February 4, 2022

Future Focussed Portfolio – Todays’ Mega Caps

Share this:


Components of a “future focused portfolio” – Part 1: ‘Todays’ Mega Caps

In our previous piece for XY, we made a case for the advantages (for Financial Planners and investors alike) of what we call a future focussed portfolio, that is a portfolio that addresses the domestic market bias – to be underweight in innovation and technology enabled businesses – in too many Australian portfolios. Local investors potentially miss an estimated 97% of global opportunities – a serious potential growth impediment for both Australian index and active investors.

A deeper dive into this line of thinking will look at what many feel are the compelling features, benefits and the investment case for a global Mega Cap investment component. For the purposes of this analysis we will define Mega Cap as referring to companies with a market capitalization above USD$200 billion.



International growth investors often mistakenly view a future focused portfolio as a technology fund and therefore, risky. The reality is quite the opposite.

These Mega Caps are the largest companies in the world with billions of customers, entrenched network effects, incredible balance sheets and the world’s best talent – and yet are still saddled with the risk label. Why?

As a first step, let’s define risk.

Volatility is not necessarily risk. It can even be said that volatility is good, so long as it’s in the right direction over time. We need volatility.

Instead, risk is better defined as:

The probability of the expected cash flows not being realized.”

When investing in a company you are taking ownership of a real business. As a business owner, you care about the quality and reliability of the free cash generated by that business, not the share price fluctuations. The share price merely presents an opportunity for us to value and benchmark these cash flow streams and ensure that a portfolio is invested in quality growth businesses at reasonable valuations.

A future focused portfolio invests across the innovation of today, tomorrow and the future, as illustrated above. The risk, as we defined, changes across these three components.

The largest proportion of a future focused portfolio is the ‘today’ bucket. It is the core of the portfolio. Based on the definition of risk — the probability of the expected cash flows not being realised – the ‘today’ companies are far less risky than most investors realise. These Mega Cap companies are in such dominant competitive positions (think Amazon, Tencent, Alibaba, Alphabet, Facebook, Microsoft and Apple) that they are almost guaranteed to generate massive cash flows into the future. And despite perceptions, they are also good value… particularly after the recent market pull-back.


Unassailable positions

These are the companies that enable the development of e-commerce, the distribution of digital entertainment and gaming, and the infrastructure on which much of our digital lives are currently based. These massive Mega Caps, along with their networked platforms are Web 2.0 based entities.

The value proposition of these companies is so strong and the economies of scale and scope so large that they are in near unassailable positions as shown in the following market capitalisation diagram:

Mega Cap Market Capitalisation


These Mega Caps have diversified across multiple industries and business lines; they reach billions of growing customers; and they have incredibly strong balance sheets, enabling them to easily respond to opportunities, invest and grow. What’s more, they can attract the best human talent in the world to execute their strategy. As per the chart below, in many ways these companies are starting to look stronger than some governments (they certainly have more cash and more satisfied customers).

 Key characteristics of Mega Caps


Importantly, as the chart below highlights, the Australian share market has significantly lagged the U.S market throughout the internet age and this differential is accelerating. In particular, the technology rich NASDAQ 100 has outperformed the banking and resource dominated ASX 200 by 11% p.a over the past 15 years and an astounding 18% p.a over the past 5 years.

Australia has significantly lagged in the internet age


In addition, Covid-19 has proven the safety of the Mega Caps in a market sell-off. When Covid first hit the headlines in 2020, markets posted some of their sharpest falls in history. But Amazon responded by hiring 175,000 employees in one quarter to meet unprecedented demand; Google released crucial Covid statistics on their home page to keep people informed and worked with governments to communicate to a global audience. It was clear a few months later just how reliant we were on these companies and their share prices provided a cushion reflecting it.


Safe and cheap

Investors may also have concerns about valuation. That’s understandable because investors want to buy undervalued businesses. But, again, looking under the hood shows that even at scale, these companies are delivering significant growth, largely due to their cloud businesses and the continual shift by society to a digital world, a trend that is only accelerating.

The fundamentals of the business (the cashflows) have caught up to the price premiums. So, valuations that previously have looked expensive are now starting to look like good value.

Operating cash flow – Mega Caps (USD Millions)


Based on detailed analysis, the operating cashflow across the Mega Caps will increase at an average of 14% over the next 5 years, making them compelling even at this scale (chart above).

The Mega Caps are also benefiting markedly from the centralisation and scaling of data globally, creating near unassailable network economics and competitive advantages.

Post pandemic, the digital infrastructure provided by the Mega Caps is looking more essential than ever. We believe that the structural digital transformation already underway and that powers their growth has accelerated.

Investors in a future focussed portfolio are in a unique position where they gain access to the defensive nature of these Mega Caps, whilst getting exposure to the growth from the world’s accelerating digital expansion.


International investing is changing

Ultimately, when investors perceive that tech is risky, they ignore the value proposition of these companies; they ignore the enormous war chest these companies have built to weather any storm; and they ignore the reality that these businesses were investing heavily in prior years to increase cashflows which are now falling through to the bottom line.

By contrast, if we look at the ASX200, we see a market heavily overweight with old world companies that face disruption and real threats to their cashflows. The world has moved globally, and investors need to think globally.

Australian investors are daily users of the mega techs but don’t benefit as owners, and they should. It is time to accept that the world is changing and so too must our investment strategies.

With financial advice, we can’t entirely remove risks, but we can reduce them. The Mega Caps of ‘Today’ represent some of the lowest-risk and highest performing companies in the world. Australian investors not exposed to them might feel like they are avoiding ‘risk’, but in fact they just can’t see the opportunity cost and real risks of narrow local share market investing.

Visit Holon to find out more here

This article has been prepared by Holon Global Asset Management Pty Ltd ACN 629 590 585 (Holon). Holon is a corporate authorised representative (CAR number 1276082) of Atlas Funds Management Pty Ltd ACN 612 499 528 (AFS licence number 491395). The information provided in this article is general in nature and does not constitute investment advice or personal financial product advice. This information has not taken into account your investment objectives, particular needs or financial situation. Before acting on any information contained in this article, each person should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision on recommendations.

Any opinions or forecasts reflect the judgment and assumptions of Holon on the basis of information at the date of publication and may later change without notice. Any projections contained in this communication are estimates only and may not be realised in the future. Returns from investments may fluctuate. Past performance is not a reliable indicator of future performance. All investments carry risks, including that the value of investments may vary and that your capital is not guaranteed.

Whilst all care has been taken in preparation of this article, Holon gives no representation or warranty as to the reliability, completeness or accuracy of the information contained in this article. Holon accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. To the maximum extent permitted by law, Holon will not be liable in any way for any loss or damage suffered by you through use or reliance on this information. Holon’s liability for negligence, breach of contract or contravention of any law, which cannot be lawfully excluded, is limited.


Join XY today.

Already a member?

DISCLAIMER: The XY Adviser website and all content contained on the website is limited to general information. It does not constitute legal, financial or other professional advice. XY Adviser does not hold an AFS licence and does not provide any financial services. Nothing on this website should be interpreted as financial advice. Before making any investment decision, XY Adviser recommends obtaining financial advice from a qualified financial adviser.