LOGO BLOG: Markets & Opportunities
12/7/17 by Eric M. Clark, Brands Portfolio Manager
Why TACTICAL INVESTING can add significant value to your CORE portfolio:
As investors and allocators, we have many styles, themes, and markets to invest in. If you are limiting your investment allocations to broad market indices or style-box investing, you may be missing an opportunity to generate excess returns and gain important portfolio diversification. Example: As the image below shows, there is no market we know of that’s larger and more consistent than the global household consumption theme. Think about it, there’s roughly 7.5 billion people on the planet (2017 estimate). There are a dozen big, growing, and important "investable" trends that come to mind as witnessed in the image below. But, could there be a bigger total addressable market than addressing the needs of the world’s population? Regardless of location, race, or socioeconomic status, we all eat, drink, play, work, earn, save, and spend. Additionally, in a connected world, the household consumption theme has taken on a vastly different meaning than it had 50 years ago. From the time we are born until the time we pass, we consume products and services along the way. The leading companies or BRANDS that produce the most in-demand products and services have more opportunities for revenues, cash flow, and global reach than ever before. That’s wonderful news for an investor. As spenders, we work hard so we can spend our money on the things we want and need. But as investors, if we invest in large, important, and predictable themes, we get a chance to hedge that spending with the potential capital gains generated from owning the brands that are making a difference in our lives. In the end, are the products we love and consume costing us that much if we back out the potential long term capital gains we generate from owning their stocks?
CONSUMPTION MATTERS. DEMOGRAPHICS MATTER. BRANDS MATTER
That's why we created the Accuvest Iconic U.S. Brands Index. The Index is designed to invest in the largest, most profitable & powerful brands via Accuvest’s Iconic Brand Score which measures SIZE & STRENGTH of all the companies in our chosen industries. Not a bad universe of companies to track for a consumption-focused world. For more information on an ETF that's designed to track our Index, please go to the GlobalX website at https://www.globalxfunds.com/funds/logo/
IF CONSUMPTION DRIVES WORLD ECONOMIES, SHOULDN’T THE MOST POWERFUL BRANDS BE DRIVING YOUR PORTFOLIO?
12/1/17 by Eric M. Clark, Brands Portfolio Manager
The ETF business is thriving. On 6/30/17, Bob Pisani of CNBC reported record inflows in the first half of 2017 of $247 billion and record total assets of $2.971 trillion. Inflows had been positive for 16 straight months. To date, the bulk of equity ETF assets have been from "cheap beta" offerings that aim to give an investor broad exposure to various markets like the S&P 500, Russell 2000, and International developed and Emerging Markets. The next wave of ETF flows could come from allocators looking to add more alpha over the Indices by broadening their exposure to ETF's via more narrow strategies that are designed to be thematic in nature, style factor focused, or sector-based. Index investing always has a place in a portfolio but its the satellite or tactical part of the allocation that can add the most value for alpha seekers.
In a world where Core & Satellite should live together in harmony, it's likely the satellite portion of the portfolio will add the most value again in 2018. If you get the tactical or satellite allocation right, you have better odds of beating Index-only strategies. To accomplish this, one has to think about the important secular themes driving markets and economies. It's our belief that every portfolio deserves allocations to MAJOR secular themes with significantly large and predictable addressable markets. Here's an example of just a few large & growing themes that have added value to a core portfolio in 2017:
The rapidly evolving Chinese economy is moving from a manufacturing base to a CONSUMER-FOCUSED, domestic economy (CHIQ ETF) https://www.globalxfunds.com/funds/chiq/. Robotics and Artificial Intelligence is disrupting & aiding virtually every industry around the globe (BOTZ ETF) https://www.globalxfunds.com/funds/botz/. Cloud Computing is early in its build-out and an important driver of technology & innovation (SKYY ETF). The Internet & Social Media continues to be in its infancy as global consumers get fully connected and continue to engage with each other and their favorite companies (FDN ETF). Emerging market E-Commerce adoption is low and growing rapidly. This theme is quite possibly the most attractive from a pure growth perspective (EMQQ ETF). http://emqqetf.com
The chart below highlights the power of allocating to these important themes for the last year. They all added value to a CORE portfolio in 2017.
Can you invest directly in the growth of the ETF market?
You can now. There's been a significant amount of product innovation through ETF creation but let us not forget about the viability of investing directly in the beneficiaries of the growth in the ETF business. Toroso Investments recently launched a "focused financials" ETF with the symbol TETF. The ETF offers direct exposure to growth in the ETF Industry. More than just traditional asset management, TETF offers exposure to a myriad of supporting players in the ETF ecosystem (ETF sponsors, index providers, exchanges, traders, and more). If you believe in the continued growth of the ETF business as I do, how can you NOT add an allocation to TETF? https://www.tetfetf.com
All of the above "themes" are large, important and appear to be sustainable but combined they are not likely as large or predictable as the HOUSEHOLD CONSUMPTION theme. Consumption is quite possibly the largest and most important driver of EVERY major economy. In good times and bad, consumers spend money on things they want, and things they need. Consumption habits change according to demographic groups and through different parts of the business cycle but rarely do our consumption habits slow dramatically. Even if consumption slows in a recession, its often the first economic data-point to recover and the Consumer Discretionary sector has traditionally been a top performer coming out of slow-downs. Any slow-down in economic activity is yet another opportunity to invest in the "consumer & consumption" theme.
ICONIC BRANDS: TOP B2C & B2B COMPANIES TRACKING CONSUMPTION
The U.S. is the largest economy by GDP on the planet. We are also the largest consumer-focused economy. It shouldn't surprise anyone that the most relevant & recognizable BRANDS that serve American consumers have a history of adding significant value to a long-term portfolio. Not every great Brand is a great stock each year for a variety of reasons, but in aggregate, a collection of top brands with high and growing sales should add value over a plain-vanilla Index like the S&P 500. The story gets even better when you consider that virtually every major economy is in some way anchored to the household consumption theme. U.S. Brands spend tens of billions every year on distribution and brand awareness campaigns to help assure they get their fair share of sales in every consumer-focused industry. The global economy is now fully inter-connected and billions of consumers around the world now recognize, trust, and consume the products and services of top U.S. Brands.
How can you NOT have an allocation to CONSUMPTION?
Accuvest Iconic U.S. Brands Index - Current Industry Bets versus the S&P 500
The graphic below highlights how the Iconic Brands Index is currently positioned. As a reminder, the goal of the Index is to track a lifetime of spending across the industries and top brands that exhibit the best "size and strength" via our Iconic Brand Score. This ranking system takes every company in our chosen industry groups and ranks them based on current market cap, 3 year total sales and 3 year sales growth. The Brands that make the Index of 100 top brands are the top ranking companies by Iconic Brand Score when taking into consideration our industry constraints as defined in our Index Methodology document on the homepage of this site.
Exposure to traditional brick-n-mortar retailers offers strong VALUE exposure Plus access to attractive lower mkt cap companies ($33B avg vs. $195B S&P 500)
Index weight 9.74% versus .14% weight in the S&P 500
KNOW WHAT YOU OWN & WHY YOU OWN IT
If you've been following the retail sales data lately you would know the CONSUMER is alive and well. Because the consumer is healthy and spending, there's plenty of opportunity in owning other top retailers along with an Amazon allocation. The narrative heading into 2017 was "if it's not Amazon, it's dead". The latest round of retail earnings proved the Amazon-only narrative might have been slightly over-played! The U.S. is no-doubt "over-retailed" but the top brands, the most recognized and respected will do just fine. Amazon's dominance has been a wake up call for most management teams and going forward, look for more innovation & spending to update the model and add better customer experiences in stores and online. A bonus: Many of the leading retail brands are quite cheap, pay sustainable dividends, and still generate attractive cash flow.
The Index's #1 active bet versus the S&P 500 is Retailing: 16.4% exposure in the Brands Index versus 5.5% for the S&P 500
Index Retailing constituents: Netflix, Amazon, Priceline, Expedia, Home Depot, Lowe's, Dollar Tree, Dollar General, Ross Stores, Target, TJX Cos, Best Buy
No one knows the future but if the charts below don't highlight the power of investing in top brands serving massive addressable markets I'm not sure what will. 10 years worth of price action is analyzed for the retailing basket tracked by the Brands Index.
- Adding allocations to important, sustainable and large addressable markets/themes via focused ETF's can add significant value to a core portfolio
- The HOUSEHOLD CONSUMPTION theme is quite possibly the largest total addressable market opportunity available to investors.
- Roughly 60% of total global GDP is derived from household spending (Mckinsey Report 2016). We project it's a $32 trillion opportunity. $12 trillion in the U.S. alone.
- Within the consumption theme, retail sales is a roughly $5.5 trillion opportunity for investors.
- The Accuvest Iconic U.S. Brands Index holds a significant overweight position in many of the most important Brands serving this $5.5 trillion+ opportunity.
- The Brands from the Retailing Industry that are being tracked in the Index have largely outperformed the S&P 500 significantly over the last 10 years.
- Most of these Brands are cheap relative to their history and generating significant cash flow that will allow them to continue reinvesting in technology & innovation.
DEMOGRAPHICS MATTER & THE LEADING BRANDS ARE SPENDING VIGOROUSLY TO ASSURE THEY ARE BUILDING TRUST & LOYALTY
The Accuvest Iconic U.S. Brands Index holds many of the leading Brands serving the most important demographic groups across the industries that matter to consumption.