Investing in the digital economy
Summary: The digital world is taking off. More and more investors are investing in this area. But how can you do this yourself and what should you pay attention to?
Level: Any experience
With the global spread of the internet (according to Cybersecurity Ventures, an estimated 6 billion people will be online by 2022) we not only share our joys and sorrows online, but also have the whole world at our fingertips via our PC or smart phone. Whether buying clothes online or trading on the exchange market, people's behaviours are becoming ever more digital and more companies are offering their services and products online.
I have also noticed that the coronavirus seems to have accelerated the digitalisation of the world. The requirement to work from home not only saves travelling time, but also brings technology to the forefront by ensuring that meetings take place via online platforms such as Microsoft Teams. And what about groceries ordered via the internet? It has become so popular, there are waiting lines for delivery!
Restaurants are also increasingly offering their menus digitally for takeaway or delivery. E-health is also on the rise: online treatment programs within healthcare (including mental health care). A while ago, I even had my first blind beer tasting via the World Wide Web. The opportunities were already plentiful, but social distancing and the "one and a half meters economy" seem to be a breeding ground for new online initiatives and accelerators of existing ones.
In a previous article, I discussed the importance of cyber security and the opportunities for investing in it. Now that the coronavirus—despite the introduction of effective vaccines—is further fuelling the digital economy, and with the opportunities for investment within the digitalisation sector or the "digital economy" in mind, I would like to give you a head start with this article.
From digitisation to the digital economy
Digitisation is the transition from analogue information—paper books, audio and film on tape, and so on—to a form that can be used by computers. Digitisation can relate to the data itself as well, such as scanning documents for online use (going from paper road maps to modern navigation systems) or the use of digital photography.
It can also be about procedures (such as the digital submission of notarial deeds to the land registry instead of the old-fashioned paper ones) or the impact on society in general (from the increasing use of digital information and devices).
And the bridge to the digital economy? Digitisation and the ease with which connections can now be made to other businesses or information systems—also known as connectivity—have permanently changed the way people communicate and the way companies do business. Along with the increased connectivity, digitisation has changed the way markets and economies function. In other words, digitisation has affected all aspects of traditional markets, on both the demand and supply sides of the economy.
The Economics of Digital article by PwC Netherlands' Europe Monitor outlines this—loosely translated—as follows: On the demand side, the influence of consumers is no longer limited to purchasing decisions. They can now also participate in all stages of the production of goods: from ideas and design to crowdfunding and production, for example, by using cheaper prototypes based on 3D printing. In short, don't just buy a dark blue chair, but also choose the upholstery and decide what wood the chair should be made from.
On the supply side, companies have evolved from serving the masses as efficiently as possible to—as far as feasible—fully automated customised and real-time solutions. By harnessing the power of data and advanced algorithms (smart arithmetic), companies today can reach their target consumers at the desired moment, using the right sales message.
Actually, there is no single definition for the digital economy. Nowadays, it is increasingly seen as "doing business through internet-based markets". For this reason, it is also called the "internet economy" or the "new economy". Sometimes the English term "Web economy" is used.
Although the internet plays an important role, the digital economy is more than that. In an interview, Corina Kuiper, associate professor at Business School Netherlands and founder of the Innovation Family, gave the following interpretation of the term: Digital economy connects everything with everything, data with data, data with people and people with people. In other words, it's about always being online, robotising, analysing data and using data to connect things and people.
Digital economy: growth ahead?
Companies that want to be successful in the digital economy also offer their services and/or sell products via the internet. Companies that traditionally only had physical shops, such as Ahold Delhaize's supermarkets and McDonald's fast food restaurants, are now adopting a "clicks and bricks" strategy. In other words, in addition to physical shops (bricks), they have a good online strategy (clicks) where the customer can order via a website and have the food delivered to his/her home. But there is still a world to be conquered for many companies. A major OECD study states that in 2017, 95% of the companies within the scope of the international organisation had a broadband internet connection, but only 23% of them had an ecommerce strategy.
Researcher and think tank Oxford Economics calculated in their study "Digital Spillover" that the digital economy in 2016 amounted to USD 11.5 trillion, or 15.5% of the total GDP worldwide. That percentage that is estimated to rise to 24.3% in 2025, equivalent to some USD 23 trillion. In short, there is an expected robust growth for the digital economy involving staggering amounts of money. Incidentally, the study was published before the world had to deal with the coronavirus. Perhaps the current situation will give a boost to the growth trend of the digital economy.
Investing in the digital economy?
The expected growth of the digital economy and the related development and implementation of online sales strategies means more demand for and increased spending on IT/ICT services and products. You could of course buy Dutch ICT shares from Ctac or ICT Group, or shares from the American "tech classic" Microsoft or relative newcomer Slack. However, investing in individual shares is generally riskier than investing in a diversified portfolio through, for example, a mutual fund or ETF.
As the sector is at the beginning of its development, the supply of investment funds and ETFs (for individuals) is not great yet. During my search, I came across two investment funds that may help capitalise on the expected growth of the digital economy: the iShares Digitalisation UCITS ETF (ISIN IE00BYZK4883) and the Pictet - Digital - I - Acc fund (ISIN LU0340554673).
Before I zoom in any further, I'll add a comment. Regular readers know that I always discuss two investment funds side by side. This time, however, the iShares ETF falls short: although it follows the benchmark except for friction costs, it scores only 2 stars with Morningstar. Risk and return, relative to similar investments within the digital economy category, are not fully balanced for this fund.
Fortunately, Swiss Pictet has traditionally had a good eye for "tomorrow's markets". The fund has 60 stocks in its portfolio, including Baidu, Salesforce.com and Intuit. It is quoted in euros and is tradable in SaxoInvestor via FundSettle.
The fund has the MSCI ACWI Euro as its reference index. Since its inception on 30 June 2008, the fund (14.16% p.a.) has been able to achieve better returns, in the form of price gains and dividends, than this index (7.29% p.a.). The fund therefore scores very well with Morningstar: four stars. The dividend, about 0.5–0.75% per year, is automatically reinvested. Current costs are 1.16%: defensible, given the good performance.
The value of your investment may fluctuate.
As a bonus, the fund invests in stocks that score well on corporate sustainability and have a smaller CO2 footprint than its sector peers. Overall, the fund receives three globes for the Morningstar Sustainability Rating™.
In terms of investing like a football coach, it is a midfielder with a sense of attack.
In a nutshell, the Pictet fund is interesting for long-term investors who can and want to bear equity risk, who want to add nuance to their portfolios with companies that are driving the development of the digital economy, and who want to focus on sustainability.
Would you like to know more? Read about the Pictet fund.
Investing carries risks. Your investment may depreciate.
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