The Co Collapse of of Inte ntellectua ual P Property Bradford Rutan, CFA Managing Director MFS Investment Management The views expressed in this presentation are those of the speaker and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. 38155.3 FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY.
Dispersion of equity returns – normal? Cumulative return 150% 106.6% 106. 100% urn % etur 50% e ret ive r ulativ umula 0% Cum -55. 55.1% -50% -100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Positive Earnings Negative Earnings 38793.1 Source: Compustat earnings per share (EPS) data from December 2006 – December 2016 for the S&P 500. Each portfolio of positive and negative earnings companies is rebalanced monthly and market cap weighted. Data labels are cumulative returns as of 31st December 2016. 2
Dispersion of equity returns – abnormal? Cumulative return 120% 100% 98. 98.3% urn % etur 80% e ret ive r 92. 92.0% ulativ 60% umula Cum 40% 20% 0% -20% 2012 2013 2014 2015 2016 Positive Earnings Negative Earnings 38793.1 Source: Compustat earnings per share (EPS) data from December 2011 – December 2016 for the S&P 500. Each portfolio of positive and negative earnings companies is rebalanced monthly and market cap weighted. Data labels are cumulative returns as of 31st December 2016. 3
Dispersion of equity returns Cumul mulative r ret eturn rn 25% 23.2% 20% urn % etur 15% e ret ive r ulativ 10% umula Cum 5% -0.7% 0% -5% -10% 2017 Positive Earnings Negative Earnings Source: Compustat earnings per share (EPS) data from December 2016 – December 2017 for the S&P 500. Each portfolio of positive and negative earnings companies is rebalanced monthly and market cap weighted. Data labels are cumulative returns as of 31st December 2017. 37863.1
Agenda • Major disruption occurring in the global economy • What industries will be affected? • Who could the winners and losers be? • Why stock selection will become mission critical? 5
Disruption in major profit pools Advertising – Time spent vs. money spent Avg. daily worldwide consumption Advertising spend ($B) (minutes) 350 200 300 180 160 250 140 200 120 100 150 80 100 60 40 50 20 0 0 Internet TV Online Traditional Source: (LHS) Statista via Zenith/Recode. (RHS)Magna Global, Goldman Sachs Global Investment Research, Jan. 16, 2017. Latest data available 6
Disruption in major profit pools Advertising – who might win/lose with this shift? FB & GOOG growing share of ad spending FB & GOOG have 60% share of all incremental ad spending globally 20% 70% 18% 18% 59% 60% 60% 16% 53% 54% 16% 53% 50% 14% 14% 45% 12% 12% 40% 11% 10% 9% 30% 25% 24% 8% 7% 6% 18% 20% 6% 15% 5% 4% 10% 4% 8% 10% 3% 2% 2% 1% 0% 0% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e Change in FB & GOOG ad revenue as % of change in FB & GOOG as % of global ad revenue global ad revenue Source: Credit Suisse, Zenith Optimedia Note Facebook data available from 2010. As-of 9/30/2017 The companies referenced are used for informational purposes only, and do not necessarily represent holdings in any MFS portfolio. 7
Disruption in major profit pools Media 8 Source: flickr public domain
Disruption in major profit pools Media - the rise of eGaming Global eSports Revenue $millions +16% CAGR $1,600 2014-19 $1,072 $1,200 +43% +67% YoY YoY $800 $463 $325 $400 $194 $0 2014 2015 2016 2019e Global eSports Monthly Viewers in millions 200 180 131 150 115 90 100 74 58 50 0 2012 2013 2014 2015 2016 2019e Source for top chart: Kleiner Perkins May 2017 /bNewzoo Global eSports Market Report (2/17), Newzoo press release (1/16), Newzoo Casual Connect Europe Presentation (2/15) 9 Source for bottom chart: Newzoo 2016 Global eSports Market Report
Disruption in major profit pools The house where it all began Source: L2 Gartner 10
Disruption in major profit pools Retail - Warehouses are the new black…. Amazon has 75 fulfillment centers in the US…one located within 20 miles of half of US population Largest distribution center has 2.4m of total usable square footage…which is about ½ the size of Magic Kingdom They have 110m square feet of warehouses…which equals the total area of all 750 Costco stores put together Source: L2 Gartner, Baltimore Business Journal, eMarketer, Curbed, MVPVL. Latest data available The companies referenced are used for informational purposes only, and do not necessarily represent holdings in any MFS portfolio 11
Disruption in major profit pools Brick and mortar retailing Country Shopping Center Population GLA per capita GLA (sq ft) (millions) U.S. 7,527 319 24 Canada 542 36 15 U.K. 318 64 5 France 264 64 4 Italy 171 60 3 Spain 142 46 3 Germany 195 80 2 Source: ICSC September 2015 (latest data available). 12
Disruption in major profit pools Retail - How do you stay alive when sales are headed south? Cumulative Sales Growth 2012-2016 140% 123% 120% 100% 80% 60% 40% 20% -6% -6% -4% -3% 0% -20% Amazon JC Penney Macy's Target Kohl's Source: Factset. The companies referenced are used for informational purposes only, and do not necessarily represent holdings in any MFS portfolio 13
Disruption in major profit pools Retail - All-time high in store closures US Retail Store Closures 10000 8640 9000 8000 6163 7000 6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Credit Suisse 14
Disruption in major profit pools Groceries, drugs, etc.– The Amazon effect Impact on stock price in 1 st 24 hours following Amazon announcement Dental supplies Rx drugs Sporting goods Grocery 4% 2% 0% -2% -4% -6% -8% -10% Source: L2 Gartner analysis of Yahoo Finance data. 1/4/18 15
Disruption in major profit pools Consumer brands example - batteries Comparison of AAA batteries bought on amazon.com Duracell Amazon Basics Percent of ratings 4/5 stars (total #) 77% (1040) 86% (13041) Conversion rate 10.2% 17.7% Price per battery 65 cents 24 cents Percent of online sales 21% 31% Marketing budget 1 $50.6m $0 Sources: Amazon.com, L2 Gartner, 1010Data. Latest data available 1 Marketing budget for Duracell 5 year average per Statista. Latest data available 16
Disruption in major profit pools The IT stack: compute, storage, service Worldwide spending on public cloud computing ($B) 180 $162 Avg. growth rate of cloud spend = 19% 160 Avg. growth rate of overall IT spend = 3% $138 140 $117 120 $99 100 $82 80 $67 $57 60 $46 $37 40 20 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IDC Whitepaper, September 2016. Data after 2016 is estimates. 17
Disruption - artificial intelligence Artificial intelligence is the new electricity" 19 th & 20 th centuries 21 st century Automotive Refrigeration Artificial Electricity Health Care Education Transportation Agriculture Intelligence Manufacturing Finance 18
Disruption - artificial intelligence Artificial intelligence improving health care diagnoses Machine ImageNet Classification Error Rate Breast cancer diagnosis error rates 30.0% 4.0% 28.2% 3.5% 3.5% 25.8% 25.0% 2.9% 3.0% 20.0% 2.5% 16.4% 2.0% 15.0% 1.5% 11.7% Human error, 5.1% 10.0% 1.0% 7.3% 0.5% 5.0% 0.5% 3.6% 3.1% 0.0% 0.0% Study pathologist AI model AI model + Study 2010 2011 2012 2013 2014 2015 2016 pathologist Source: (RHS) NVIDIA article from September 2016 on error rates achieved in 2016 Camelyon Grand Challenge. (LHS) ImageNet and Bernstein analysis. 19
Disruption - a rtificial intelligence Breadth and depth of companies investing in AI is exploding # of companies investing Applications of AI include: in artificial intelligence 1 25,000 Automotive ► • Autonomous vehicles • Driver-assist safety features 19,662 20,000 Health Care ► • Medical diagnostics • Drug development 15,000 Defense ► • Surrogate operators for combat • Flight simulation for training 10,000 Finance ► • Fraud detection • Personal finance 5,000 3,409 Manufacturing ► 1,549 • Robotics and automation 100 • Predictive maintenance 0 2013 2014 2015 2016 Communications ► • Speech, face and handwriting recognition • Natural language processing Source: NVIDIA 1 number of companies buying artificial intelligence processors from NVIDIA as reported by NVIDIA 29023.30 20
"If you don't like change…you will like irrelevance even less." -General Eric Shinseki 21
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