See you in 10 year's time

The figures reported by APPLE last week prompted another bout of giddiness with sales of USD51.5bn, 48 million iPhones sold during the period and a margin of 40%, which is unique in the sector, along with virtually zero tax.

APPLE defies the laws of competition and also those of taxation. Its market performance is a good reflection: shareholders who have hung onto their shares over the past 10 years boast an annual return on investment (TSR) of 32%! Was this the best choice? Not necessarily. A happy owner of PRICELINE shares would have boasted a record TSR of 54%.

This is only a half-surprise: we all know that the digital sector was the best stock-market performer of the past 10 years (average TSR of 29%), as confirmed by the study published by research agency Estin & Co on yields by sector and by share in western markets. As such, it is not surprising that if we look at APPLE and PRICELINE, two of the best players in the best sector, we obtain record TSR rates.

However, if we continue to look through this ranking, we see that the digital sector is closely followed by the biotechnology sector (25%). Here again, this is not surprising. More unexpectedly, the textiles and apparel sector comes in third place (19%). And if we jump right to the end of the pack, we find banks and insurance companies whose TSRs have plummeted from double-digit levels during the 1990s to 1% over 2005-15 for banks and 2% for insurance companies.

As such, between a top return at 29% and worst return of 1%, sector choices are decisive for fund managers. However, this is not enough: without even mentioning the totally forgotten internet stars, the worst-performing player of the best performing sector (YAHOO, close to 0%) has fared far less well than the best player in the worst sector (JP MORGAN, 9%)! Another reassuring piece of information for managers: there is no inevitability. A stock may find itself in a difficult sector (air transport for example) and deliver an outstanding TSR: indeed EASYJET has posted an annual return on investment of 21% over the past 10 years.

Apart from the vertigo effect, and sometimes admittedly the regret, sustained by reading certain figures in the study, it remains to be seen what conclusions we can draw to build future performances.

The first simple conclusion: statuses change quickly. The star sectors in one decade can become the red lights in the next one, such as the oil and bank sectors already mentioned. The second conclusion concerns players in so-called “bad” sectors (namely those with low stockmarket performances such as air transport and insurance). For a company in this category, salvation can only come from a breakthrough strategy. Like an EASYJET that does not resemble AIR FRANCE. Or PRUDENTIAL, which eight years ago, refocused all its businesses in order to benefit from growth in Asia when a large number of its rivals remained focused on domestic businesses. If, on the contrary, a stock is in a “good” sector underpinned by high growth in underlying business, it can admittedly be an historical innovator (back to APPLE), but often, the best player is quite simply a super concentrator, expanding its business in new geographies, the pure player, rather than the creator of a new model. While AB INBEV and HERMES (both winners in their sector) have not reinvented their businesses, they push their characteristics to the extreme every day.

This ranking reminds managers of two of their key objectives: choosing, as far as possible, the best sectors of the time, but even more so, identifying the right target, depending on whether it is in a buoyant universe or an adverse universe. Favouring leaders that can draw the line beyond expectations in the first case, and favouring those that manage to stand out from the crowd in the second. Easy, isn’t it?

Didier Le Menestrel