In these turbulent times, thematic investing in strong brands is particularly interesting because substance comes to bear. Still, such investments also entail enormous risks as history has demonstrated, Lombard Odier's Andreas Arni tells finews.com in an interview.
Mr. Arni, what does thematic investing mean?
Thematic investing is a top-down investment approach focusing on long-term societal mega-trends instead of bottom-up investing in individual stocks and sectors. This allows investors to benefit from structural and fundamental changes in an economy, which usually unfold over a longer period.
It is often the case that these changes have an impact beyond sector boundaries and thus go beyond the traditional framework of sector allocation.
Why is thematic investing a trend for private banking clients?
One key advantage is that investors can take a much more focused approach; traditional equity funds often invest in 60 to 80 stocks because the focus is on diversification - usually at the expense of returns.
«Nike shows what this status means»
Thematic portfolios focus on a much smaller number of stocks. This does increase the specific risk - but so does the return outlook. Another advantage is that with thematic investments, you can better align your portfolio with your own beliefs and expectations.
What are some examples of thematic investments?
Typical examples are the digitalization of the economy or demographic changes in an economy but also sustainability topics such as the future of food or the topic of electrification.
A more narrowly defined investment theme is so-called global brands, where it is assumed that companies with globally established brands can generate an excess return for their shareholders.
How do you define a global brand?
Nike shows what this status means. Everyone knows the Nike brand today. It stands for innovation, origin, and culture. The product itself allows Nike to raise prices and thus generate very attractive margins over decades.
«Even big investors like Warren Buffett invest in stocks with strong consumer brands»
This is very important, especially now. Because to survive higher corporate costs due to rising inflation, pricing power and regular price increases are important. Only the strongest brands can afford to do that.
Why are global brands interesting as an investment?
Investing in stocks with a strong brand is well established. Even big investors like Warren Buffett invest in stocks with strong consumer brands that - like Apple or Nike - are financially very healthy.
With a strong brand with momentum, innovation, and loyalty, one can see that sales grow - due to regular price increases and higher volumes in the long term; and thanks to a successful expansion of the brand into international markets or the introduction of new product categories.
Aren't global brands also subject to fashion cycles and therefore unpredictable?
Indeed, new, emerging brands are riskier than established ones. One example is Peloton in the sports sector. The home cycle producer is more exposed to cycles than leading brands like Nike. It's possible that Peloton's home cycle was nothing more than a fad during the pandemic.
A «best in class» luxury brand, however, like Hermes, has not been exposed to cyclical risk until now. Even digital brands like Alphabet, which has more than two billion active customers with Google and YouTube, have limited cyclicality.
So which global brands are lucrative for investors?
The most attractive «brands» are those that can establish themselves as global market leaders and maintain their position. The first phase, when the brand has very strong momentum, is very interesting for shareholders.
«Sales collapse, the valuation of the company reduces substantially»
Usually, this phase is characterized by a strong entrepreneur, like Elon Musk with Tesla or Jeff Bezos with Amazon.
Global brands, as mentioned, also carry risks - for example, if they go out of fashion or suffer reputational damage (see Abercrombie & Fitch); what happens to the investments then?
Sales collapse and the company's valuation is substantially reduced. Volkswagen is an example.
In what way?
After the diesel emissions scandal came to light, the stock price plummeted in 2015. Today, the VW Group is focused on the launch of electric vehicles and the future IPO of Porsche.
In Volkswagen's case, the brand was stronger than the scandal. But the most striking example is Apple. When the company was only 90 days away from bankruptcy in 1997, Microsoft came to the rescue, investing $150 million. Steve Jobs came back, gave Apple a product innovation boost, and built the brand sustainably. Today, Apple has the world's largest market capitalization.
To what extent are global brands currently affected by supply chain bottlenecks?
Supply bottlenecks can pose another risk, as was seen with the cosmetics company Estée Lauder. Shanghai was at a standstill because of its zero-covid strategy. Estée Lauder could not fulfill orders because the distribution center in Shanghai was closed. The stock price reflected this negative situation.
«Sustainability and innovation are driving new brands»
For automotive brands, this can be more or less true. If a brand is highly vertically integrated, the bottlenecks may be less problematic, as in the case of Ferrari or Tesla.
What are the global brands of tomorrow?
Sustainability (solutions for a better sustainable future) and innovation (disruption) are driving new brands. For example, our investment theme «Natural Capital» is an equity strategy for the circular economy.
What does that mean?
Investors in this strategy are benefiting from the mega-trend of circularization of economies, with new business models emerging, such as the «sharing economy.»
A second example is the «Climate Transition» strategy that invests in companies that are on a successful development path to completely avoid CO2 emissions.
Andreas Arni has headed Lombard Odier's Zurich office since the beginning of December 2019 where he is also responsible for the Swiss Domestic Market. He graduated with a Ph.D. in economics from the University of St. Gallen. Most recently, he worked for Credit Suisse where, in addition to his role as head of entrepreneurs & executives Switzerland, he was also a member of the private banking management committee Switzerland. Before that, he held a similar position at UBS. He has more than twenty years of experience in the wealth management business.
