Once you are middle class you start changing your spending habits. This throws up investment opportunities around the world that Arjen Los of Dominion has had considerable success in capturing. As a global investor in aspirational brands, he says things look pretty positive. "Existing estimates for global GDP growth are 3.6 per cent for this year. So if you are a global investor it looks good. It's just if you live in Europe that it doesn't seem so great."
He looks at products that are aspirational and have pricing power, effectively exploiting the explosive growth in global discretionary spending from fast growing economies around the world. This isn't just investing in the traditional luxury goods of handbags and jewellery, but companies benefiting from 'lifestyle spending' - new technology and everything from cars to education (thousands of Chinese are learning English) and even healthcare treatments such as Botox.
Mr Los's Dominion CHIC fund has reached its fifth anniversary and performance has been consistently strong. Launched in June 2007 (just as the FTSE100 peaked), the fund aims to capture long-term out-performance of quoted luxury goods producers, driven by the global mega trend of increasing discretionary incomes, particularly in the rapidly growing economies of Brazil, Russia, India and China, amongst other emerging markets. The fund invests typically in blue chip companies, listed on developed-market exchanges that provide premium products and services to access this global trend. "We have a bias to buying companies that have distribution. By and large our holdings are governed by corporate governance and accountancy rules in the west. We have been wary of investing directly," says Mr Los.
"We're looking at the behaviour of the consumer with additional disposable income and what they want to spend it on," he says. "My parents wanted Wedgwood furniture and silver cutlery. But we don't. It changes over time."
For example, he was investing in Starbucks from day one of the fund. "We originally rejected Starbucks because it was over exposed in the US and had no real strategy for Asia. Now both of those issues are sorted out and it has become attractive."
He has also been a long-term investor in Apple. "We now spend far more money on Apple and less on PlayStations. Nokia and Blackberry owner RIM have fallen from favour." He held RIM and Sony in his portfolio at launch, but doesn't now.
However, he is wary of relying on Apple having a cast iron future. "We always watch Apple like a hawk every time they launch a new product. We're not saying Apple will always be there." The portfolio operates a stop-loss signal but when Steve Jobs died, Mr Los overruled this for Apple. "We thought it was irrelevant and the company would stay the same without Jobs," he says.
Arjen Los CV Arjen Los is Dominion's Chief Investment officer. He was research director of European equities at Merrill Lynch from 1995 to 2000, with main responsibilities for quality assurance, product development, research methodology and analytics. Previous to that he has worked for Smith New Court, Schroder Securities and Pierson Heldring Pierson. He holds an MSc in Monetary Economics from Erasmus University in Rotterdam. |
Mr Los keeps a close eye on the countries where the demographics are best for rising middle classes. As populations move from an agricultural to a modern economy the middle classes start changing their spending habits.
"Only now is China's middle class starting to really grow," he says. "Aspirational products in China may not be aspirational in Europe. But it is still Western brands that people aspire to. The Ralph Lauren logo is small here but in China the logo has to be very big. The Chinese will evolve their own brands but for the moment in China the most wanted western brands are Nike, Polo, Starbucks and Apple." Nevertheless, he says among the ten more valuable brands in China are two to three spirits brands from China.
In terms of key differences, he points to the car industry where BMW has produced a lengthened version of its '3-series' executive car for sale in China, where business people prefer to be chauffeured. "Fast cars are bought more by women in China and men do most of their paying in cash, so they have big man bags."
Last year he introduced an outdoor leisure category to include mountain bikes and VF Corporation – the company that owns The North Face brand. "People want to create an impression of an active lifestyle. North Face is growing fast in China." Exposure to mountain biking is harder to access, though with Giant being the one global brand of mountain bikes and others too small to invest in.
Meanwhile, the middle classes in China are spending lots on education, meaning New Oriental Education is on his watchlist. He also recently added Samsonite to his portfolio. "Middle class Asians and Chinese have started to travel in big numbers."
If you want to dip a toe into the luxury goods areas directly, he suggests investing in LVMH, owner of Bulgari and other prestigious luxury brands. "They are the biggest conglomerate of the biggest luxury goods and sell everywhere in the world, so it's the simplest way of doing it," he says.
