You can’t afford a Hermes bag — but you can invest in one
MAYBE you can’t afford to shop for luxury goods, but that’s no reason not to invest in them.
Premium brands have had a stellar run since the turn of the century, which turned slightly sour last year, but experts are tipping a turnaround in 2015.
Luxury brands include everything from jewellery and handbags to cars and chocolate — anything people are prepared to pay a premium for. The type of product isn’t important, it’s the strength of the brand which counts.
With the world still in recovery from a global recession, savers might question whether the time is right for the premium market.
But Alexandre Mouthon, portfolio manager of the Pictet Premium Brands fund, says: ‘There is a polarisation of demand — people tend to be either very rich or quite poor, and consumers either like luxury, high- end products or very basic, cheap goods.’
And the number of people rising into the middle classes and wanting to snap up luxury goods is growing.
In emerging markets, such as India and China, this is a growing part of society and women are taking an increasingly central role in household finances. Many of these consumers aspire to the same global brands that are available in the West.
Because of that, tourism is intrinsically linked to the success of these companies. Around 30 pc of all luxury purchases are made while people are travelling, either because they are treating themselves while on holiday or because they are taking advantage of duty-free prices while waiting in the airport.
And as wealth rises, tourism increases and brands are spreading globally to take advantage of this trend. Mr Mouthon says handbag maker Michael Kors is a good example of this. ‘It started in the U.S. from nothing just a few years ago and now it is becoming global,’ he says.
‘It has been very successful in bringing a y oung, fresh, dynamic range to the consumer at attractive prices and grew by around 35 pc last year.’
But while Michael Kors was soaring, many firms struggled in 2014. A strong euro hit margins for many of the European brands, while the spread of ebola and political upheaval in Russia put a dampener on international travel.
But the prospects for this year look much brighter. The euro has weakened, helping sales margins, and even the shock plummet of the oil price is good news for this sector as it means there’s more money in consumers’ pockets for them to spend elsewhere.
Scilla Huang Sun, manager of the Julius Baer Luxury Brands fund, says: ‘Some 30 pc of global luxury goods purchases is from Chinese consumers, but it’s mostly tourism. People worry because China’s growth is slowing, but it’s not about the economy — it’s about what the tourists are doing.’
The word luxury goods conjures images of diamond-encrusted jewellery and expensive leather handbags.
But Ms Sun is especially interested in affordable luxury brands. These catch those consumers just able to afford premium goods, capturing their attention with aspirational products at attainable prices. This includes brands such as Macy’s and Michael Kors, and in the beauty industry Estee Lauder and L’Oreal — firms which don’t price people out, but aren’t so cheap they are available to everyone and margins are squeezed.
And one of the best performers over the past year has been sports brand Nike. Ms Sun says: ‘It’s a desirable brand which young people are happy to pay a premium for.’
The firm has been helped by a strong U.S. economy and the rising popularity of running shoes. Indeed, shares have tripled over the past five years to 64p.
Another company which may surprise is chocolatier Lindt. Where other confectionery firms are struggling, the Swiss-based firm is growing by up to 8 pc a year and the share price has more than doubled to £36 since 2010.
Of course, there are some more atypical choices in the fund, designer handbag maker Hermes and jewellery brands Tiffany and Cartier. These latter two do particularly well because just 20 pc of the jewellery market is branded. Car makers are also popular with these fund managers, particularly the likes of BMW and Daimler — quality marques which will benefit from the fall in the euro. Once a company creates a strong brand it should go from st r e ngth to strength. But there are dangers i n chasing world domination. Become too popular and you might fall out of favour. Ms Sun cites handbag maker Coach as one such example. Its share price has almost halved since 2012 to 28p. She says: ‘It became common in outlet stores and began to feel less exclusive. Building up a brand t akes many years and can be destroyed easily.’
This will become more important as the buying power of consumers in a greater number of regions increases.
Around 50 pc of premium goods sales are from emerging markets; by 2020 that is set to hit 60 pc. Tom Becket, head of investment at Psigma, likes the JB fund with its small portfolio of just 31 companies and leaning towards luxury brands. It focuses on well managed companies which are adept at building up strong, global brands.
The fund has returned 18.6 pc over the past year, and over five years would have turned £1,000 into £2,200. The Pictet fund has put in a similar performance, returning 19.6 pc over a year.