As an asset management group with a 40-year heritage, we invest our clients’ capital using active strategies across asset classes. In our Hyper Active series, we showcase GAM managers adding real value for investors. The first piece features Flavio Cereda discussing active management in the luxury sector and how it can exploit stock performance dispersion.
5 September 2024
Passive investment has grown in popularity over recent years, as cost-conscious investors have been willing to track, rather than potentially outperform, market indices.
But in an new age of uncertainty, between geopolitics and rapid technological change - from automation to AI - that touches every industry and will shape how we all live in the future, for investors, the scope to pick the stock winners from the losers could be more rewarding than ever.
Let’s first consider, in an era of vigilance over costs the broad case for active management. Then we’ll explore how GAM Investments’ portfolio managers – across both equities and fixed income, aim to go about harnessing the potential of active management to deliver better results for clients.
What sets active management apart from a passive approach:
- Scope for higher returns - identifying and buying undervalued stocks, rather than just tracking a benchmark, can deliver outperformance, And over a period of years, sustained outperformance can truly add up.
- Exploit the power of research - greater knowledge about the companies behind the investment opportunity, and the risks and opportunities they face, can give investors an edge. It can also help avoid potential hazards, some of which index-led investors could have more exposure to.
- Investment flexibility - Active Managers can adapt strategies to changing circumstances, capitalising on market opportunities. Volatility can be an opportunity to buy or sell at advantageous levels.
- Risk management - Active Managers can tailor strategies to manage specific risks, such as by hedging or raising stock-specific concentration, instead of being led by their specific benchmark.
So much for the standard, well-worn case for active over passive investing. But in the real world, active portfolio management, typically involves higher costs for investors, reflecting the research and other expenses active manager incur in aiming to deliver benchmark-beating returns for investors.
With this in mind, now let’s explore how some of GAM Investments’ fund managers, in both equities and fixed income, go about their task of delivering value for investors, aiming to capitalise on the full performance potential of active management.
Exploiting stock performance dispersion
In the luxury sector, the performance differential in between winners and losers can be considerable – a case of the winners taking it all. And so far in 2024, the differential has been meaningful. The below chart shows the gulf between the year-to-date (YTD) winners like Hermès, Ferrari and Prada, and underperformers such as Kering and Burberry.
Luxury: not all that glistens is investment gold
Chart 1: Stock performance dispersion in USD (%)
Source: Bloomberg, GAM, as at 30 August 2024.
Past performance is not an indicator of future performance and current or future trends.
Past performance is not an indicator of future performance and current or future trends.
To maximise returns, investing in luxury as a broad sector is not nearly enough. Given the dramatic performance divergences between successful brands and those struggling, active management - based on fundamental research and deep understanding of all aspects of the luxury sector – is essential to pick the winners. And in this segment, the positions of winners and losers can change markedly in a matter of weeks and months. Research, including the use of contacts across the industry I have built up over nearly two decades as an equity analyst, can give us a real edge. With the confidence to stray from the cosy analyst consensus view, we can truly capitalise on intra-sector performance dispersion.
For instance, looking at less obvious names, we have favoured Viking Holdings and On Holding, neither of which is a benchmark constituent, and both have performed strongly. Viking Holdings is a US-listed play on the Luxury Cruise market and a way to directly engage with the wealthiest consumers and their growing appetite for high-end Travel/Experiences whereas On Holding is the parent company of US-listed but Swiss-based On Running, which is gaining significant traction and market share at the expense of the likes of Nike (a position we exited from early on in my tenure) given greater innovation, better pricing discipline and strong brand heat.
Kering is another example of the active management advantage. Kering which holds a weighting of around 3% in the S&P Global Luxury Brands Index benchmark, dropped by circa 35% YTD as at 30 August 2024. We finished selling what was left of our holding in March as we believe the deterioration of metrics at Gucci would not revert anytime soon, and we held concerns over management’s recent strategic decisions.
The luxury sector is evolving and growing, driven by powerful secular trends such as the ongoing rise of middle-class consumers in Asia. We believe that premiumisation – as reflected in the upper echelons of our luxury brand pyramid - and the demand for personalisation from the most exclusive luxury brands are now creating many of the most compelling opportunities for revenue growth. And, in my view, active management gives us scope to exploit the very best of them.
Flavio Cereda manages the Luxury Brands Equity strategy at GAM Investments.
We believe that in an environment of rapid geopolitical and tech-driven change, the case for an active investment approach is particularly compelling, both in terms of risk management and the potential for enhanced returns over the long-term.
While we recognise the role that low-cost tracker funds can play for some investors, in our view, for many others, blending active and passive investment strategies offers a balanced approach that leverages the many strengths of active with the cost benefits of passive exposure.
Nevertheless, as the global financial landscape continues to evolve, we believe that active investment strategies are valuable tools that can help investors achieve their long-term financial objectives.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The S&P Global Luxury Index is comprised of 80 of the largest publicly-traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investibility requirements. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The S&P Global Luxury Index is comprised of 80 of the largest publicly-traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investibility requirements. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.