Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
GAM's Luxury Brands strategy is designed to capture emerging market growth at a developed market cost of capital, to generate above market returns for clients. The fund seeks to compound shareholder returns over time through a long-term investment strategy in brands with wide / widening moats, and which are able to continue investing for growth at high rates of return.
A long-term and robust thematic, our investments in luxury brands seek to benefit from multi-decade tailwinds, including the structural growth of the emerging middle class, overlaid with premiumisation trends and the rising contribution of millennials and Gen Z consumers. The growing focus on sustainability and ‘buy less but buy better' also plays into luxury demand. Further, many companies in the sector enjoy pricing power and high margins, in addition to being strongly cash-generative, broadly insulating them from a rising rate environment.
The strategy follows a bottom-up, stock selection process based on proprietary research and valuation. We integrate ESG (environmental, social, governance) characteristics with risk-aware portfolio construction to enhance shareholder returns. We pay keen attention to moats cultivated by businesses and to valuation - in our view, the high return on invested capital seen at leading luxury brands drives long-term shareholder value. We actively engage with smaller, private luxury companies to keep abreast of changing consumer trends.
The Luxury Brands strategy is managed by Swetha Ramachandran, who has more than twenty years of investments experience and has been the lead manager on the strategy for over three years. She is a member of the Global Growth team at GAM, which comprises eight investors with over 150 years of investment experience in total. The team manages a range of client portfolios across multiple thematic areas (Disruptive Growth, Merger Arbitrage) benefiting from shared research and investment ideas, as well as codified and replicable investment processes.
How are you positioning your portfolio in uncertain times?
Historically, luxury stocks have exceeded previous peaks following every crisis within a shorter timeframe than anticipated by the market. This is attributable to resilient long-term demand, exceeding global GDP growth - driven by growing emerging middle class formation and demographic tailwinds. The luxury industry itself boasts high and resilient margins - a consequence of its pricing power and high gross margins. The industry has grown these margins through the pandemic as consumers have made more considered purchases, trading up to luxury from casual consumption.
As such, we believe the current market volatility is ripe for active stock-picking with a long-term thematic investing horizon. We are concentrating our portfolio into profitable companies with high ROICs and robust cash generation which are well-positioned to gain market share in challenging circumstances. We are also increasing our exposure to companies with superior pricing power and inelastic demand - which we see as key to preserving margins in an inflationary environment. We believe consumers are increasingly focusing on leading brands in respective subsegments - be it in watches and jewellery or cosmetics and skincare, as well as in companies showcasing strong sustainability credentials. We are not exposed to companies with high cash burn - viewing their capital-raising prospects as more limited going forward.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The luxury sector is not a monolith - despite the common perception that it consists of a handful of companies in the business of selling fashion, leather goods and watches and jewellery. Rather, it is a trillion dollar sector in revenues, comprising of a wide variety of subsectors spanning fashion, accessories, cosmetics and skincare, hospitality, autos, art and home furnishings and watches and jewellery, among others. As such, the sector is meaningfully exposed to the ‘experiential economy', which we presently see roaring back.
Travel, in particular, is an area benefiting from strong pent-up demand around the world with luxury hotel operators such as Accor, Hilton and Marriott reporting strong room rate rises into the key summer travel season, boding well for profitability. "Revenge conviviality" remains strong as consumers seek to make up for lost time through socialising where possible - and with ‘less, but better' a prevailing theme - premium spirits brands owned by the likes of Campari and Diageo are noted to be faring particularly well, seen as an affordable indulgence even as consumers are tightening purse strings elsewhere. What's interesting is the ‘at home' cocktail culture that flourished during the pandemic remains well entrenched, even as consumers spend more time socialising outside of their homes.
