2013 was another good year for the luxury funds sector. But can the trend continue? Nick Sudbury reports
Don’t let anybody tell you that the world’s appetite for the good life has been slowing down recently. Although it’s true that last year’s 2% estimated increase in worldwide spending on luxury goods, to €217 billion, does look a little modest, the growth rate would have been three times larger if you measured it at constant exchange rates. And that’s particularly impressive when you take into account the slowdown in the biggest market, China, where last autumn’s government crackdown on conspicuous consumerism is having a noticeable impact.
Fortunately, considering the China crackdown, there’s a rather encouraging trend under way that looks like it’ll correct the balance for this resilient sector. A recent report by consultants Bain & Company suggests that in 2013 it was actually the Americas that took back the lead from the emerging markets. Partly this was due to new store openings in second tier cities; but yes, there was also an increased level of spending by Chinese tourists buyng things they couldn’t buy at home.
In 2013 the S&P Global Luxury Goods Index, which tracks a portfolio of 80 of the largest public companies engaged in the production and distribution of luxury goods, rose by 29.9%, outpacing the 24.5% increase in MSCI World. If you expect the outperformance to continue, there are a handful of specialist funds that might be of interest.
Globally, the largest segment of the personal luxury goods market is leather goods and shoes at 28% – closely followed by apparel at 25%. But other exclusive areas, such as expensive cars, fine wine and spending on hotels, are also enjoying strong growth.
Broad Brush Approach
Dominion Global Trends Consumer Fund
One of the broadest and most successful mandates is that used by the Dominion Global Trends Consumer Fund, previously known as the Dominion CHIC fund. The manager aims to achieve long-term capital growth by investing in companies with recognised brands that are directly or indirectly associated with the discretionary consumer goods and services sector.
Dominion Fund Management is a Guernsey based asset manager that was founded in 2004. The funds focus on key global trends, such as urbanisation, demographics and economic change, with the portfolios based on bottom-up stock selection coupled with rigorous risk management.
The Consumer fund invests in companies with brand strength and pricing power. These are the businesses that aim to fulfil consumers’ aspirations and that combine robust growth with high profitability. As well as the traditional luxury areas such as clothing, leather goods and jewellery, the fund can also take advantage of other trends in consumer spending such as the growth in outdoor leisure activities.
Despite this wide mandate, the fund has a highly concentrated portfolio of 38 separate positions. The top 10 holdings account for just over 40% of the assets and include top end names like Burberry, Richemont and Estee Lauder, as well as less exclusive brands such as Diageo and Adidas.
Dominion uses a ‘Growth at a Reasonable Price’ approach and has identified 400 companies for the fund, which it has reduced to an investible universe of 75. These are whittled down to 35-45 best ideas based on the fundamentals and meetings with the management.
It’s a strategy that has worked incredibly well with the fund returning 119% during the 5 years to the end of 2013. Over the same period MSCI World is up just 66%. The Sharpe Ratio of 1.76 demonstrates the manager’s ability to deliver better than benchmark returns without taking on excessive risk. This is partly due to their focus on capital preservation and the use of stop losses to trim positions whenever the volatility increases.
Name: Dominion Global Trends Consumer Fund
Sector: IMA Global
Fund size: €48.7m (30th June 2013)
Launch Date: June 2007
Manager: Dominion Fund Management Limited
Top End of the Market
Julius Baer Luxury Brands Fund
Clients who prefer to focus on the very top end of the market might want to consider Julius Baer Luxury Brands, which is managed by Swiss & Global, a member of the highly regarded GAM group. 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 almost 23% since their launch in July 2011, which is equivalent to an annualised return of 8.7%. The manager employs a bottom-up stock selection technique and has put together a highly concentrated portfolio, which at the end of September comprised just 32 positions. These sorts of businesses have genuine pricing power, which can make them very profitable. In fact the average operating margin across all the various holdings is a healthy 18%.
Scilla Huang Sun, who co-manages the fund with Andrea Gerst, is expecting the luxury goods sector to grow by 7% to 9% in 2014, which is slightly ahead of last year. This is due to the improved global economic growth outlook with the emerging markets being the main driver backed up by solid demand from the US.
Although the anti-corruption measures in China have had a large impact on the demand for luxury watches and expensive spirits, they have made less of an impression on areas such as fashion accessories, clothing and jewellery. Because of this, the managers have taken large positions in the jewellery manufacturers Richemont and Tiffany. They also like more affordable luxury goods such as those sold by Swatch, Nike, Estée Lauder and L’Oréal.
Despite the wider trend, a fund like this will always be heavily influenced by the manager’s stock selection decisions. In December, for example, there were significant positive contributions from L’Oréal, which benefited from speculation regarding Nestlé’s stake in the company, and Tiffany, whose shares continued to do well after strong results in November. These gains were partly offset by a decline in Prada on the back of slowing growth in Europe and China.
Name: Julius Baer Luxury Brands Fund
Type: SICAV under Luxembourg law
Sector: Equity – Other Specialist
Fund size: £392m
Launch Date: July 2011
Manager: Swiss & Global Asset Management
Pictet Premium Brands
Caroline Reyl, the manager of Pictet Premium Brands, has a bit more room for manoeuvre, as she only has to invest at least two-thirds of the portfolio in the premium brands sector. Companies with these sorts of top quality products typically enjoy higher revenue growth and operating margins as well as solid balance sheets, but the fund will only buy into them if the valuations are attractive enough.
Reyl has put together a concentrated portfolio of 42 holdings with the top 10 accounting for 43.9% of the fund. Almost half the money is invested in the Apparel/Luxury sector, while the biggest geographical exposure is the 43% weighting in the United States. The largest individual positions at around 5% are Nike, Diageo, L’Oréal and the Swatch Group.
The manager focuses on the fundamentals and looks for premium brand companies that can perform even in a challenging environment. She favours strong established brands with pricing power, solid balance sheets and good cash-flow generation, as well as smaller brands with high growth potential. Since it was launched in November 2007 the fund has risen 88.9%, which is 5.6% ahead of its MSCI World benchmark.
In January it closed down almost 5%, largely because around 40% of the portfolio is driven by sales in emerging markets. Despite the setback the manager is adamant that the premium brand companies she invests in are fundamentally strong and can grow profitably in the near future. Positive fourth quarter earnings announcements from the likes of Swatch and Burberry appear to back her up.
Name: Pictet Premium Brands-P dy GBP
Sector: IMA Specialist
Fund size: £869m
Launch Date: November 2007
Manager: Pictet Funds
Dedicated Follower of Fashion
JPMorgan Global Consumer Trends
Clients who prefer a less constrained approach may be interested in the JPMorgan Global Consumer Trends fund, which adopts a more structural approach. Rather than merely concentrating narrowly on the luxury sector, the manager targets the key underlying changes that affect the way consumers spend their money. The fund is divided three ways between the three main themes he is focusing on – demographics and urbanisation, health and wellness, and aspiration.
This broad, top down approach gives the manager a much wider universe of shares to choose from, although at any one time he will typically only hold around 70 to 90 stocks. As well as fitting the overall theme, the companies he invests in tend to have high structural rates of growth, a durable competitive advantage, high returns on capital and strong cash flow generation.
The resulting portfolio is markedly different to the other funds, and it’s generally more diversified, with the weightings of the largest holdings being only around 2.7%. These tend to be more mainstream companies, and they include the likes of Barclays, Microsoft, Royal Dutch Shell and Johnson & Johnson. Portfolio turnover is relatively high at upwards of 100%, which adds 30 or 40 basis points to the annual cost.
There is a much broader spread across the different sectors with the largest exposures being Financials, Healthcare and IT, each of which account for more than 20% of the assets. This is mirrored in the geographical allocation where the biggest weighting is the US at 32% followed by the UK at 17%.
Since it was launched in April 2008 the fund has gained 67% – comfortably beating the 51% increase in its MSCI World benchmark. Unfortunately, most of the outperformance came early on: returns over the last 3 years have been relatively slow. But the managers remain confident that the generally stronger economic backdrop will soon start paying dividends again.
Name: JPMorgan Global Consumer Trends
Sector: IMA Global
Fund size: £195.3m
Launch Date: April 2008
Ongoing Charges: 1.68%
Manager: JPMorgan Asset Management UK