non-essential retailers having been ordered to close during various periods of lockdowns all around the globe, it isn’t surprising that sales of global luxury goods plunged by 22% to €217 billion¹ in 2020. And yet, an internet platform selling the kind of goods you’d typically find at an upmarket store reported a 64% increase in revenue to US$1.7 billion.²

The company behind this feat is one we are invested in: Farfetch. But while the pandemic has certainly helped it grow its customer base, it was already a growth story before. Unlike many other online stores, it has no inventory of its own. It operates a platform that provides a network of over 1,300 sellers – some of which are small brick-and-mortar boutiques – with a strong online presence, as well as an inventory management platform. If a customer in the UK orders a product from the Farfetch website, that item could be sold and dispatched by an independently-owned boutique in Poland.

A tech company at heart

The model outlined above allows the company to carry over 3,200 luxury brands, but also provides it with the opportunity to focus on the design and content of its website, and most importantly, the new type of gold in our digital age: data. For despite being positioned in the fashion industry, Farfetch is first and foremost a tech company. Its data scientists and engineers work diligently to enhance their recommendation system³ that doesn’t just provide useful information to its customers, but also to retailers using their platform.

Farfetch blurs the lines between the digital and physical by seeking to bring data-gathering technologies into brick-and-mortar stores, which could help retailers provide a superior consumer experience both online and offline. And in our opinion, its partnership with China’s JD.com should strengthen its position further.

We believe that the luxury market has a compelling growth story with an extremely low e-commerce penetration that is set to grow. In our view, investing in the top online luxury platforms could be a good way to capture not only the long-term trend of consumers moving towards digital channels, but also the near-term ‘reopening’ of the fashion industry after more than a year of Covid-19 restrictions.

Video games: helping people connect

Countless movies of the past have portrayed gamers as basement-dwelling loners hiding from real life. There may have been an element of truth to this in the distant past, but studies have continuously debunked this pop culture stereotype in recent years.

There are an estimated three billion⁴ video game players worldwide today, spanning various age ranges and professions. And with Covid-19 limiting activities such as sports, school and live entertainment for over a year, it’s perhaps no surprise that video games have exploded in popularity.

We have seen large increases in gaming time and spending from every carrier, platform and geography all across the globe. But as with other products, we have noticed that the pandemic has inevitably changed how games were bought. Consumers have shifted their spending from retail purchases to digital downloads, which is more beneficial for industry profitability.

While video games have experienced an unusual boost during these unprecedented times, we believe that some of the benefits could be sticky. During the pandemic, people have searched for new and interactive ways to socialize, and many have surprisingly found a social lifeline in online gaming⁵. Some gamers new to the scene are also likely to have been taken in by key franchises that elicit loyalty from its customer base.

What drew us to video games

Prior to the onset of the pandemic, it was the increasing processing power of mobile phones that got us excited about video games. Premium video games aren’t available on mobile devices due to the lack of graphics processing power in the hardware. But a lifting of this barrier could represent a huge opportunity. Put simply, there are more people in the world carrying phones in their pockets than there are owning gaming PCs and consoles. Early evidence of this can be found in the huge success of mobile franchises launched by two video games companies we are invested in: Niantic’s (in collaboration with Nintendo) Pokémon Go and Activision’s Call of Duty mobile.

One of our best-performing holdings throughout the pandemic straddles both the consumer segments we have mentioned above. Sea Limited is a tech company headquartered in Singapore, but with a presence throughout Southeast Asia, Taiwan and (more recently) Latin America. We were originally attracted to the business because of their e-commerce platform, Shopee. But it also own Garena, a very successful video game distribution platform, as well as SeaMoney, a digital payments and financial services provider.

In 2017, the company released a self-developed Battle Royale game for mobile devices (‘Free Fire’), which has been tremendously successful and has crossed the threshold of one billion downloads on the Google Play Store this summer.⁶ The game has done particularly well in markets that tend to have lower-end mobile devices, which helped it garner the title of highest grossing mobile game in Latin America and Southeast Asia in 2019 and 2020.

Focused on what’s driving consumers

The Invesco Global Consumer Trends Fund is focused on the long-term drivers of consumer trends: increased connectivity, demographics and standards of living. As we look beyond Covid-19, we see a return to a low growth environment, where companies that are generating organic growth through market share shifts could outperform those dependent on GDP growth. We believe active management is likely to capture market share winners than backward-looking passive or quantitative strategies.

Further, we believe that the businesses we hold in our portfolio have tremendous potential, and that our portfolio strikes a balance between near-term and longer-term themes that should benefit investors for years to come.