Investing for a new media reality

Later this year, S&P Dow Jones and MSCI will make significant changes to their industry classification system, which will include renaming the telecommunication services sector as communication services. Reflecting the new reality of media and communication today, the new classification will place tech giants such as Facebook, Netflix and Google alongside established telecom names like AT&T and Verizon.

As a market leader in ETFs, BMO GAM’s latest offering, BMO Global Communications Index ETF (COMM), will provide investors with exposure to this hybrid space. Managing the fund is Chris McHaney, director and portfolio manager with BMO GAM, who explains the origins of the product.

“Over the last five to 10 years, the way people consume media has really changed,” he says. “That has caused a disconnect between certain companies and the way they are classified. In Canada, we have Shaw Communications, which is classified as consumer discretionary, but then you have Rogers or BCE classified as telecommunications. Over time, we can see that these companies are all in the same business.”

Then there are the Apples and Facebooks of this world, which are clearly huge players in the media landscape in 2018. Bell and Rogers might not have seen these companies as competition 10 years ago, but that’s no longer the case today.

“Companies that traditionally have been thought of as IT or technology are moving into the media and communications space,” McHaney says. “This [COMM] strategy is trying to represent this new paradigm, and will include traditional media companies, but also those newer to the label of media. Going forward, all of these companies will have a hand in what we consume in media and how we consume it.”

Using the Solactive Media & Communications Index as its benchmark, COMM will include holdings from across the communications spectrum. That includes some of the best-performing stocks out there today (Alphabet, Apple, Netflix), as well as companies with long track records of performance (Rogers, BCE, Disney).

Of the underlying stocks, Apple and Facebook constitute the largest weighting, but diversification is a central tenet of the fund’s investment strategy.

“What we have done with our construction and weighting methodology is what we do with most of our ETFs – we are thoughtful of the way companies are weighted,” McHaney says. “There is no undue weight into any one stock, and that helps with stock-specific risk.”

In terms of the fund’s geographical mix, it’s not surprising to find the US making up the lion’s share with weighting of more than 60% – it is home to Silicon Valley, after all. Japan is\ next on the list for representation – and for good reason.

“It is one of the larger developed economies outside of the US, and they have some larger incumbent companies in the telecom space,” McHaney says. “Back in the late ’90s and early 2000s, everyone thought of Japan as being at the forefront of mobile phone technology. Three of the larger companies there – SoftBank, NTT, KDDI – were really involved in that growth back then and have grown to be very large companies globally.”

COMM provides investors easy access to this broadened landscape through the industry reclassification, and McHaney believes ETFs are the perfect vehicle for thematic investing in general. BMO has led out when they want to.”

An ETF also allows Canadian investors a chance to gain geographical exposure to stocks they might not be able to access otherwise. The financial and resource sectors dominate here in Canada, and McHaney doesn’t see that disparity changing anytime soon. For that reason, he advises those seeking diversification for their portfolio to consider ETF alternatives.

“We have a pretty good artificial intelligence community in Southern Ontario,” he says. “That might one day be a really strong growth area, but that is still a ways off. Part of the reason we launch these global funds is that we cover areas that don’t have strong representation in Canada. It is being able to balance out a typical Canadian portfolio.”

And for those wanting to gain exposure to the media companies of the future alongside the traditional names in the space, COMM ticks all those boxes.

“It’s not something that is huge in a typical Canadian’s portfolio exposure,” McHaney says. “They can add a growth element in an area that doesn’t have a lot of representation in Canadian equities. They can do that very easily through an ETF at a low cost. It is a longer-term building block that should have several years to grow as this new area propels how we consume media.”