The idea of thematic investing is not new but the performance of luxury-themed stock-picking continues to win fans and returns, according to Swiss & Global in a recent interview.

Glamorous handbags, glittering gems and top-of-the-range wristwatches - what’s not to like?

From an investment point of view there is plenty to like, as the demand for luxury goods and services continues to boom, Dr Scilla Huang Sun, co-manager of the Julius Baer Luxury Brands Fund, which is managed by Swiss & Global Asset Management, told this publication in a recent interview.

With the luxury market offering a plethora of globally-renowned brands, consumer desire is growing fast, and it is within this luxury arena that investment opportunities are buoyant. Buying the latest Louis Vuitton handbag, a hot-off-the-runway Burberry trench, or even that blingy Van Cleef and Arpels rock is not only a fashion trend, but a growing trend in investment. And much of this consumption is coming from emerging markets, such as China, with countries like Brazil, Russia and the Middle East following suit, according to the Julius Baer Luxury Brands Fund. It celebrates its five year anniversary this month. 

With a "volatile environment" such as luxury, Dr Huang Sun notes that being careful with thematic investing, playing secular trends - and having an investment horizon of up to three and five years - are necessary traits for success. Recent performance for this fund is encouraging: investors in the fund are up almost 80 per cent in euro-based terms since it was launched five years ago.

"With thematic investing, it is about long-term investing, so you’re playing on secular growth trends, and what we try to do is really play the wealth creation in emerging markets - playing on the fact that you have more and more consumers in the developing world wanting to buy Hermès or Cartier,” said Dr Huang Sun.

Dr Huang Sun, who has more than 12 years of experience in the luxury sector, launched the Clariden Fund in 2007, and went on to launch the Julius Baer Luxury Brands Fund in 2008, which she co-manages with Andrea Gerst, who has nearly 10 years' experience in consumer stocks.

Investor types

The type of investors the fund attracts will "need to be people who can take equity risk and people who believe in the secular growth of emerging market consumption and wealth creation". In addition to this, buying times are also of importance. "The best time to buy luxury goods are when you have a crisis or bad headlines on China for example," as people very often sell off equity stocks, "but they rebound quite sharply,” she said.

Launched in Switzerland in 2008, the fund holds 33 stocks and a basket of eye-catching global brands including LVMH, Prada, L’Oréal, Burberry, Hermès, Totes, Michael Kors, Estée Lauder, Swatch, BMW, and Van Cleef and Arpels. While it has never exceeded 40 stocks, the fund has a threshold band of between 25 and 45, as Dr Huang Sun believes in "diversification", to avoid constraints to investors. As with any significant purchase, when looking at luxury brands and luxury stocks, the brand and the product must be given great attention. "It’s not like we don’t need another pair of shoes or another handbag, a great product always sells, so when you judge a company it is important that you get a grip on the power of the brand," said Dr Huang Sun.

With the majority (47.8 per cent) of stocks in fashion, accessories and jewellery, the brands which the fund affiliates itself with are predominantly in handbags, watches, cars and gems - with all products being "above-average price positioning", and seemingly most appealing to the emerging markets, Dr Huang Sun said.

Apparel (only 3.5 per cent of share), is the "most fickle and difficult area to invest in", given that there are so many brands and the seasonal nature of fashion is a huge factor in that. But when it comes to handbags, or watches or jewellery, brands tend to be more stable, "less slave of fashion", she added.

Forecast

Swiss & Global forecasts that the luxury industry will grow by 6 to 8 per cent in 2013, with 90 per cent of growth continuing to come from emerging market consumers, and companies mention the Middle East as a high-growth area, with the Middle East expected to show mid-single upticks (between 3 and 7 per cent). Similarly, the US should deliver healthy contributions, and Switzerland, France, Italy and Germany are expected to follow suit.

The Chinese luxury consumption is still seen as the most important driver, with their share reaching nearly 30 per cent overall, and with the number of Chinese travelling outside of China to indulge in the world of luxury goods increasing by 25 per cent last year. With more millionaires in Asia and the Middle East than in Europe, and with China expected to surpass Japan as the second wealthiest country in the world, this is perhaps not surprising.

But what about the emerging market countries themselves?

Dr Huang Sun said citizens in these countries do spend lavishly, "given that they aspire to buy western brands". Do they offer such brands themselves?

“They [emerging markets] do have good consumer companies, but when it comes to luxury, they are still a couple of years away, and it’s not easy to find established brands where consumers are willing to pay premium prices," she said. While there may be some good consumer brands that are domiciled in emerging markets, when it comes to the leading brands, true luxury branding is limited to the more developed countries. Italy leads the way for fashion and leather goods, France for perfume and cosmetics, Swiss companies for watches, and Germany for cars.

Impact

As at 31 December last year, Italian fashion leader Prada made the strongest impact on the fund’s returns. Michael Kors and Richmont Group brands were also strong performers. BMW, the car-maker, saw a surge - driven by a rally in the auto industry - and Swatch contributed positively on improving Chinese consumption, with the Chinese being the most prominent buyers of Swiss watches.

Meanwhile, US stocks such as Ralph Lauren and Brown-Forman made negative contributions on worries regarding the political and fiscal issues in the US, and brands such as Tiffany & Co saw declines, with the silver industry waning over recent years. Hermès suffered a slight dip due to merger and acquisition speculation, and Coach continued to face competition from booming brands like Michael Kors.

"Many of these European companies are quite financially sound. More than 50 per cent in our portfolio are companies who are net cash, or slightly less, meaning that most luxury companies generate a lot of cashflow. They can finance all the expansions into the emerging markets out of the cashflow that they generate," said Dr Huang Sun.

While risk is inevitable, the choice of brands can help to "risk-manage" and having established, well-known brands in the luxury field is imperative to the success of the fund. However, that said, Dr Huang Sun does take risks with newer brands and tries "to have a balanced approach" by having both established brands and newer ones. A mid-size brand that is globally known, but not as well-known as Louis Vuitton for example, could be considered by the fund, given it holds the right credentials and branding structure.

Appeal

To appeal to a "demanding" luxury clientele, Dr Huang Sun points to four areas of necessity for a successful luxury brand. 1, the product needs to be right, 2, a clear market position 3, a consistency of the brand over the years and 4, it needs to be innovative and creative.

“I think the biggest challenge for any luxury brand is to continue to grow on the one hand, but on the other hand to keep its exclusivity and high-end positioning. This is probably the biggest challenge any luxury companies face in management,” said Dr Huang Sun.

As it celebrates its fifth year, a look at the investors who are contributing to and gaining from the Julius Baer Luxury Fund is noteworthy. The fund's investor base is "quite broadly diversified" and many of them are "people who understand equity markets a bit, and then they find the theme interesting,” says Dr Huang Sun.

The fund does not have a performance fee, but levies an annual management fee of 1.6 per cent for retail share classes and an 0.85 per cent fee for institutional share classes. As a Luxembourg fund, it is traded on a daily basis and has retail shares and institutional shares. As far as concentration of risk is concerned the fund has a restriction, and cannot go above 10 per cent for one single position, but Dr Huang Sun said she doesn't "usually go above 8 per cent". For positions above 5 per cent, they should not make up more than 40 per cent of the fund.

Dr Huang Sun particularly likes brands such as Hermès. While it's not a new brand, "if you look at them over the years, they have done a consistent job in delivering to their classical positioning" and in typical French fashion "it’s not very flashy", but effortlessly stylish. Similarly with Prada; Dr Huang Sun believes the legendary Italian brand is "always ahead of the curve".

On her role as fund manager of the JB Luxury Brands Fund at Swiss & Global Asset Management in the luxury goods market, Dr Huang Sun says

“I love my job. For a woman it’s a great thing, it's a very positive industry.”