Manager Laurent Belloni explains how this bottom-up fund uses macro trends.
Consumers have come under attack from central banks in recent years, whose tightening monetary policies aim to discourage spending and lower inflation. So far, however, the consumer has proved tougher than expected and some experts believe this will force banks to hike rates past 6%.
Laurent Belloni, co-manager of the €2.2 billion Pictet Premium Brands fund, is closely monitoring this data as his fund’s performance depends on consumer health.
However, it managed to maintain a positive track record during the challenging time of the Covid pandemic, keeping the fund in the first performance decile of its peers over five and three years and in the first quartile over one year.
Below he explains how he and co-manager Caroline Reyl achieved this, why he believes consumer attitudes will remain positive and how he is positioning his portfolio accordingly, and the mistakes he hasn’t made when it comes to Tesla and Elon Musk would take over from Twitter.
Fund performance over 3 years versus sector and index
Source: FE Analytics
What is your investment philosophy?
We take a bottom-up, thematic and benchmark-agnostic approach to premium consumer brands. We invest in around 40 best-in-class companies, selected from a small universe of 120 names across various sub-segments including Luxury, Sporting Goods, Travel & Leisure, and Cosmetics, Food & Beverage.
Why should investors choose your fund?
Access to a strategy with extremely high persuasion and exposure to emerging market consumers through quality industrial stocks. It typically appeals to European and US investors looking to gain exposure to emerging markets through quality stocks domiciled in Europe and the US.
Unlike many other luxury brand funds, in our process we look for high profitability, strong cash flows, robust balance sheets and pricing power, which is very important now with inflation.
How do you build your portfolio?
Currently, luxury is the largest engagement at around 40%, along with travel and leisure (20%). These are the stocks that are more exposed to macro developments. In the middle is sporting goods, which tends to be more discretionary, accounting for 15% of the fund. Finally, we have the more stable, defensive part of the portfolio, namely cosmetics and food & beverages, which is currently at 25%.
We’re fairly bullish on consumer resilience. This is partly due to the reopening of China and the fact that most of our stocks have performed decently and shown nice pricing power. Up until December of last year we had almost 30% exposure to the more defensive end, but since then we’ve reduced food and beverages, for example, which went from 30% to 25% at the end of January.
In which scenarios do you expect the fund to underperform?
We are dependent on consumer sentiment, but because we can be quite agile with our portfolio, we have outperformed the MSCI World Index over three, four and five years.
Geopolitics can pose risks, and the US-China trade war is definitely something we need to look at closely. In the US and Europe, we also need to keep an eye on inflation, but consumers of premium brands tend to be more resilient than average.
What were the best and worst calls in the last 12 months?
Luxury and travel have done well. Key outperformers included Hermès, which fell just 5% last year in a down market when the fund was nearly -15%; Visa with slightly positive performance; Brown Forman, at -3%; Brunello Cucinelli, up 15%; and Spanish leisure resort operator Melia, down just 2%.
Performance of the stock over 1 year
Source: Google Finance
Conversely, sporting goods-cosmetics were the biggest detractors, with Nike down 25%, Adidas down 49% and Puma down 46%, while L’Oréal was down 19%.
What recent mistake do you think you could have avoided?
We own a few Teslas in our portfolio [3.2% of net assets as of the end of September 2022] and we were quite opposed to the Twitter acquisition, mainly due to a lack of resources and funding. The stock has fallen massively over the past year, down nearly 70%. In hindsight, we should have reduced our exposure in April more aggressively.
Recently, however, Tesla announced new long-term trends at 50% sell, so we bought more late last year to play the recovery. Now it’s the biggest performer so far of 2023. That gives you a rough idea of how we tend to be long-term oriented and stick to our beliefs.
Share performance over the year to date
Source: Google Finance
What do you do outside of fund management?
I travel a lot. Last year I went on safari, this year I’m visiting the west coast of the USA. I am also interested in tennis and skiing.
