Welcome to the March 2020 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. We leverage our unique expertise and existing assets to create high capital growth opportunities, with generally a long-term hold mindset, for investors.
Since inception, the unit price of the Waterhouse VC Fund has risen from $1.00 to $2.50, as at 29th February 2020. Despite pulling back with the market in the last two weeks, the unit price rose 11.1% over the month, following a very strong start to February. This compares to -8.21% for the S&P/ASX 200 and -8.41% for the S&P 500. More on the Fund's performance below.
A month of disorder
The coronavirus dominated headlines in late February as the outbreak disrupted global economic activity and caused significant movements in financial markets. We've seen disruption and uncertainty emerge in pockets of the gambling and video gaming industries.
Gaming revenue in Macau plunged 88% in February with casinos closed for 15 days and only a trickle of traffic for the balance of the month.[1] Sporting events and esports tournaments are being cancelled, postponed or played without a live audience. Remarkably, all Italian sporting fixtures will be played in front of empty seats until at least April 3rd.[2]
As bans on travel and public gatherings around the world continue, investors should prepare for further pain in land-based forms of gambling.
The spread of the virus in China is even leading to bottlenecks in video game development. According to investment bank Jefferies, a third to half of art creation for Western game developers is done in China. Productivity issues due to lockdowns may lead to delays in new releases and a short-term hit to revenues.[3]
Proceeding cautiously
We're not experts, but it seems likely the coronavirus episode could continue for six months or more. Here's what we do know.
Gambling is a defensive industry with several structural growth tailwinds. Online gambling is not only robust, but has continued to grow despite equine influenza, financial crises, war, Brexit, the U.S. fiscal cliff, trade wars and more. The average racing and sports bettor in Australia loses about $400 a year, which is only about $8.00 per week. Gambling is a cheap form of entertainment and highly sticky, making it one of the last budget items to be cut.
Most importantly, online sports betting companies can use marketing to incentivise customers to shift their betting to other sports and geographies in case of event cancellations.
Despite the troubles in video gaming mentioned above, millions of people (and counting) are spending more time gaming while confined to their homes in lockdowns and quarantines. This is potentially a significant event for online gambling and online video gaming as stay-at-home entertainment takes off.
We're seeing this in China, with the total Daily Active Users across the six most popular video games growing 48% from December 2019 to February 2020, compared with 19% over the same period a year ago.[4] This is extraordinary growth given limited access to internet cafes and the huge base of users these games already have.
Source: Roundhill Investments, Bloomberg.
Historically, video game stocks have outperformed following previous epidemics due to people engaging more with indoor entertainment mediums:
We remain confident in the defensive nature of our strategy and the opportunities provided by volatility and an impatient market. The performance of the Fund through this period so far is a testament to this.
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[1] http://www.dicj.gov.mo/web/en/information/DadosEstat_mensal/2015/index.html
[2] https://www.abc.net.au/news/2020-03-03/coronavirus-causes-mass-cancellations-of-events/12017158
[3] https://www.scmp.com/tech/gear/article/3049168/game-launches-worldwide-may-be-delayed-due-chinas-coronavirus-outbreak
[4] https://www.bloomberg.com/news/articles/2020-03-04/virus-quarantines-in-china-spur-tencent-netease-gaming-surge