Riding on the Rising Affluent

We've heard of the burgeoning number of high net worth individuals and emerging middle classes worldwide, particularly in the emerging world. What latent opportunities lie beneath this growing phenomenon?


Don't we all dream for a slice of luxury at some point in life? Imagine a limousine packed with all you need for a comfy and luxurious ride at your disposal, a wardrobe filled with haute couture at your pick, designer timepieces and jewelry sprawled out for your selection, or even an exotic getaway at a resort haven tucked away at the immaculate beaches and azure waters of the Seychelles or the Caribbean Islands... and the list goes on.

While many of us would be quick to quash these hedonistic thoughts, dismissing them as mere fantasies, statistics are showing that more and more individuals globally are increasingly able to afford these lavish products and more, notably in Asia. In a report released in 2006, UBS Asia Pacific estimates that the number of individuals with liquid assets in Asia (excluding Japan) will grow by 9.7% annually from 2005 to 2010, versus a corresponding global growth rate of less than 6% per annum.

In 2005, according to a report by Merrill Lynch and French business consultants Capgemini, the number of Asians with more than US$1 million in financial assets (excluding their homes) has grown 7.3% to 2.4 million, outpacing that of Europe (4.5% to 2.8 million) and North America (6.9% to 2.9 million). Both organizations also projected that indivuduals with at least US$1 million of assets in the Asia Pacific region would increase by an average of 6.7% annually to US$10.6 trillion in the next 4 years. Although the largest number of millionaires in the world are found in Europe and North America currently, Asia's rich is growing at a much faster rate.

According to Societe Generale Asset Management's (SGAM) Senior Portfolio Strategist, Philippe Lasnier de Lavalette - fund manager of the SGAM Global Luxury & Lifestyle Fund, this developing trend is here to stay, and it is not just Asia which will benefit from the growing pool of wealthy persons in the world. Besides China and India, he points out, Russia and Eastern Europe, the Middle East, Latin America and the United States are also some of the upcoming consumption powerhouses which will drive the luxury and lifestyle investment theme, going forward. We explore deeper into the fund manager's thoughts on how he taps into these trends.

Defining True Luxury

Interestingly, one man's notion of what true luxury is, may never be quite the same as another's. As the fund manager highlights, the perception of what constitutes luxury differs between countries. He cited an example, "95% of the Japanese between the ages of 20 and 30 own a Louis Vuitton (LV) bag. Middle-class Americans can also afford to purchase an LV bag. But to them, it's not so much of a desired luxury item. So, what is perceived as a luxury item in Asia may not appear so to the middle-class Americans."

In the context of the SGAM Global Luxury & Lifestyle Fund, 'luxury' comprises a wide universe to tap into myriad trends related to the wealthy. To add to the common definition which describes a luxury good as something inessential, expensive and difficult to obtain, SGAM defines 'luxury' as all products and services which can charge a premium, either because of their perceived value, quality, performance or image, and possess superior quality.

To the fund manager, luxury products can be both branded and premium-quality products. Price, according to the fund's investment team, is not a determinant. The fund manager explains that companies manufacturing premium goods and services - which may not be branded products per se - usually enjoy a steady flow of clientele, as existing clients would have become accustomed to the quality of the product and will not change their preference easily. And of course, premium-quality products also attract new pools of consumers who are increasingly more particular about product quality.

The underlying thesis of this investment theme assumes that as the number of wealthy persons increases in the world, the demand for luxury products will trace the trend. When these luxury and premium-quality products – which come with high entry barriers - become indispensable to these consumers, demand becomes insensitive to price fluctuations, spawning a long-term growth trend.

Philippe opined, "What we see is that people are expecting a higher quality in everything, and are willing to pay for it. And as long as they do, companies will cater to the discerning consumer."To SGAM, "High Net Worth Individuals"(or "HNWIs") - individuals who own more than US$1 million in liquid financial assets - will be the crucial trendsetters of the luxury and lifestyle sector, as they decide what constitutes luxury.

Quoting private banking as an example, he explains that the demand for such services is enjoying exponential growth, due to the increasing number and sophistication of affluent customers. Similarly, high-end medical products such as lenses, dental implants and hearing aids - which cater to the affluent ageing population – are also included in the fund's portfolio, based on the same principle.

With close to 140 brand names owned in the fund's portfolio, coupled with a high emphasis on premium brands, the fund manager reveals that the array of companies which the fund invests in include those which provide goods and services such as private banking services, luxury vehicles (jets, cars, motorcycles, yachts), high-end medical equipment and products, luxurious hotel cruises and travel services, deluxe wine and spirits, premium sportswear, perfumes and cosmetics, haute couture, leather goods and accessories - the list is inexhaustive and expandable. In fact, its definition of 'luxury' is broader than what is tracked in its benchmark index – the MSCI World Textile Apparels and Luxury Goods Index - widening its investment vista.


Germinating Trends of Opulent Consumption

Where do the consumers of luxury goods and services hail from then? Aside from China, India and other parts of Asia, the fund manager is also looking at the trends of the growing rich in other regions in the world, such as Russia and Eastern Europe, Latin America, the Middle East and the United States.

Taking Russia and Eastern Europe as an example, Philippe pointed out that the Russian consumers are already representing 6% of the global luxury sales. In the Middle East, a ballooning pool of wealthy consumers have also become important buyers of luxurious products and services, given that their wealth has been dramatically enhanced by the escalating oil prices over the years.

Interestingly, amid common concerns about a slowdown of the US economy, the fund manager believes that the US will also become a potential market for luxury products. He said that the US consumers are currently spending a very low percentage of their disposable income on luxury goods and services, compared to that of Japan and Europe. He commented, "We expect spendings on luxury goods and services, as a percentage of disposable income, to increase over time in the US. The key driver is the increased marketing by premium European brands in the country. As consumers are accustomed to the quality of such products and services, they will continue to purchase them, especially the premium-quality products."

However, the fund manager notes that a dichotomy between the very high-end luxury products and the very low-end products is brewing. Some brands which fall between both extremes of the spectrum, he said, will face survival difficulties. This is because the mid-end products will have a more difficult time in positioning themselves, compared to the other products lying at both ends of the consumption band.

In addition, he believes that new sub-sectors will emerge in all sectors (e.g. services, medical) of the global economy to cater to different needs for high-quality products - a result of the fast growing demand for premium goods and services.

Incorporating The Premium Brand Names

Naturally, we were also curious about the fund manager's stock selection for the fund's portfolio, given the broad range of luxury products and services in the worldwide market and the fund's extensive definition of what 'luxury' is.

Philippe revealed that the fund selects some large companies which are leaders or co-leaders in their respective market sectors, and at the same time, possess very renowned brand names. He quoted well-established brand names such as Pernod Ricard Groupe, Luxottica Group and Nobel Biocare.

Pernod Ricard Groupe is a French wine & spirits company which owns brand names such as Martell ( Cognac), Chivas Regal (Scotch whiskey) and Jacobs Creek (wine). Luxottica Group, on the other hand, is a leading Italian manufacturer of designer sunglasses which owns house brands like Ray-Ban and Vogue as well as licenced brands such as Bvlgari, Chanel, Dolce & Gabbana, Donna Karan, Prada, Versace, Burberry and Polo Ralph Lauren – a total of 26 brands in the group's brand portfolio. Nobel Biocare, a Swiss-based and Swedish-based world market leader, designs and manufactures innovative dental implants, crowns and bridges.

The fund also captures smaller luxury companies which excel in their respective niche industries. These include companies like Raymarine Plc. and Antichi Pellettieri. Raymarine Plc. is a UK-based world leading manufacturer of marine electronic equipment for recreational and light commercial watercrafts. Antichi Pellettieri, an Italian-based European leader in the luxury goods market, distributes luxury handbags, small leather goods, footwear and apparel; its principal brands include Baldinini, Sebastian and Coccinelle, while some of the licenced brands include Mario Cerutti, Vivienne Westwood and Miss Sixty.

Less Cyclical Demand Is Key

Since the players in the fund's portfolio are highly dependent on the growth of higher-end consumption, we would be inclined to think that their performance would be extremely sensitive to economic cycles. You would ask, "How would it weather risks which stem from economic downturns?"

On this, Philippe believes that the wealthy's consumption pattern is less affected by economic downturns than most cyclical consumer goods. He explained, "Interestingly, studies from US business consulting firm Bain & Company Inc. have shown that since 1995, the sales of luxury goods globally had been enjoying positive growth every year, except in the year 2003. Even during the Asian Financial Crisis (1997-1998), sales grew by 10% and 5% in the years 1997 and 1998 respectively."The chart below illustrates the growth trend of global luxury products over the period 1995 to 2008.

Chart 1: Historical & Projected Growth in Global Sales of Luxury Goods (1995 - 2008)

Source: Bain & Company Inc., Lehman Brothers Inc. (statistical data provided by SGAM)

* Lehman Brothers forecast figures

Even so, he points out that factors such as terrorism or anything which will possibly jeopardize tourism could affect the demand for luxury products. The fund manager cited the year 2003 as an example. He points out that in 2003, when a global recession occurred, post-911 fears and the SARs pandemic had severely impacted tourism, affecting global sales of luxury products. Tourism, as he emphasized, is an important driver of luxury goods sales. However, the growth momentum was quick to pick up from the quagmire, as it registered a 10% jump only a year later.

To minimize such risks, Philippe mentioned, the fund spreads its investments across multiple sectors (e.g. automobiles, hotels & gaming, etc.). It also invests in some companies targeting wealthy ageing populations,tapping into the irreversible trend of the ageing global population, where sales are less cyclical.

In addition, the fund manager notes that luxury companies would usually have a diversified client base which is sprawled over many countries in the world. This means that in the event a regional economic crisis occurs, these companies will be able to shift their business focus to other regions, to offset the losses incurred in that particular troubled region. Aside from this, a diversified product mix to target various customer segments in different countries also works to mitigate risks.

Branding Itself Among Its Peers

Though it is the first retail fund in Singapore which invests in luxury products, the fund sees other peers in Europe. Last year, Swiss private banking group - Banque Syz & Co. Group - launched its Oyster Italian Opportunities Fund. Credit Suisse also launched its Credit Suisse Equity Fund (Lux) Global Prestige. Others include ING Groep's ING Prestige & Luxe and Clariden Investments' Luxury Goods Equity Fund.

We asked Philippe how different these funds are from the SGAM Global Luxury & Lifestyle Fund. He explains, "The main difference is that we are constantly analyzing our luxury universe - which currently comprises 140 premium brand names - researching on the pricing power of these companies and why their brands are so valuable."

Quizzed upon the target return he sets for the fund, the fund manager says he has none. However, he also explains that the performance of the fund is not constrained by the fund's proxy index - the MSCI World Textile Apparels and Luxury Goods Index.

To give a feel of the investment concept's viability, he remarked, "We have been offering the global luxury and lifestyle strategy to retail investors in France via the 'SGAM Invest Secteur Luxe' since October 2002, and the mutual fund has outperformed its benchmark index and other MSCI global indices over the years."

Since the fund commenced trading on 1 March 2007 (date of inception: 15 January 2007), the SGAM Global Luxury & Lifestyle Fund has returned 9.93% (bid-to-bid prices) as at 25 April 2007.