Growth, demographics key megatrends for Dominion CHIC
Arjen Los, portfolio manager on the Dominion CHIC fund remains firm on the megatrends of demographics and global growth that underpin the fund’s investment objectives.
Despite concerns over growth rates in key markets such as China this year, he said the long term changes in per capita income across the global emerging market population are undimmed, creating the opportunity to invest in companies seen as providing aspirational goods and services.
Investor material on the CHIC Fund, which is a sub fund of Dominion Global Trends SICAV p.l.c., regulated by the Malta Financial Services Authority, cites Goldman Sachs Research numbers pointing to a 600 million increase in the population globally between 2010 to 2025, of those with incomes of more than $30,000 annually.
This is the global emerging middle class that wants to buy BMW cars, spend money at casinos in China, and apply anti-wrinkle agents – the sorts of sectors and products that the Chic fund is interest in.
Los (pictured) stressed, however, that as the case of Japan proves, just because demographics are against a country at the macro level, it does not mean that companies cannot prosper.
It is also stressed that this is not a fund solely focused on the higher end of luxury. The World Bank estimates that any annual income above $5,000 marks the point where subsistence is met and discretionary spending starts – also the point at which the fund comes in.
And large sales volume is not necessarily a downside despite the focus on aspirational brands. Los noted that BMW sells more of its 3-series cars than Ford does its Mondeo model. Larger volumes can also assist management of operational leverage within companies. It is also a good factor to look at in the retail sector, as high leverage suggests money has been spent on opening additional new outlets, which in turn suggests higher fixed costs.
The investible universe is defined as being about products that “capture a disproportionately large share of a consumer’s income as that income increases” .
Examples would be the consumer selecting BMW rather than Toyota or Fiat in automobiles. Or Apple rather than LG or Samsung in the tech sector. Or the Mandarin Oriental and Starwood Hotels rather than Accor or Melia Hotels.
It is about identifying aspirational products, where companies have pricing power linked to emotional spending decisions, Los said. This emotion is easily visible on display in markets such as China, where consumers will queue around the block just to get inside a newly opened Starbucks coffee house, he said.
But, positioning oneself as an aspirational brand is not enough. Sales have to be made across borders. Los said that exclusive Italian shoe manufacturers that have failed to increase exports to China would not be added to the portfolio of about 40 holdings, which are mainly focused on companies with market capitalisation value above $1bn.
Also, there is recognition that some areas can be difficult to buy into. For example, the top end of the bicycle market is dominated by privately held companies.
The management learned lessons from 2008-9, Los added. It is not a portfolio taking a buy and hold strategy, but is also interested in managing volatility on behalf of investors.
The active management of volatility impacts in areas such as turnover, which is higher because of techniques such as stop-loss. There are factors that cannot be predicted, such as the Swiss National Bank decision to set a CHF rate against the euro. Prior to that, investors had sold Swatch – the watch maker – on the basis of fears a more expensive CHF would mean lower sales. But, because of its pricing power it was able to raise prices to retain profit margins anyway, Los said.
Other changes, although still in the future, are more widely expected. One is improving governance in Asia. This is important as it is estimated that the proportion of listings will hit 20% there in ten years’ time, up from 6% today. The region will then account for half of constituent’s sales, up from 23% today.
Other areas of improvement expected include access to reliable statistics and other data from within markets such as China. Everybody wants to export to the country, but actually gauging brand strength within that market remains challenging.
Looking ahead, Los said that the portfolio was interested in adding new categories of businesses. In 2011 it was the active/outdoor category, where it has been noticed that consumers will buy The North Face branded outdoor gear, even if they do not do any serious mountain walking.
Kuoni, the Swiss travel firm was added too, along with luggage maker Samsonite.