Investing in luxury brands reaps rewards
For the luxury brand sector, the recession is well and truly over.
Shares in Burberry, behemoth LVMH and Mulberry are all soaring, showing that our penchant for luxury shows no sign of dampening, even in the age of austerity.
Burberry is a particular success story. In the past year to 17 June, it has posted profits of 64 per cent, while LVMH – a conjunction of fashion brand Louis Vuitton and premium alcoholic brands Moet and Hennessy – saw record revenues of £20 billion in 2010.
While most can only dream of owning a Mulberry handbag, a vintage bottle of Moet or some Tiffany jewellery, for some, it’s a reality made easy by investing in a luxury brand fund – some of which are making stellar gains.
The Pictet Premium Brands fund, from Swiss Asset Management firm Pictet, has gained 25 per cent over the past year to 17 June, and 57 per cent over three years. The fund invests in companies with ‘strong brand recognition’, which provide ‘aspirational products and services’ to consumers. ‘We target every consumer segment, and about 50 per cent of our profits are from the luxury sector – it’s a key selling point for us,’ says co-fund manager Laurent Belloni.
He highlights several luxury brands that reported strong quarterly growth figures of late. ‘In particular, LVMH, Hugo Boss, L'Oréal, Essilor, PPR, Wynn Macau, Daimler and Interparfum all surprised positively. Burberry, Starwood and Tempur Pedic also performed well,’ he says.
However, the luxury sector hasn’t always been an easy ride. ‘After going through one of the most severe crises in their history, premium brands are back on the road to growth and superior profitability,’ says Belloni.
It’s clear that the emerging markets have much to do with the super profits the luxury companies are recording. Asian consumers, particularly from China, now represent 40 per cent of premium brand sales as they hanker after the trappings of the West. And this figure will keep increasing: Belloni expects this figure to be close to 60 per cent in 2020, believing China, Asia and Russia are the key regions.
Asset managers have been quick to jump on the China bandwagon and capitalise on this growing trend. Investment house Fidelity launched a China consumer fund in May, investing in consumer stocks listed in China, Taiwan and Hong Kong. The fund aims to profit from ‘China’s consumption boom as it spreads from the top affluent groups to the middle class’, according to fund manager Raymond Ma. As the fund is relatively new, performance data for the fund isn’t yet available.
‘China is now at the point that Japan reached in the late 1960s and Korea reached in the late 1980s,’ Ma says. ‘The last 10 years in China have been a golden age of manufacturing and investment-led growth. The next 10 will be an age of consumer-led growth.’ Add to this an increase in Chinese wages and domestic demand, and the Asian consumer boom looks set to rocket. In this climate, Ma highlights that branded and luxury items will become ‘especially popular’.
An increased standard of living among the emerging markets is something Peter Kirkman, manager of the long-running JPMorgan Global Consumer Trends Fund, finds is driving his fund’s performance. ‘As salaries continue to rise, diets, lifestyles and consumer needs are going to change – including a disposition towards luxury brands,’ he says. Kirkman believes his fund is well-placed to benefit from this. Indeed, its performance says it all: over three years, it’s returned 46.5 per cent to investors. ‘In the luxury space, we continue to believe that western brands will be the key beneficiaries,’ he notes.
Dr Scilla Huang Sun, portfolio manager of the Julius Baer Luxury Brands Fund, agrees that luxury brand fund funds are a great way to play the emerging markets, simply by investing in US and European-listed stocks. Managed by Swiss & Global Asset Management, the Luxembourg-domiciled fund has soared 21.5 per cent over the past year. It focuses on the leading companies in the luxury space, with its biggest holding premium giant LVMH. Huang Sun attributes this recent good performance to the ‘increasing wealth of the emerging markets’ as well as particular luxury stocks – Burberry and jewellery brand Tiffany included – doing ‘extremely well’. ‘It’s a high growth area and very profitable in the years ahead,’ she comments.
However, it’s not just luxury and premium brands that have the emerging market consumers’ tongues wagging. ‘The brands being bought into are not limited to the designer labels but across the everyday products familiar to Western countries, such as Pampers nappies and Colgate toothpaste, creating a real boom in retail figures,’ says Tom Biggar, head of investments at TQ Invest.
However attractive the funds – and indeed the returns – might be, Biggar warns that these luxury funds are ‘more volatile’ than a general equity fund, purely because it’s such a specialist area. As such, it should be balanced with other themes in a portfolio and form part of a satellite, rather than a core, holding. ‘It’s not an all-eggs-in-one-basket fund, even if you have strong convictions in this sector you should consider capping your holdings to a maximum of 20 per cent,’ he adds.
Having said that, he likes the JPMorgan Global Consumer Trends fund as it focuses on ‘areas exposed to increased consumer spending in emerging markets’: ‘Holdings are mainly in western companies operating in sectors that will benefit from these demographic changes. Investments are also made in developing markets, making this one of our more aggressive global equity picks.’ He also recommends Schroders Global Alpha Plus as it’s more ‘diversified’, albeit less focused on the consumer trends.
Is it all good news for the sector going forward? Peter Kirkman of JPMorgan believes so. ‘Many luxury brands continue to benefit from the insatiable demand of emerging market consumers, particularly the Chinese, for high-end goods. From champagne to leather handbags, demand continues to surprise to the upside and shows no sign of slowing.’