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Bling Funds at Poundsaver Prices

2014 was a year to forget for the luxury goods sector, says Nick Sudbury. But could the sell-off represent a buying opportunity?

It’s hard to think of an industry more exposed to the world’s socio-economic hotspots than the luxury goods makers. In 2014 many of their main markets suffered a succession of problems – with the first and potentially most serious being the slowdown in China. Since then the terrible conflict in Syria and collapse of the oil price have hit the big ticket spenders in the Middle East, while the most recent casualties have been the high rollers in Russia.

Not that it’s all been bad news – it’s just that the rate of growth has stalled. Industry specialists Bain & Company believe that the final 2014 sales figure for the global personal luxury goods sector will be around €223bn – a modest 5% annual increase on the peak €212bn of sales recorded in 2012, and certainly a big improvement on the €153bn recorded back in 2009. But for now it looks as though the first golden years after the 2008 financial crisis are now in the past. These days the main drivers of growth are in the Americas and Japan, with China experiencing a small reduction.

There are also structural challenges from within the sector. The latest evidence suggests that there is a shift in emphasis away from the more conspicuous, globally recognised symbols of wealth, in favour of originality and niche top-end brands. And at the same time, consumers are buying online. If these trends remain, they could yet change the whole dynamic of the industry – which is another reason why we’d say that it pays for investors to use experienced fund managers who are familiar with the whims and desires of the rich and famous rather than doing their own stock-picking.

 


 

Uphill Struggle

Julius Baer Luxury Brands Fund

After a strong 2012 and 2013 the Julius Baer Luxury Brands fund from Swiss & Global has found it a lot tougher going, with a 2% shrinkage in the last calendar year. The fund aims to achieve long-term capital growth by investing in leading luxury companies with excellent brands, high quality products and continuous innovation.

 The sterling accumulation units have risen by around 20% since they were launched in July 2011, but the fund has struggled to make much headway since August 2013 as the sector has slowed. The managers use bottom-up stock selection based on the underlying fundamentals, and they have constructed a highly concentrated portfolio with the top 5 holdings accounting for almost 29% of the assets.

Scilla Huang Sun, who co manages the fund with Andrea Gerst, believes that there are two main trends influencing the sector. The first of these, she says, is the increasing importance of e-commerce with companies like Burberry leading the way by allowing clients to personalise their items so that they can be handcrafted to order. The other is the growth in top-end menswear, with brands like Gucci and Prada opening more men-only stores.

Julius Baer Luxury Brands is heavily weighted towards jewellery and watch makers, which is one of the fastest growing areas of the sector. In fact its top holdings include both Tiffany and the Swatch Group with fashion, accessories and jewels making up over 50% of the portfolio. Swatch and Nike, another of the largest weightings, also fall into the category of affordable luxury goods that appeal to the Chinese market that is experiencing its own version of austerity.

BMW is the only car maker in the portfolio, but it makes it into the top 5 holdings with a weighting of 5.6% of the fund. It has been chosen on the back of its sound balance sheet and attractive valuation and also benefits from the fact that these sorts of premium cars are still selling particularly well.

Company results have been mixed, which is perhaps not that surprising given the patchy economic backdrop. The fund’s largest holding, Tiffany, recently reported strong double digit growth in the US, while the Italian leather goods specialist Ferragamo was upbeat in its outlook. There was less positive news from the American fashion designer Michael Kors, where the figures were negatively affected by the competitive promotional environment in the US.

Fund Facts

Name:                                                  Julius Baer Luxury Brands Fund

Type:                                                   SICAV under Luxembourg law

Sector:                                                Equity – Other Specialist

Fund size:                                           £262m

Launch Date:                                      July 2011

Yield:                                                  n/a

TER:                                                   2.06%

Manager:                                             Swiss & Global Asset Management

Website:                                             www.jbfundnet.com

 


 

Tough at the Top

 Pictet Premium Brands

One fund with a bit more wriggle room is the Geneva-based Pictet Premium Brands, which is only required to invest a minimum of two-thirds of its portfolio in companies operating in the luxury sector. Normally these sorts of businesses enjoy higher operating margins than their middle of the road counterparts, but this hasn’t stopped the fund massively underperforming its (dollar-based) MSCI World benchmark in 2014 – even though in absolute terms it was up a creditable 6.5%.

Caroline Reyl, the manager, invests in companies with strong brands that provide aspirational products and services. She concentrates on the fundamentals and looks for businesses with pricing power, solid balance sheets and good cash flow that can perform even in a challenging environment. There is also a willingness to invest in smaller brands with high growth potential.

The result is a highly concentrated portfolio of 37 holdings, with the top 10 accounting for 47% of the fund. These include the likes of Nike, Macy’s, L’Oreal, Burberry and Christian Dior. The biggest sector weighting is Apparel/Luxury at 43.7%, followed by Travel and Tourism at 13.2% and Vehicles at 10.8%.

Reyl has recently increased her holding in fashion retailer Burberry, because she says its impressive digital offering should allow it to gain market share. She has also upped her stake in Hugo Boss, where she thinks the shift to women’s wear and retail distribution will have a beneficial impact on the bottom line.

 It is interesting to note that the fund has a remarkably high beta of 1.21 – which implies that investors are exposed to a greater than normal element of market risk. Unfortunately, when the active returns are measured against the MSCI World index, they produce a negative Information Ratio. This suggests that the manager has not been able to add value – although it may be largely due to the fact that about 40% of the fund is driven by sales in emerging markets, an area that has been struggling.

Despite the disappointing performance, Reyl remains optimistic and believes that premium brand companies have strong fundamentals and are well placed to grow their profits. In all probability, a lot will depend on the strength of the global economy and whether it can shrug off the socio-economic problems that we have seen in 2014.

 Fund Facts

Name:                                                 Pictet Premium Brands-P dy GBP

Type:                                                   SICAV

Sector:                                                IMA Specialist

Fund size:                                           £675m

Launch Date:                                      November 2007

Yield:                                                  n/a

TER:                                                   1.99%

Manager:                                             Pictet Funds

Website:                                             www.pictetfunds.com

 


 

Back to America

 Dominion Global Trends Luxury Consumer Fund

One fund that may be better placed to weather the geopolitical storm than most is Dominion Global Trends Luxury Consumer. Throughout the year, the manager, Dan Gianera, has been steadily increasing his exposure to North America.

By the start of December the US weighting had reached a hefty 57%, up from 39% at the end of June. This prescient move should help to protect investors from the worst of the turmoil affecting the other regions.

Actually, the thinking behind this shift was nothing to do with geopolitical risk, but was rather due to the fact that US-based companies like Macys, Nike, Tiffany & Co, and Michael Kors are all leading the way when it comes to digital sales and marketing. This is an area that Gianera considers an absolute necessity. His view is backed up by a recent report by Exane BNP Paribas which estimates that 40% of luxury growth from 2013 to 2020 will originate online.

Dominion Global Trends Luxury Consumer – formerly known as Dominion CHIC – aims to achieve long-term capital growth by investing in global companies in the luxury or discretionary spending sector. Like the other funds, it has a highly concentrated portfolio of 37 positions with the top 10 accounting for 46.4% of the portfolio. These include: Macy’s, the American clothing company VF Corporation, Estee Lauder, Burberry and Polaris Industries, which makes off-road vehicles for the leisure market.

A highly focused portfolio can be the best way to add value, but in the short-term it can be highly volatile. In November, for example, the fund rose by more than 6% on the back of strong double digit gains from holdings such as Jimmy Choo, Salvatore Ferragamo, Brunello Cucinelli, Tiffany and Macy’s. Unfortunately, most of these gains were then given back in the first half of December when world markets experienced a sharp sell-off. Over the last five years the sterling accumulation units are up 74.6%, although in fact most of these gains came prior to 2014.

There are many unknowns facing the luxury sector, but most of the top brands have stood the test of time and are likely to continue to do so. Whether the shares will outperform is more debatable and seems unlikely if markets continue to struggle and the geopolitical tensions persist. It is much easier for these sorts of companies to make headway when the global economy expands.

 Fund Facts

Name:                                                 Dominion Global Trends Luxury Consumer Fund

Type:                                                   SICAV

Sector:                                                IMA Global

Fund size:                                           £55.6m

Launch Date:                                      June 2007

Yield:                                                  n/a

AMC:                                                  1.5%

Manager:                                             Dominion Fund Management Limited

Website:                                             www.dominion-funds.com

 


 

Going Up in the World

 Amundi ETF S&P Global Luxury UCITS ETF

The cheapest way to enjoy a bit of bling is to invest using one of the themed ETFs that track the sector. An interesting example is the Amundi ETF S&P Global Luxury UCITS ETF, which is domiciled in France but is available in the UK. This ETF currently provides exposure to around 80 of the world’s main luxury-related securities.

But it has a much more humble origin. Amazingly, the Amundi ETF started life by tracking the MSCI Europe Insurance Index, which was a far cry from its glitzy future. From the time that it was created in November 2008 to 17th February 2014 it followed this rather mundane objective before it was decided to upgrade it to a life of luxury. That, of course, makes the early past performance rather irrelevant for comparison purposes, although it has no impact going forwards.

The ETF provides a more diversified exposure to the luxury sector than its actively managed peer group. Its largest weightings are in Nike, Diageo, Daimler, Louis Vuitton, and Richemont, with the top 10 accounting for about 50% of the portfolio.

 Performance since the change of mandate in mid-February 2014 has been broadly similar to the fund’s actively managed competitors, although with a fair amount of volatility along the way. But then, let’s remember that it was a tough year all round.

So what of the future? As long as there are no more seismic shifts in the benchmark, the ETF should continue to offer a cheap and diversified exposure to the luxury goods sector. This would allow clients to play the broader theme, although one would hope that experienced active managers would be able to add enough value in such a constrained sector to more than compensate for their higher fees.

 

Fund Facts

Name:                                                 Amundi ETF S&P Global Luxury UCITS ETF – EUR

Type:                                                   UCITS ETF

Sector:                                                Equity – Other Specialist

Fund Size:                                           €57.8m

Launch Date:                                      December 2008

Portfolio yield:                                   n/a

Ongoing Charges:                               0.25%

Manager:                                             Amundi ETF

Website:                                             www.amundietf.com

 

 

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