Entertainment, toys and games companies are experiencing a shift from analog to digital that is changing the ways everything is consumed. Consumers are being more selective about what content they choose to watch. Analysts say they use more bandwidth — with 80% to 90% of traffic on the internet being video — and are less tolerant of advertising. There are differences by demographics on which kind of content and platform the audience prefers, with Millennials favoring mobile and preferring fewer ads; younger teens preferring content they feel is authentic, with digital-native content being perceived as more authentic than studio-produced content; and Baby Boomers preferring content that fits a living room setting, analysts say.
Another big theme in the space according to analysts is convergence, that being the blurring of the lines between what a cable company and a telecom do. The television ad market is quite strong, some analysts say, adding that advertising in general is strong. They say there’s been a focus on improving the existing system both in terms of measurement and in terms of how TV companies’ revenue streams. The last two years were weak for TV advertising, some of which was related to fears that viewership wasn’t accurately measured, but some analysts say there is more comfort with viewership-measuring methodologies now. Analysts say we are seeing early signs that advertisers are moving back toward traditional media or are having more sophisticated ad buy strategies than just digital. Others, however, say the pendulum hasn’t quite turned back and that ad spending remains focused on the digital realm.
Ad spending is not expected to grow faster than GDP because companies advertise for customers when they think they have money to spend. For operators, analysts say there has been consolidation, which has given them leverage to set lower rates for TV networks. Some analysts are positive on media and entertainment, saying these companies are either transitioning toward a digital future, or they are sticking to their traditional strengths. One example is the newspaper industry. As their cost structures are no longer tied down to printing plants and expensive downtown buildings, analysts say they are capitalizing on the heavy online traffic they get from their local markets and they are moving towards video content.
In the toys realm, analysts say the new parents of the Millennial generation do more research on the toys they buy and don’t necessarily shop at brick-and-mortar stores. Analysts also say the tie-ins or media convergence, where product is backed by content such as television programs or movies, is growing in the high single digits while commoditized product grows in the low single digits. Product discovery and brand creation isn’t happening in front of the television on Saturday mornings, but rather through digital formats. There are toys that have been moved away from basic learning and development, and they are moving toward elevated intellectual development such as STEM. Analysts add that the quality of toys is increasing as well.
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Rob Leuty says the philosophy of his firm is high-quality investment portfolios, consistency of returns and excellent client service. He says the firm uses a uniform investment process to minimize volatility and improve consistency of returns. Mr. Leuty works with fixed income, and views that as a complement to an investor’s overall portfolio. He says that in the current low-growth economic environment coupled with unconventional monetary policy, fixed income allocation is adding solid stability by way of diversification in conjunction with attractive levels of cash flow streams. He builds fixed income portfolios using high-quality and liquid securities.
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Patrick Pascal discusses his firm’s investment philosophy,, which has been largely characterized by participating on the upside with the market and limiting downside with the market. Mr. Pascal takes a macro view of the world’s economies, identifies sectors he likes, and at that point looks exclusively at the leaders in each sector. He says this philosophy brings long-term results to investors because turnover can be very low.
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Lisa Z. Ramirez discusses Denver Investments as well as the Westcore Small-Cap Value Dividend and Westcore Mid-Cap Value Dividend Funds. Ms. Ramirez’s investment philosophy is based on four tenets: focusing on cash flow, rather than earnings or revenue growth; investing in quality businesses that pay a dividend; buying businesses on sale; and making team-based decisions. According to Ms. Ramirez, this approach makes sense in all market conditions because dividend-paying stocks have historically outperformed the market and done so with less risk. In addition, Ms. Ramirez expects to participate in up markets and protect capital in down markets because she invests in companies with a lower payout ratio that can grow their dividends over time.
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Kenneth N. Ross discusses Eagle Capital Management, LLC. Mr. Ross provides balanced fund services to institutional and individual clients. He develops an asset-allocation target for each client and then builds a portfolio with equity and fixed income securities. Mr. Ross considers himself a risk manager as well as an investment adviser. He manages risk on a functional basis by creating diversified portfolios and on a tactical basis by establishing sell targets at the security level. When it comes to selecting equity investments, Mr. Ross builds a portfolio with a combination of ETFs, or what he calls first responders; dividend growth stocks; industry leaders; and companies that change the way people function today.
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Patrick Pascal, President of Chelsea Management, says 3M Co (NYSE:MMM) has been a key stock for his firm’s portfolio because of the company’s continued R&D investments and dividend-raising history, among other characteristics.
It’s been in our portfolio for many, many years, presently trading in the high $170s and low $180s. We owned it for many years and have cost basis between $30 and $60 for most of our clients.
But what we like about 3M is its product diversity, its excellent management and long-term philosophy that used to be fairly standard in American industry but has gone by the wayside. 3M continues to spend an inordinate share of its money on R&D. They have a goal that 15% of their revenues comes from products that were developed within the last five years.
They’re in industrial supplies, adhesives and all of that kind of things, but they’re also in consumer staples like Post-it notes and Scotch Tape. They’re also quite strong in health care. Most dental practices couldn’t open these days without 3M. They continue to add many, many high-tech items.
So 3M is a perfect kind of company that we like, particularly in this kind of market. It still yields a better than 2.4% and has a long history of raising its dividend, and we think that can continue for some time.
Sam Peters discusses ClearBridge Investments. He works on the ClearBridge All Cap Value Fund and the ClearBridge Value Trust Fund. Mr. Peters looks for investments with a price-to-value gap. He often finds these opportunities due to behavioral issues, such as overreactions, and in companies where he thinks the market is getting it wrong. Due to the current environment, Mr. Peters thinks an investor shouldn’t be blindly contrary. He believes it is important to identify the risks your being paid to take and to understand why a company’s business value is higher than its stock price.
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Andrea Nardon discusses his firm’s approach to quantitative investing. Mr. Nardon says that with systematic investing, he aims to exploit specific risk premiums in the market and wrap those into products that are simple to understand. He discusses the different products his firm offers, which include an emerging market fund and a statistical arbitrage fund. He adds that systematic investing in Europe has become popular because smart beta tries to generate additional return in a very clear, logical and transparent way.
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Malcolm Polley’s firm is an institutional-only money manager. This value-oriented firm has three products: a midcap product, an all-cap product and a large-cap value product. Mr. Polley believes in good businesses at good prices and says his firm’s decision-making process is at the company level rather than the allocation level. Because of the valuation levels the market has reached, Mr. Polley has been finding that either the businesses themselves are troubled or the industry has been troubled. He is currently finding a number of misunderstood or special situations.
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Francisco Javier Perez Fernandez discusses March A.M. Mr. Perez is in charge of the firm’s global funds as well as two thematic funds, The Family Business Fund and March Vini Catena. The Family Business Fund invests in family-owned businesses, while March Vini Catena invests in wine and spirits. One of the firm’s global funds is March Global. Mr. Perez manages this fund using a fundamental-driven process. Being value-oriented, he aims to identify undervalued equities with huge returns on invested capital.
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