Investors had a decade to buy Amazon. Is it Spotify’s turn now?

Cast your mind back to your childhood, to a famous tale and simple lesson: slow and steady wins the race.

No doubt The Tortoise and the Hare comes to mind.

Most people are mistaken in that the fable is about doggedness. It is, in fact, more about artfulness and ingenuity.

These two values became clear from the conversation I had with Denver-based Joshua Cummings, Portfolio Manager of the Janus Henderson Global Research Growth Fund, about the firm's approach to uncovering durable growth and the long-term winners that they back.

In this episode, Cummings explains how volatility creates opportunity, why time is a long-term investor’s best friend, and what separates the winners from the noise. 

Cummings also calls out the growth opportunity in Spotify - could this be a second shot at an Amazon-style success?

You can listen to the full conversation or read a summary of the key points below. 

Volatility equals opportunity, not risk

“I think it’s been an exciting year so far….We love when markets get emotional,” states Cummings at the beginning of our conversation. It’s a refreshing entry point to the topic of markets this year, which has seen its fair share of pessimism already.

The noise and uncertainty around politics and policy are what actually create the larger concern, Cummings says. “When uncertainty picks up, decision making slows down….how do you make any long-term fixed capital decisions?

Investors love certainty - who doesn’t? “I think the whole market just wants to get to that point of certainty where they know what the rules of engagement are.”

Cummings shares an anecdote from a recent dinner with Walmart’s CFO. “They were about to report, and somebody asked if they’d change guidance,” recalls Cummings. “And the CFO's response to the question was like, well, okay, should I take numbers up or down? We don’t know what’s going to happen.’”

Even retail giants, it seems, are flying a little blind.

So how does this affect Janus Henderson’s portfolio and approach? Cummings explains: 

Volatility is not risk. It's not the same thing. If you're a long-term investor committing to owning a business for whatever it is, 5, 10, 20 years, why do you care about volatility?

For Janus Henderson, “We want to own really good, durable economic engines that generate high returns on capital,” Cummings explains. “Think of a business model as an engine. Capital goes in, after-tax free cash flow comes out. How efficient is that engine, and how durable is it?”

Deep, fundamental research and patience, he says, are what it takes to identify business that can compound through multiple economic cycles.

They’re so close to the subject matter, in fact, that many of the team are from the respective industries they are analysing.

"If you think about our healthcare team, we've got three PhDs and a practising MD on our healthcare team. He still sees patients." Cummings tells me. The benefit as a long-term investor is that he is able to give an insider's perspective into healthcare and pharma that is as close as you can get to cause and effect. 

So, while many funds chase fast growth, Janus Henderson takes a different approach: low turnover, high conviction. Cummings gives a surprising stat: “The average mutual fund in the US turns over its portfolio about 100% a year. What’s the point of owning a high-ROI business if you’re not going to own it long enough to benefit from compounding?”

Cummings explains that their goal is to build a portfolio filled with a highly competitively advantaged business models, gaining market share, reinvesting, and led by a really smart management team. Names like Progressive Insurance (NYSE: PGR) stand out: 

"That's really where our sweet spot is - finding and identifying these market-leading companies that generate really high returns on capital and with management teams and corporate governance that we can trust to do the right thing."

Thinking AI? Think big and broad - just like the internet

Any discussion about growth investing must take into account the hot topics of today, and inevitably, that is AI. 

When Janus Henderson think about hot themes such as semiconductors or AI, it isn’t from a broad level, like, which semiconductor is going to win? Or how is AI going to impact the global economy across sectors? Rather, the team debates how an individual company can benefit, for example, can Chipotle use automation in AI? 

"It reminds me so much of the internet in 98, 99," Cummings says, "but the internet itself was orders of magnitude more impactful to the global economy than anyone could have foreseen in 1999. I think AI is going to go like that…It is just going to permeate everything.

Spotify - music to an investor’s ears

A company that Cummings calls out as meeting the firm's growth criteria is Spotify (NYSE: SPOT), the largest audio streaming company in the world. With nearly 700 million monthly active users, half of whom pay for premium, Cummings believes it's just getting started. 

“We’ve identified Spotify as the category leader in a total addressable market that we think is still immature and growing,” he says. Only 20% of the global audio market is penetrated, leaving significant room for growth, particularly outside developed markets. 

Crucially, 88% of Spotify's revenue comes from subscriptions, not ads. “It’s a very strong, durable business model, not necessarily leveraged to advertising growth,” says Cummings. “It reminds me of Amazon 20 years ago, frankly.”

And while the naysayers worry about licensing costs from the major music labels, Cummings sees leverage shifting. “Spotify’s revenue is now larger than the three big music labels combined."

"We don't think there's anything that's better than Spotify in terms of its ability to disrupt it. We don't think there's a next technology coming anytime soon." 

Remember when one single album used to cost $15? 

Time is a growth investors ally

“You should be a sceptic in the short term, but a raging optimist over the long term,” Cummings says. “Stocks go up, not down, over time… If you own good businesses, the stocks go up.”

And if you’re worried about missing the next Amazon or Google, he offers this “visceral” example: 

"I was actually in attendance at the IPO roadshow with my boss. Nobody had any interest in it, by the way...You could have waited a decade after Amazon's IPO to determine whether you wanted to own this investment thesis or not. That would've put you in 2007....You could have bought Amazon there ahead of the GFC today, you'd be up 68-fold."

These disruptive companies find ways to create, expand, and monetise in ways you can’t always foresee in the moment, he explains. 

"You have to have a degree of faith," Cummings concludes. "The market's not going to give you a free lunch."

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