Tim Dieppe explains why the FP WHEB Sustainability Fund currently has no exposure to the education theme.
In spite of what Pink Floyd might think, education, as a five trillion Dollar market growing at 7-9% CAGR, is clearly something that many people think they do need. This is particularly true in emerging markets which are seeing significant increases in demand, e-learning, and increasing social mobility.[1]
Yet education is currently facing two major structural challenges: First, there is an increased focus on affordability and the cost/benefit of education. This has manifested itself most prominently in the USA where ‘gainful employment’ regulations are set to come into force. These regulations are intended to limit the amount of debt that students accumulate whilst studying, relative to their expected earnings power after graduation. This follows a period of 25 years when growth in tuition fees has steadily outpaced income, accelerating more recently.[2] The average student now graduates with debt of $25,000, more than half the average starting salary.[3] Value for money, then, becomes a much more significant focus for both policy makers and students. In the UK, the numbers are even more extreme: today’s UK students are expected to graduate with average debt of £40,000-£50,000.[4] Student debt in the UK is estimated to have tripled between 2008 and 2012. At the same time, average graduate starting salaries have declined. There is bound to be a backlash against such conflicting trends and value for money will come under further scrutiny.
The second structural challenge is the shift to digital delivery of education. Digital delivery and online learning are rapidly changing the education industry. It’s not just that my kids can’t imagine how we ever did homework without the internet (and neither can I really!) The massively ingrained position of the publishing houses with high barriers to entry is being undermined. Lots of information and teaching material is available for free on the internet and this makes it harder to justify paid-for content. High cost text books, by contrast, fall out of date in just a few years. This trend to digitisation of education is illustrated with Amazon’s purchase of private education technology company TenMarks last year, taking them further into education where they have long offered multiple free or low-cost education apps for the Kindle. Then there are MOOCs (Massive Open On-line Courses) which may start enabling students to obtain low-cost qualifications – directly challenging the high-cost, heavily debt-burdened tertiary education model we now have. Furthermore, pressure to provide open-access to academic research is another challenge for the publishers to manage.
These challenges have kept us from investing in the US education market, and as a consequence of rethinking these trends we also sold our position in Pearson last year. There are other companies in the education theme that are not subject to these pressures, but so far valuation has kept us from getting involved.
Our current lack of exposure to the education theme demonstrates the flexibility we have to allocate across our themes where we see the best opportunities. We still very much believe in the long-term growth in demand for education and expect that we will come back to investing in the space before long. Pink Floyd would be disappointed.
[1] BAML Global Education Primer, November2013
[4] http://www.telegraph.co.uk/finance/personalfinance/10473644/Five-years-of-falling-family-debt-ends-due-to-student-loans.html
