Gaming is a solid, defensive sector in a value portfolio
In this sector overview, we ask Bruce Du, Equities Analyst, and Daniel Moore, Portfolio Manager and Senior Equities Analyst, what Investors Mutual Ltd (IML) sees in the gaming sector, which companies stand out and which companies IML avoids.
What does IML look for in the gaming sector?
Daniel: With any sector, we’re always looking for companies with four criteria:
- A strong competitive advantage
- Recurring earnings
- Capable management
- Ability to grow earnings over time
and we like to buy these companies when they are trading as what we assess as a reasonable price.
When we look at the first two factors – competitive advantage and recurring earnings – a number of gaming companies fit nicely into these categories.
In some cases, the competitive advantage is very strong as they may often be the only player in a particular segment of the market. The companies in which we’re invested in have exclusive, long-term licences – and by long term, we’re talking 50 years plus.
What about recurring earnings?
Daniel: The gaming sector, in general, has always enjoyed fairly solid recurring earning streams – these earnings streams also tend to be more defensive than most other sectors. While not completely immune to economic conditions, many gaming companies’ earnings have tended to hold up relatively well even when economic conditions have softened.
Lotteries is a very good example of this. Historically, lottery spend grows steadily over time even during slower periods of economic growth. In fact, studies have been done globally over the past 20 years showing that lottery spend actually grew during periods of recession in places as diverse as the US and Iceland.