Funds Investing in luxury brands have returned up to 13% a year, thanks to strong pricing power and the so-termed heritage premium. So should you invest this London Fashion Week?
London Fashion Week, which comes to an end today, is one of the world's highest-profile showpiece events in the cultural calendar, with total orders placed in the region of £100m.
Investing in high-end fashion wear is often associated with the super-rich, but it can be affordable and, more importantly, a shrewd buy for any investor, even those not interested in clothes. Funds focusing on upmarket brands have delivered spectacular returns in recent years.
The Julius Baer Luxury Brands fund, for instance, has returned 13% per annum over the past five years by investing in an array of prestige names, from fashion wear including Christian Dior and Ralph Lauren, to champagne, Moët Hennessey and Pernod Ricard.
How have high-end brands delivered sky-high returns?
There are two ways with which high-end brands deliver spectacular returns: pricing power and heritage premium.
1. Pricing power
Premium brands keep their pricing power better than everyday items when tough times hit the economy. According to Morningstar's consumer fund analyst, Fatima Khizou, "high net worth individuals tend to remain loyal to their preferred brands and will spend irrespective of the economic growth". In contrast, a dent in income for middle-class earners would likely reduce spending on non-essentials, including luxury goods, no matter how necessary these everyday items are perceived to be.
2. Heritage premium
Luxury brands can't be replicated overnight. Some of the best-known brands take years to carve out their identity. Dom Perignon champagne is named after a seventeenth century monk who reputedly invented the first sparkling white wine. Swiss watchmaker, Patek Philippe, founded in 1839, takes months to craft one of their famous timepieces. This in-built heritage shields the old watchmaker from Apple's mass-produced wearable watch and protects vintage champagne from the supermarket's prosecco. There are few like-for-like substitutes for centuries' old heritage.
TD Direct Investing's favourite fund – Julius Baer Luxury Brands
Julius Baer is unlikely to be a household name for UK investors, but the Swiss-based firm has been managing money for more than a century over at its Zurich HQ, a location close to many luxury brand operators in Switzerland, France and Italy.
Two-thirds of the fund's holdings are listed on European bourses and current top stocks include French fashion house Hermès, and Italian sunglasses designer Luxottica. The pricing power of these premium brands should help protect profits and support share prices.
Furthermore, Julius Baer is the highest-rated fund by Morningstar's fund analyst team within the rating agency's peer group of Consumer Goods & Services Sector. Morningstar analysts have positive ratings on only three funds in this sector of more than 100, indicating the difficulty of adding value with a niche market theme and the importance of being selective when choosing a fund.
Is the fund suitable for investors?
Luxury brands offer a compelling combination of growth and relatively robust earnings. However, investors should be aware that this type of fund is not immune to short-term drawdowns. The fund's 10% loss in August was in line with the FTSE 100's fall.
A slowdown in China could impact the fund in tandem with the rest of the market, although China's slower growth rate is still adding a new wave of high-end consumers to the market every year.
Fund investors can now reap the rewards of luxury brands too, albeit only in performance terms as opposed to the literal enjoyment of fine wine, jewellery and fashion wear held in the fund's portfolio.