AI Brands: The Next Big Thing

The Next Phase of AI Enablement Has Already Begun:

As investors pile into technology stocks amid the AI revolution, a critical inflection point is emerging — the shift from AI infrastructure buildout to mass enterprise deployment. While semiconductor and hyperscaler names have dominated early returns, the next and potentially more durable phase of value creation will come from AI’s application across traditional industries & sectors. Remember, it’s the companies with the most robust data that will likely receive the disproportionate benefits from AI deployment. Consumer companies have massive amounts of data on their customers and this data + AI inferences can drive incredible benefits to customers and leading brands. For investors like us — focused on global household consumption and the enduring strength of brand-driven businesses — this shift represents a compelling opportunity. As AI tools move beyond labs and data centers into real-world operations, many companies historically seen as lower-growth or having structurally lower-multiples stand to benefit from a wave of productivity, profitability, and ultimately, multiple expansion.

Consider this:

There’s about $3 trillion invested in technology-focused ETF’s alone. Most core and growth indexes have technology as the highest weighted sector as well. Whether they realize it or not, investors have an enormous overweight position to technology. Thank heavens many of the leading tech brands are highly profitable and quality businesses but the reality is, a typical portfolio is wildly underweight many other sectors and opportunities. Imagine if just a fraction of the trillions invested in technology shares decided to invest in other sectors that are sure to benefit from AI deployment. The Consumer Discretionary & Staples sectors combined have less than $100B in assets. When the evidence of these benefits arrives to non-tech companies, there’s a very large wave of capital coming to a much smaller shore, which is sure to have a disproportionate effect on the companies that innovate the most.

Let’s analyze the 30,000-foot view on AI and where we are today.

We see two phases of the AI revolution thus far:

1. The Buildout Phase: started in 2019

This phase was characterized by:

• Explosive demand for AI infrastructure: GPUs, accelerators, custom silicon.

• Capex surges by hyperscalers to build AI-ready data centers.

• Strong returns for chipmakers (e.g., NVIDIA, Broadcom), cloud platforms, and power/utility providers.

2. The Deployment Phase: started 2024

This phase will be marked by:

• Mass enterprise integration of AI tools into workflows.

• A sharp rise in productivity, cost savings, and customer personalization.

• Margin expansion and renewed earnings growth across non-tech sectors.

• Early development & deployment of AI agents (Agentics).

• Capital shifting from tech-heavy names to the broader economy making “the rest of the market” a more intriguing investment than it’s been in many years.

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Why This Matters to Global Brands Investors

We have long prioritized companies with:

• Durable demand factors tied to global household consumption.

• High brand relevance and global pricing power.

• Sustainable economic moats, stronger balance sheets, & global opportunities.

Many dominant brands trade with lower average multiples when compared to most technology stocks. That dynamic is about to change for brands with vision, capex to deploy, and an eye for AI efficiencies

The Hidden Alpha: Multiple Expansion in Lower-Multiple Sectors

With AI improving operating leverage and compressing cost structures, industry leaders outside the technology sector are poised to:

• Deliver faster earnings growth.

• Unlock operating leverage while generally keeping headcount flat.

• Improve FCF yields with higher ROIC.

• Improve margins & profitability meaningfully.

As AI-powered companies show similar growth rates & never-before-seen operating leverage, but from a lower base — the re-rating potential is meaningful. For now, very few investors are focused on this inevitability. That makes our team excited to be early to this party.

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Capital Flows Are Poised to Shift

The setup:

• Technology has become over-owned and increasingly crowded with >$3 trillion in ETF AUM alone. Plus, tech is >35-50% in many growth & core indices.

• AI tailwinds will begin flowing into other sectors.

• Active managers are looking for laggard plays on AI with better valuation upside.

This creates a window where capital will rotate into quality brands and consumer-facing names that show tangible AI deployment benefits. We already see tangible signs of AI benefits in brands like: Walmart, Amazon, Mercado Libre, Spotify, Netflix, Uber, Microsoft, Tesla, American Express, Blackstone, Apollo, KKR, Booking Holdings, Service Now, Coca Cola, Goldman Sachs, CBRE, Draftkings, Shopify, Intuit, Caterpillar, Robinhood, with much more to come.

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Brand Case Studies: AI Driving Profits and Re-Rating

1.  Walmart (P/E ~24x)

AI Deployment:

·         Real-time inventory management with generative AI forecasting.

·         Automated supplier negotiations using AI bots.

·         Labor scheduling optimization in warehouses and stores.

·         Higher customer engagement C cross-selling opportunities.

Result:

·         Improved inventory turns, lower shrinkage, and optimized labor costs.

·         Potential margin expansion of 150–200bps over 3 years.

·         As EPS grows faster than the long-term average and the multiple re-rates higher due to better profitability, stock price could appreciate 50%+ from current levels.

·         At the current $700B in annual revenues, we expect Walmart to join the $1 trillion club on its current trajectory. Implementing more AI tool could accelerate this trip.

2.  Amazon Retail

AI Deployment Areas:

1.      Personalization & Recommendations

o    AI refines product search, cross-selling, and bundle suggestions based on user behavior.

o    Improves conversion rates and increases average order value (AOV).

2.      Dynamic Pricing & Promotions

o    Algorithmic pricing adjusts in real-time to competitor prices, supply chain constraints, and customer behavior.

o    Enhances margins without losing market share.

3.    Logistics & Inventory Optimization

o    Machine learning predicts demand and optimizes warehouse placement and delivery routes.

o    Reduces shipping costs and improves delivery speed.

4.       Customer Support Automation

o    AI chatbots reduce reliance on human reps while increasing resolution speed.

o    Lower SGCA costs and improved customer satisfaction.

5.      Robotics & Fulfillment Automation

o    Expanding use of warehouse robotics and AI-assisted sorting reduces labor intensity per package.

o    Lowers cost per unit and supports scale without headcount growth.

Amazon Web Services (AWS):

AI Deployment Opportunities:

1.      Foundational Infrastructure

o    AWS provides compute and storage for model training and inference.

o    Leader in custom silicon (e.g., Trainium, Inferentia) tailored to AI workloads.

2.      AI-as-a-Service (AaaS)

o    Sagemaker, Bedrock, and Q democratize access to LLMs and fine-tuning.

o    Broadens AWS's customer base to include SMBs, enterprises, and developers who can't build in-house.

3.      Verticalized AI Tools

o    AWS provides tailored solutions to healthcare, fintech, retail — creating industry-specific moat

o    Enhances stickiness and increases “per-customer spend”.

4.      Global Hyperscaler Share Gain

o    As AI drives global capex, hyperscaler spend accelerates — AWS captures significant share via compute contracts and data migration.

Result:

·         Amazon Retail operating margins continue to expand as cost to serve falls.

·         EPS accelerates to high teens over 5 years.

·         AWS revenue re-accelerates from mid-teens to 20%+ CAGR.

·         Margins remain high and expand further, even with high cap-ex commitments.

·         Overall, margins expand, operating leverage improves, headcount stays contained, profitability balloons, stock has meaningful re-rating higher.

1.    Netflix

AI Deployment Areas:

1.      Personalized Content Discovery

o    AI refines the recommendation engine with LLM-enhanced user profiles, mood detection, and context-aware suggestions.

o    Results in longer watch times, reduced churn, and better content ROI.

2.      Localized Content Creation

o    AI dubbing, voice cloning, and real-time subtitle generation allow global releases at scale.

o    Lowers cost of localization while increasing international appeal and velocity of new releases.

3.      Script & Production Optimization

o    AI-assisted tools identify story arcs, sentiment analysis, pacing, and character modeling.

o    Enhances hit rate of originals and trims development cycles and production waste.

4.      Dynamic Ad Targeting (Netflix’s Ad Tier)

o    AI tailors’ ads by viewer behavior, geography, device, and content type.

o    Yields better monetization per user.

5.      Churn Prediction & Pricing Optimization

o    Machine learning predicts the likelihood of churn and adjusts retention offers or suggests pricing tier adjustments.

o    Improves net subscriber retention and average revenue per user (ARPU).

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Conclusion: AI adoption is a 1st inning opportunity for investors.

For now, all investors seem to want is technology stocks. Keep your eye on the prize: We believe the next AI leaders will not just be those building the tools — but those using them to transform their businesses. This spans industries and the most innovative companies could see meaningful re-ratings as the benefits show up in earnings results.

The opportunity ahead for global brand investors is to identify:

·         Trusted consumer franchises.

·         With the will and ability to deploy AI at scale.

·         In ways that improve margin structure, ROIC, and brand equity.

The AI revolution may have started in Silicon Valley. But its longest-lasting impacts will be felt in the aisles, screens, homes, and experiences that define global consumption.

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Carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. This and other information can be found in the Fund’s statutory and summary prospectuses, which may be obtained at LogoETF.com. Read the prospectus carefully before investing. Equity Market Risk. By virtue of the Fund’s investments in equity securities, the Fund is exposed to common stocks which subjects The Fund to equity market risk. Common stocks are generally exposed to greater risk than other types of securities, such as preferred stock and debt obligations, because common stockholders generally have inferior rights to receive payment from specific issuers. Equity Securities may experience sudden, unpredictable drops in value or long periods of decline in value. Foreign Securities Risk. Investments in securities or other instruments of non-U.S. issuers involve certain risks not involved in domestic investments and may experience more rapid and extreme changes in value than investments in securities of U.S. companies. Financial markets in foreign countries often are not as developed, efficient, or liquid as financial markets in the United States, and therefore, the prices of non-U.S. securities and instruments can be more volatile. Economic and Market Risk. Economies and financial markets throughout the world are becoming increasingly interconnected, which increases the likelihood that events or conditions in one country or region will adversely impact markets or issuers in other countries or regions. Securities in the Fund’s portfolio may underperform in comparison to securities in the general financial markets, a particular financial market, or other asset classes, due to a number of factors, including inflation (or expectations for inflation), deflation (or expectations for deflation), interest rates, global demand for particular products or resources, market instability, financial system instability, debt crises and downgrades, embargoes, tariffs, sanctions and other trade barriers, regulatory events, other governmental trade or market control programs and related geopolitical events. Models and Data Risk. The Sub-Adviser’s evaluation of potential Fund portfolio holdings is heavily dependent on proprietary quantitative models as well as information and data supplied by third parties (Models and Data). When Models and Data prove to be incorrect or incomplete, any decisions made in reliance thereon may lead to the inclusion or exclusion of securities from the Fund’s portfolio that would have been excluded or included had the Models and Data been correct and complete. New Fund Risk. The Fund is a recently organized management investment company with no operating history. As a result, prospective investors do not have a track record or history on which to base their investment decisions. Investing involves risk, including possible loss of principal. Distributed by Foreside Fund Services, LLC

Consumer Brands - Getting Fit in Turmoil

August 2025

Eric M. Clark, CIO

How Leading Consumer Brands Emerged Leaner, Stronger, and More Valuable from 2019–2025. LOGO’s Matter.

The last five years have been among the most intense stress tests in modern business history. Consumer brands have faced a relentless series of macro shocks — each one forcing operational reinvention: - 2020–2021: Global pandemic, supply chain breakdowns, inventory mis-alignments, above-trend consumption from government payments, and rapid shifts in consumer behavior. - 2022–2023: 50-year-high inflation and the fastest interest rate hike cycle in modern history caused tremendous damage to consumer sentiment with stocks & bonds crashing in 2022. - 2024–2025: New trade tariffs, potential squeeze of margins for brands that import goods, more inventory management lumpiness and lingering effects of inflation driving consumers to want even more value from brands. For most of the 2010s, consumer companies operated in a benign environment — stable interest rates, modest inflation, reliable supply chains, and predictable consumer spending. As you might image, the Consumer Discretionary Sector Index showed stellar performance from March 9, 2009, to January 1, 2020, with a 22.7% annualized return versus the S&P 500 Index at 17.85% over that period.

Since the end of 2019, the stable conditions that allowed for strong returns have been a bit more infrequent. One would expect the returns of the stocks involved to also be potentially lumpy. Here’s the data: over the trailing 3 years ending August 14, 2025, the Consumer Discretionary Sector shows a rare & significant underperformance period of annualized returns at 11.51% versus the S&P 500 Index at 16.34%, largely due to the strong returns in the tech sector versus other sectors.

Here's the opportunity today for investors.

Not every company thrives when conditions are more difficult, but brands with high brand relevancy, pricing power, and balance sheet strength come out the other end of turmoil leaner, more operationally fit, and more profitable than at any time in their history. And as conditions normalize, these are the kinds of companies well positioned to command higher valuations than they’ve historically enjoyed. As AI deployment gains momentum across

industries, the companies that were forced to run more efficiently and that deploy AI tools to drive even better operating efficiencies, will begin reporting superior metrics. The re-rating could be sharp and swift. If you follow Shopify, the leading brand powering other companies’ e-commerce efforts, you have seen what these positive earnings surprises do to a stock’s valuation. More are sure to follow.

Here's how great brands respond to adversity and why the turmoil can lead to long-term competitive advantages:

1. The Pandemic as an Accelerated Fitness Test

When COVID-19 shut down economies in early 2020, consumer brands had to rewrite their playbooks overnight. The challenges: - Store closures and foot traffic collapses. - Supply chain disruptions from Asia to Europe. - Surging e-commerce demand creating fulfillment bottlenecks. - Rapid shifts in consumer preferences (home goods up, formal apparel down). How leading brands responded: - Operational agility: Retailers like Nike and Lululemon accelerated direct-to-consumer digital investments that were planned over years into months. - Product line optimization: Companies shed slow-moving SKUs to focus on high-turn, profitable items. - Supplier diversification: Brands reduced dependence on single geographies, building redundancy and flexibility. By mid-2021, the best operators weren’t just surviving — they had transformed bloated supply chains into lean, responsive networks.

2. Inflation Shock and the Return of Pricing Power

As economies reopened, pent-up demand collided with supply shortages. Inflation soared to levels not seen in 50 years, peaking above 9% in the U.S. in mid-2022. The challenges: - Input costs for raw materials, freight, and labor surged. - Consumers faced higher prices for essentials, compressing discretionary spending. How leading brands responded: - Dynamic pricing strategies: Leaders like Procter & Gamble, Chipotle, McDonalds, Mondelez implemented multiple price hikes, paired with smaller pack sizes or product innovation to preserve volumes. - Efficiency drives: Every dollar of spend was re-evaluated — from marketing channels to manufacturing processes — to offset cost pressures.

- Brand equity leverage: Strong consumer loyalty enabled premium brands to raise prices without losing share. The result? Many leading consumer companies not only passed on costs but expanded gross margins, proving that strong brands can maintain pricing power even in inflationary environments.

3. Interest Rates and the Higher Cost of Capital

From near-zero in 2021, U.S. interest rates climbed above 5% by 2023 — the fastest pace in decades. The challenges: - Debt refinancing costs surged. - Leveraged acquisitions became more expensive. - Consumer sentiment fell to the floor & value-seeking became the norm.

How leading brands responded: - Balance sheet discipline: Many reduced leverage to avoid expensive refinancing. - Capex selectivity: Investment dollars were funneled only into projects with the highest returns or strategic necessity. - Product lineups were re-assessed, and suppliers were asked to give up some margins to serve value-oriented consumers. This discipline created companies with cleaner balance sheets and higher return thresholds — a structural improvement that will persist even when rates decline.

4. The Tariff Layer: 2024–2025 Trade Shocks

Just as inflation and rates stabilized, new rounds of tariffs were announced, targeting imports from major manufacturing hubs. The goods sector and the stocks tied to it took a meaningful hit on the news, many of which continue to struggle as pricing power has become more difficult. The challenges: - Input costs rose again, particularly in categories dependent on overseas manufacturing. - Supply chains faced renewed complexity.

How leading brands responded: - Local sourcing acceleration: More manufacturing and assembly was moved closer to the end market. - Supplier diversification 2.0: Companies had already learned in 2020–2021 not to rely on single points of failure — now they doubled down. - Product redesign for tariff optimization: Some altered materials, origin points, or assembly

processes to reduce tariff exposure. Far from starting from scratch, the capabilities built during the pandemic — agility, supplier diversity, rapid product iteration — became the toolkit for this new challenge.

5. Why These Shocks Create More Valuable Companies

Each of these events — pandemic, inflation, rising rates, and tariffs — has forced consumer brands to operate with unprecedented discipline. They have streamlined supply chains, optimized SKUs, reinforced pricing power, strengthened balance sheets, and improved capital allocation discipline.

And then there’s the eventual AI deployment that will happen across sectors and industries. Headcounts will stay flat or fall, productivity will increase, profit margins will increase, revenue per employee will rise, customer engagement should rise, and overall profits and free cash flow will rise. You know what happens to stock prices generally when important operating metrics rise sustainably? When a company tends to trade at a 13-16x multiple and operating metrics rise and sustain at the new level, the multiple re-rates higher. It’s coming folks, we’ve already seen some examples and the re-ratings have been massive. As an investor, you generally want to get ahead of catalysts with this size and scale. Macro headwinds won’t linger forever and great companies use these volatile periods to enhance the underlying business so when the normalization phase arrives, the stocks look a lot cheaper when the earnings surprises start rolling in. This is the future we see for most leading consumer brands today. Great businesses don’t lag indefinitely; the positive catalyst is straight ahead.

Disclosure: The above data is for illustrative purposes only. This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts

depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

There’s an Estimated $57 trillion in Household Spending Each Year

These thematic drives ~60% of world GDP.

Does a $57 trillion theme warrant dedication in an investment portfolio? Absolutely.

 Key Points

• Investors are chronically underweight non-U.S. stocks and countries.

• The leading emerging market economies offer one of the best opportunities today.

• Asia, including India, offers the greatest long-term potential for U.S. investors.

Investors Have Always Been Overweight U.S. Stocks & Bonds.

Our bias to invest most of our portfolio in the stocks and bonds based in our home country has generally served us well. This “home bias” can sometimes lead to an underperforming portfolio. Why? Markets trade in cycles and there have been periods, typically multi-year in duration, where non-U.S. stocks and bonds significantly outperform the U.S. Our industry preaches proper diversification to help assure our portfolio’s do not suffer from missing opportunities, wherever they are. The reality, though, most investors need the U.S. to perform well for the entire portfolio to grow as required. Having very little or no exposure to non-U.S. assets makes a portfolio vulnerable. The good news: most companies in the U.S. have a global footprint so people are getting access to a key style factor: “high international sales.” Sometimes that’s sufficient, sometimes more direct exposure is required. Every country has a handful of dominant brands serving its own consumers. Holding a basket of these leading brands is ideal.

Internal Consumption Drives Most Economies.

Here’s a great visual showing where this important cohort resides around the world. Generally, emerging economies grow much faster than developed economies like the U.S. and Europe. A key thing happens as consumers begin to make more money and join the middle class: they spend more, and they also spend differently than they used to. Our team has witnessed this over and over making the outcomes very predictable. Using China offers a great example. China’s median disposable income per capita has more than doubled since 2013. In fact, the average annual disposable income of households in China has grown from about $904 yuan to about $36,883 yuan since 1990 (Source: Statista). Many decades ago, China became the world’s preferred manufacturing partner. Massive amounts of foreign direct investment came to China to help build the infrastructure needed to be a manufacturing powerhouse. Fast forward to today, China has rapidly become an internal household consumption story as Chinese citizens were pulled out of poverty and joined the middle class. The same story is playing out across India, Mexico, Indonesia, Brazil, and the many frontier markets with great demographic trends.

We know how this movie ends; it’s the brands that citizens favor most, that are the direct beneficiaries of extra earning, saving, and spending over time. This thesis of joining the middle class and accelerating spending is a key reason the emerging markets offer investors such a wonderful opportunity today.

The best part, EM equities have significantly underperformed the developed economies, including the U.S., for the better part of the last decade. Many of these countries are trading at trough valuations as the economies begin to recover over time. The price you pay matters.

The chart below, highlights the under and outperformance cycles of EM equities vs developed markets going back to 1987. What you will see from this chart: when EM outperforms developed markets (the line goes up), it happens for many years and the outperformance can be significant. At the very least and after a 12-year period of EM underperformance, adding some exposure to the leading EM countries & brands is prudent. You can do that through ETF’s or active mutual funds, and you can certainly do it through investing in leading brands with significant non-U.S. sales exposure. The classic definition of being a highly relevant brand, means you have global exposure to consumers around the world.

Emerging markets outperformed developed markets from 1987 to about 1995 when the U.S. Internet boom began. EM again outperformed from the peak of the Internet boom in 2000 through about 2011. Since then, developed markets have handily outperformed emerging markets. As you can see from the chart, the underperformance ratio is about down to the extremes seen around 2000 when EM began its streak of outperformance. Again, the best part, most emerging market economies are some of the cheapest across the world today. See the patterns here?

Sizing-Up the Opportunity in Asia, including India & Latin America.

Last I checked, there are 48 countries in Asia. India and China, each have about 1.4 billion consumers. Ignore these two countries in your portfolio at your peril. If you read my last blog note, you know there’s billions of younger consumers across Asia and particularly in India, and they will be spending their money on their favorite brands for many decades to come. These consumers love luxury brands, are digital native, use e-commerce frequently, and are generally wellness and vanity focused. These insights alone, offer some wonderful opportunities with the brands serving these consumers. From a consumption perspective, Nike, Lululemon, LVMH, Hermes, L’Oréal, Estee Lauder, Tesla, Apple, Meta, Visa, Mastercard, American Express, McDonald’s, MGM, Wynn, Las Vegas Sands, Airbnb, Booking Holdings, and Uber come to mind as key beneficiaries.

Because Asia holds about 60% of the world’s population, you really shouldn’t ignore the region from an investment perspective. Yet, many ignore it completely and just hope some of their investments benefit from Asia’s growth. My friends, “hope” is not a strategy. It’s time to get some dedication to this important region and the brands strategy certainly can be a part of the discussion given our focus on the global consumer. In one fund, investors get access to leading brands serving U.S. and international consumers.

Bottom line:

Investors are chronically underweight non-U.S. stocks in general and woefully exposed to emerging market opportunities specifically. To rectify this, one can do some research and find attractive ETF’s and active mutual funds that are dedicated to this endeavor. Another way to gain exposure, is to identify ETF’s and funds that have a “global sales” mandate even if they do it through U.S. companies. In the brands fund, we have significant exposure to global sales trends and in U.S. and non-U.S. companies.

The definition of a Mega Brand should offer some perspective on what we look for: a leading company, selling products and/or services that appeal to multiple age groups, both men and women, and all over the world. Mega Brands earn the right to charge a premium, have high brand loyalty which feeds into repeat purchases, and continuously release new products or services that consumers can’t live without. When you become a Mega Brand, you also tend to join the $trillion-dollar market cap club. There are only a few members of the $trillion-dollar club today, which means there’s likely some wonderful gains ahead for the next batch of brands who meet the criteria to reach that milestone. Our team spends an enormous amount of time trying to identify the future $trillion club entrants.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Powerful Demographic Trends Can Drive Secular Portfolio Performance

Roughly 4 billion Millennials and Gen-Z globally offer massive tailwinds to certain brands.

Key Points

• Demographics play a key role in identifying important consumer trends & themes.

• Millennials and Gen-Z now make up a large portion of the global population.

• The brands that are loved by this cohort have a multi-decade runway of growth ahead.

Demographics Matter.

In the early 1980’s, the Baby Boomers were just beginning their saving, spending, and earning cycle. The youngest Boomers were roughly 35 years old just as the stock market and real estate markets began a new and lasting bull market. To be sure, the cost of living today for Millennials versus the early 1980’s is radically different but directionally, the same trends will happen for today’s younger generations but with certain nuances. As an investor in consumer trends and habits, we must analyze today’s trends so we can map back to the brands that should benefit most. Today’s younger generations make more money versus the Boomers, but everything costs much more, our dollars don’t go as far as they once did. A bigger, and more potentially damaging issue we face today; younger adults are not having as many babies as the Boomers or their parents. That’s a long-term issue for many countries. Additionally, younger adults are having kids later in life, having less kids, and therefore spending more time and money on themselves. Experiences are very important to Millennials and Gen-Z, which means the services sector will play a key role in serving this massive group of consumers. Within portfolios, we believe there’s a key allocation to “selective indulgences” that must be made, and our research indicates most portfolios are underweight many of the leading brands that stand to benefit the most. Example: the luxury goods sector. Millennials are the key buyers of aspirational, differentiated luxury products around the world and given their age and future income potential, it leads us to see a very bright future for the brands that make these products. LVMH, Hermes, L’Oreal, Tesla, and Ferrari are just a few brands that appear to have wonderful tailwinds on a secular basis, particularly within Asia. Collectively, Asia has ~2 billion consumers that fall in the Millennial and Gen-Z cohort. They are digitally native, highly brand aware, and are passionate about aspirational brands.

Millennials are the largest population cohort on the planet at roughly 1.8 billion people.

Here’s a great visual showing where this important cohort resides around the world.

As you can see, you cannot ignore how Asian consumers (1.1 billion in size) think and spend if you are investing in the Millennial-focused consumption theme. This cohort loves luxury brands, and they love experiential luxury. Additionally, Millennials are the most educated population cohort which means they have higher lifetime earning potential. As you know, there is a very high correlation between education and earning potential. And when you make more, you spend more, that has not changed from generation to generation.

One concept we think the media will begin focusing on is how U.S. and China relations evolve over time and how it will affect the consumption habits and brand love of consumers. Our view is quite different than consensus currently and we think over time, consensus will move in our direction. Because of poor relations between the two largest countries in the world and because of increased nationalism, we think it will get harder to build a brand in China and some U.S. brands operating in China could see an erosion of brand value as European brands become more popular as well as more Chinese and Asian brands rise in popularity.

To be clear, we think brands like Apple, Starbucks, and Nike have deep roots in Chinese culture but for smaller U.S. brands trying to make inroads, we say caution is advised. The government of China wants its own brands to be the dominant beneficiaries of consumption trends and when you have a centralized government with policies that have zero-tolerance, trends can change over a long period of time. To be clear, this is a slow-moving train but as a capital allocator, we must be mindful of trends like these as we make investments. The important key here: we believe the major net beneficiary of poor U.S. and China relations should be the ex-U.S. brands like Lululemon and leading European Brands like LVMH, Hermes, Ferrari, Kering, Moncler, and others.

 Gen-Z, similar in size and a source of strong future consumption opportunities.

It’s quite rare to have two back-to-back generations larger than the last big population cohort. Baby Boomers and their spending had an outsized effect on the stock market and real estate markets so it’s quite difficult for us to be bearish long-term given the powerful spending tailwinds from these two population groups. No one can predict the future and the business cycle always matters but the moral of the story is this; when you see bouts of weakness, that’s simply an opportunity to build bigger positions in the companies and Brands that serve this important mega trend.  People forget, massive secular themes tend to bail investors out even if their investment timing is poor. The greatest businesses serving the largest trends will always have buyers, particularly if/when these stocks go on sale.

Gen-Z, in many ways, will be more productive workers than their Millennial counterparts, partly because their parents were the forgotten generation, Gen-X. Gen-X is the dominant spending cohort in the U.S. today and they generally grew up more independent which makes this group more resilient and resourceful. Gen-Z will benefit from this hard-working cohort as parents. A key attribute of Gen-Z is mobility. This is the first generation that is fully digitally native. The phone is everything. Working Wi-Fi is more important than a working bathroom! They love Snapchat and Facetime. They will be huge consumers of e-commerce. They may not go to college to the degree Millennials did, they see value in alternative sources of education. Experiences matter for this cohort as well which makes the services sector a very important investment opportunity. Good or bad, this generation loves TikTok, Discord, Snap, Instagram, Spotify, Shein, Apple, DoorDash, Reddit, and Vans to name a few.

Again, it’s Asia that investors really need to focus on here. India and China are key regions for consumption opportunities. With global brands setting up more and more manufacturing operations in India, the growth of the Indian consumer is likely one of the most robust opportunities for the long-term. U.S. and European brands are spending large amounts of time and money investing in these countries and attempting to build brand love and loyalty as aggressively as they can. Below, is a great graphic highlighting the Gen-Z population stats around the world.

Bottom line:

Along with Artificial Intelligence, consumption trends for Millennials and Gen-Z offer investors wonderful long-term gain opportunities. Understanding what drives each cohort and which brands they favor is very important to stock selection. Rest assured, we spend a ton of time on these trends and analyzing the brands that matter most.

As we sit today, these brands seem well positioned to capitalize: Apple, Meta, Google, Microsoft, LVMH, Hermes, Ferrari, Spotify, Nestle, L’Oreal, Estee Lauder, Live Nation, Airbnb, Booking.com, Nike, Lululemon, Visa, Mastercard, American Express, McDonalds, Mercado Libre, Amazon, Netflix, Costco, Uber, Target, Starbucks, Home Depot, Coke, Pepsi, Monster Beverage, and Tesla, to name a few. Our portfolios own a large portion of these and with better prices, we would love to own even more.

Disclosure:
The above report is a hypothetical illustration of the benefits of using a 3-pronged approach to portfolio management. The data is for illustrative purposes only and hindsight is a key driver of the analysis. The illustration is simply meant to highlight the potential value of building a consumption focused core portfolio using leading companies (brands) as the proxy investment for the consumption theme. This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

How to Play Offense & Defense in a Portfolio: Part 2 – Offense

Key Points

• A balanced portfolio holding companies that play offense & defense is key.

• In the new economic regime, certain style factors make the most sense.

• Top “offense-oriented” brands grow despite short-term economic slowing.

Balance in a portfolio can help offer a smoother ride to investors.

For Part 2 of the portfolio creation topic, I wanted to shift to offense. There’s thoughtful, steady growth while paying attention to costs and maintaining high operational efficiency and there’s growth at all-cost. When rates were at zero and access to capital was plentiful, the “growth-at-all-cost” companies performed exceptionally well. In today’s new regime of higher base rates cost of capital, and inflation, those companies are not where one should be focused, in our opinion. This week let’s focus on the “grow through a slowdown while running the business prudently” group of offense-minded brands.

As the Fed’s aggressive actions begin to take effect across markets and the economy, it’s important to remember that brands highly focused on offense tend to be growth-oriented businesses which also tend to be higher beta (more volatile than defensives generally) and could struggle in a slowdown as end-markets slow and revenue growth eases a bit. Secular growth, or mega-trends as we call them, tend to be more stable and long-lived and can sometimes be less sensitive to shorter-term slowdowns than other cyclical growth opportunities.

Remember, to oversimplify, this is generally what investors want when they make the decision to invest their capital for long-term growth. Knowing these end-goals helps build the most appropriate portfolio for investors:

1. Achieve attractive returns

2. Have as smooth a ride along the way as possible.

3. Reach their target goal on time and intact.

How they accomplish these three goals is where the magic happens. In many cases, it’s BALANCE that helps them experience a smooth ride. When the economy slows, the best companies and brands make important decisions about where to cut costs while also continuing to grow and take market share. In fact, the best brands tend to take market share in difficult periods because they think long-term, and they have strong balance sheets that enable them to spend through slowdowns.

Important style factors for the new investment regime.

Reminder: style factors describe the characteristics of a business. Most of the time, we tend to be overweight the “quality” style factor partly because it tends to outperform long-term and partly because top brands tend to be high quality companies relative to the stock universe.

From an offense and “prudent growth” perspective, there are a handful of metrics that we believe are important to focus on today. If you are a business owner, you will instantly appreciate the importance of these metrics: high free cash flow, high free cash flow growth, high return on invested capital (ROIC), fairly stable revenue growth over time, a steady reduction in the number of shares outstanding if possible, strong balance sheet, better margins than industry peers, reasonable valuations relative to the growth opportunities in front of them, high interest expense coverage so you can service debt easily, margin expansion possibilities, and positive EPS and revenue revisions. If you want to know why market returns tend to come from only a handful of companies, look no further than the rigid list of strong metrics I have listed above. Should anyone be surprised that the bulk of long-term market returns come from a much smaller number of companies that have superior business models, management, and global opportunities?

Quality, Stable Offense via Growth Brands

Generally, the companies that can continue to grow their revenue and free cash flow across multiple demographic groups, geographies, economic environments, and through new product innovations, tend to generate strong investment returns for shareholders. These are also the brands that tend to join the $trillion-dollar-club over time. Sometimes, these companies are called “compounders”, we call them Mega-Brands. Using real-time corporate data, here’s a few Mega Brands that seem well-positioned today, rank highly across the factors cited above, and should show some stability in an economic slowdown:

Visa (V) & Mastercard (MA): “Everywhere You Want to Be”.

The use of cash has been slowly falling all over the world. In emerging market economies, the trend of using cash over cards is more prevalent still, given a large segment of the emerging consumer population does not have a traditional bank account. However, there are tons of fin-tech brands building unique value propositions to help these consumers enter the “swipe over cash” thematic. Yet, two mega brands still dominate the payment processing industry, and they are wonderfully profitable businesses. Collectively, Visa and Mastercard process almost 85% of payment transaction in the U.S., the world’s largest economy. As the economy slows and consumers make choices where and how to spend, having less exposure to consumer credit issues is ideal. Unlike American Express, CapitalOne and others, Visa & Mastercard have very little credit risk embedded in their businesses.

Consider them the owner and partners in a vast global toll-road where every visitor must pay the toll. Roughly 70% of every revenue dollar falls directly to the free-cash-flow line of Visa/Mastercard. They score in the 99 & 100th percentile for high margins and in the top decile for free cash flow metrics & operating efficiencies. They are aggressive buyers of their own stock when the stocks underperform, as they did through Covid when cross-border travel was virtually shut-down. Being more aggressive with new buying when stocks are low is exactly the kind of behavior that tends to reward companies and investors over the long-term.

Fun fact: V/MA stock has handily outperformed the S&P 500 Index over the last 1, 5, 10 years and since both went public. Over the last 3 years, with Covid restrictions and cross-border travel issues present, the stocks have underperformed. In our opinion, both companies are undervalued and will beat expectations over the next 12 months as global travel normalizes and higher average inflation keeps average transaction value elevated.

Tesla: TSLA

Achieving scale is the key to maximizing efficiencies. Tesla has a huge lead over peers, and we think it’s sustainable for many years to come. As automation and robotics drive productivity and manufacturing gains, Tesla will continue to grow much faster than most companies, regardless of industry. Yes, Tesla could be the most polarizing brand ever created and the stock is neither cheap nor stable from day to day. Additionally, if we enter a true recession, their growth could slow a bit but it will rip right back once consumers feel better about the economy.

Aside from the love or hate of Tesla, hiding in plain sight is a massive secular growth trend that is still in its infancy: the electrification of everything, starting with vehicles.

To be clear, the major opportunity for Tesla shareholders was going from small production to major production.

That stage for Tesla is largely complete but when you look at the small overall EV adoption curve and its growth trajectory while combining Tesla’s manufacturing lead and its strong brand as THE innovator in the space, there’s more growth for the company and stock in my opinion. I have little doubt that Tesla will once again be part of the $trillion club. The global opportunity is simply too large and attractive. Oddly, the stock is still under-owned institutionally, yet it has some of the most robust growth metrics relative to other companies who play offense. Here’s a quick glance at Tesla’s metrics at fiscal-end 2017 versus fiscal-end 2022:

• $11.8B in annual revenue.

• $3.4B in total cash.

• Model 3 deliveries were just beginning.

• There was no Model Y yet.

• 1128 supercharging locations globally.

• Automotive gross margins: 18.9%.

Here’s how fiscal 2022 ended for Tesla:

• $81.4B in annual revenue.

• $22.2B in cash with no debt – a monster achievement for any car company.

• $7.56B in free cash flow generated.

• Model 3 and Model Y scaled production has occurred.

• ~4200 supercharging locations globally.

• Automotive gross margins: 25.9% – the best in the industry.

Tesla stock can be a wild ride at times given how polarizing Elon Musk is and how noisy the earnings releases can be quarter-to-quarter but keep your eye on the prize: global EV adoption. Volatile stocks like this should be sized accordingly in a portfolio but TSLA surely added some value to a portfolio as they reached global scale.

A $10,000 investment in July 2010 would be worth $1.26 million today versus ~$51k in the S&P 500.

EV Sales are still small but growing rapidly.

Retail buying of used EV’s will grow even faster and Tesla has the most to gain as trailblazer!

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

How to Play Offense & Defense in a Portfolio: Part 1 – Defense

Key Points

• A balanced portfolio holding companies that play offense & defense is key.

• In the new economic regime, certain style factors make the most sense.

• Certain “defense-oriented” brands are performing quite well today.

Balance in a portfolio can help smooth the bumps to offer a smoother ride.

I wanted to do a two-part series, one focused on the benefits of holding defensive business models that tend to perform well in more difficult economic periods, and one focused on playing offense through secular growth brands. 2022 was an odd year, the highest quality secular growth companies generally delivered solid fundamental business performance, yet their stocks generally got absolutely annihilated. Generally, it was the contraction of the multiple, or what investors were willing to pay for high quality, that the market clearly questioned. Ironically, many of last year’s best performers turned in average operating performance but money flowed to these stocks because they were “defensive business models”. The growth of passive investing and ETF’s has driven this basket of stocks mentality whether there is any logic or not. In the end, what makes an asset price go up is simply having more buyers than sellers.

At the highest level, I think investors have three main goals from the investing they do:

1. Achieve attractive returns.

2. Have as smooth a ride along the way as possible.

3. Reach their target goal on time and intact.

How they accomplish these three goals is where the magic happens. In many cases, it’s BALANCE that helps them smooth the ride. To get some balance, defensive business models and the stocks of these companies are where investors can turn.

Important style factors for the new investment regime.

Style factors describe the characteristics of a business. Defense or offense. High quality or lower quality, highly levered or low leverage. Large versus small. Domestic sales versus international sales. Our team tracks a few dozen style factors so we can see where the returns are coming from in the market. Think of this like a pond for fishing. When the fish are only gathering in one part of the lake, the fishermen should gather there too. Our portfolios generally hold a portion of the companies with a high weight toward style factors that are working as well as having some exposure to companies that are out of favor but likely to see some resurgence in time. That way we always have some balance to the portfolio and there’s always a new emerging winner to consider. Overall, we tend to always be overweight the “quality” style factor partly because it tends to outperform long-term and partly because top brands tend to be high quality companies.

Year-to-date, the quality factor has gotten back to performing well after having a difficult 2022. Within the quality factor, these are some of the sub-factors that are working again: high free cash flow, high free cash flow growth, pricing power, strong balance sheets, revenue growth, better margins than industry peers, dividend growth and margin expansion. I have written many times; the big opportunity is to add to outperforming style factors when they go through shorter periods of underperformance. It may feel bad when you add but when you know how the movie ends, you’re never afraid.

Defense

Alabama coach Bear Bryant used to say, “defense wins championships.” The truth is, having a solid defense AND offense tends to win championships but in markets, defense tends to win in tough, uncertain economic environments because companies that have more defensive business models tend not to suffer big erosions in revenues and earnings. Their stocks tend to underperform in up markets and outperform in down or sideways markets but sometimes there are special companies that win more of the time. Having some exposure to both types of companies seems to make a ton of sense today. With that in mind, I wanted to discuss a few gems that seem to be all-weather brands while still having strong defense-oriented characteristics:

Hersey: HSY

Consumers all over the world love their snacks and chocolates. Hershey has been a monster in the industry and a stellar investment over many decades. The company is one of those special blends of stable, predictable grower and a key defensive for more turbulent economic periods. When you are happy, you snack. When you are sad, you snack more! Hershey management has been making very strong acquisition decisions in the snacking category and they are not done. Consumers love their products and have voted with their wallets. The brand has strong pricing power, understands how to integrate an acquisition and drive higher volume growth. From a style factor perspective, HSY scores incredibly well in key defensive areas: dividend growth, higher margins than peers, attractive dividend, strong FCF growth, size, low volatility (beta), high return on invested capital when compared to the weighted cost of capital (WACC), and very stable, predictable earnings trends. The perfect stock for this environment in our eyes.

Fun fact: HSY stock has handily outperformed the Consumer Staples sector, the top performing broad equity style, growth, and the Nasdaq 100 over the last 1, 3, 5, 10, 15, and 20 years. Something as simple as snacks and chocolates can add a lot of value to a portfolio.

Costco: Cost

First, I’ll admit something: I do not like the shopping experience at Costco. And yes, I’ve been a member for many years and yes, we visit Costco every week. That’s how powerful this model is. With the best management team in retail, Costco has been serving consumers globally for many decades. Imagine a business model where consumers pay the brand for the right to have access to the stores and its merchandise. Member renewal rates are about 90% and we all get great values when shopping at Costco. Yes, this great brand was a big Covid beneficiary but once you jump onto the hamster wheel, it’s hard to jump off. Their private label brand, Kirkland is a monster and would be the dominant category killer in most sub-categories if it were an outside brand. It’s estimated to have an annual revenue run rate of about $75 billion. Costco runs on slim margins and high volume so when you have significant private label success, you can expand margins without affecting consumer price points. There’s so much more store growth possible outside North America as well.

From a quality and defensive business model perspective, Costco scores quite well. High sales, strong economic moat, high free cash flow, top quartile dividend growth, still cheap on a price to sales basis, low debt, strong balance sheet, incredibly predictable earnings, very low default probability, and a significant amount of cash on the balance sheet.

Like Hershey: COST stock has handily outperformed the Consumer Staples sector as well as the top performing broad equity style, growth, and the Nasdaq 100 over the last 1, 3, 5, 10, 15, and 20 years.

My question to every reader: what percent of your portfolio holds stable, predictable brands that can play offense and defense while delighting you on a regular basis? I urge you to look around your house and identify which brands you will turn to in good times and bad. If the masses also feel that way, there’s a good chance they have been stellar investments too.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

How Advisors Can Act in Their Clients’ Best Interests When It Matters Most

Key Points

• Advisors have a fiduciary responsibility to act in their clients’ best interests.

• Knowing your customer and being laser-focused on investment suitability is vital.

• The discovery process between advisors and clients & potential clients needs a facelift.

Investors are more confused than ever

Over the last 3 years, we have experienced a global pandemic, 2 equity bear markets, wild volatility across all asset classes, a historic tightening cycle led by the Federal Reserve, the highest inflation in 40 years, a de-anchoring from zero interest-rate policy, interest rate spasms, the worst returns for a 60/40 portfolio in our investment careers, and a brand-new banking crisis. Investors and advisors have a lot on their plates these days and keeping clients engaged while helping them protect themselves and sleep at night is as difficult as it’s ever been. I thought I would spend a little time this week highlighting some important ideas that can help streamline the process of keeping happier clients and helping them reach their goals in difficult markets. In order to accomplish this, getting back to basics might be in order. It’s time to revisit our clients goals, objectives, and needs and also to help protect ourselves as fiduciaries.

Know your customer & be laser focused on proper suitability

FINRA Rule 2090: Know Your Client Rule (KYC). It requires advisors to know the “essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer” when opening and maintaining a client investment account. Unfortunately for advisors, the process of discovery is a fragmented one and things often fall through the cracks. Every firm has their own forms and processes, and every advisor tends to have their own approach to getting to know a client or prospective client. Sometimes it’s a yellow note pad and a face-to-face conversation(s) and other times the process gets more automated using technology and an online questionnaire. Regardless of the process, the data ultimately needs to get stored & updated periodically. That’s where the potential problems or deficiencies often begin. Fortunately, with the advent of sophisticated CRM platforms, the client information is now able to be accessed and altered as circumstances change.

FINRA Rule 2111: Suitability

Every year, there are thousands of customer complaints filed with FINRA citing poor recommendations that led to bad outcomes driven by problems with suitability. In its simplest form, advisors determine the suitability of an investment via matching proper investments based on a customer’s real-time investment profile. I say “real-time” because the goals, objectives, risk tolerances, time horizons, and return expectations change as a customer ages. If the customer profile doesn’t get updated as their needs and preferences change, the recommended investments may deviate from the original purpose creating a “suitability” mismatch.

When markets are quiet and most asset classes are generating solid returns with lower daily volatility, clients are generally happy and content. But when the economy has a problem and asset values get volatile, clients often begin to critique what they are invested in and whether each investment is still an appropriate choice for them. If clients do not fully understand and appreciate what they own and why, a wedge often creates created between them and their advisors. It’s times like today that revisiting the suitability and know your customer rules add the most value to everyone concerned. Using today’s uncertain world as the air-cover for catching up with clients is a wonderful way to service them, build deeper ties, and update investment portfolios. My general rule, when the client profile & suitability changes, so too must the portfolio recommendations & allocation weights.

Automating the discovery process can protect you & enhance your client relationship

As I stated earlier, every firm and advisor team has their own process for building an investor profile, storing the data, and updating the data over time. Because client sophistication and market knowledge tend to have a wide gap, I thought I would create a resource for advisors to use as a template for re-connecting on suitability metrics given clients’ current angst with investments & markets. The daily volatility we are seeing now can have a lasting effect on an investors willingness to take risk for goal achievement. The link below is meant to be used as a collaborative tool between the advisor and his/her clients on a 1-1 basis. How a client answers the 25 questions will paint a clear picture of: 1) their risk tolerances, 2) their return requirements, 3) their customer service preferences, 4) their time commitments, 5) their liquidity needs are, 6) what an appropriate mix between public and private alternatives might look like, and 7) what their behavioral temperament towards taking risk is. Once an advisor has this data, making sure they have the most prudent portfolio mix that matches back to their profile gets a lot easier. I can guarantee you, using something like the discovery process below will make it much easier for you to go line by line across an investment portfolio to spot-check if proper suitability is intact.  Whether you go through this assessment online together and I send you the results or you use what I have created as a general guideline, I hope you find the quick assessment helpful and useful.

One opportunity you will likely uncover: more clients would prefer to be shielded from the day-to-day volatility of traditional stocks, bonds, and in public markets. This might lead to deeper conversations about public and private market exposures that might be more suitable. The bonus: to have a less volatile ride along the way, clients are likely willing and able to give up some daily liquidity or to consider asset classes that offer less correlation to traditional stocks and bonds. And you get the opportunity to re-connect and build a more institutional portfolio.

Take me to the Investor-Advisor Profile Quiz

If you would like to discuss this Q&A assessment 1-1 with me, I’m happy to chat. My email is eric.clark@accuvest.com.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

A Historic Amount of Wealth is Transferring

This will be the x-factor for consumption stability

Key Points

• Demographics play an important role in global GDP and consumption trends.

• Trillions in cash and valuable assets are passing from older people to younger ones.

• The brands that are favored by Gen-X, Millennials, and Gen-Z stand to benefit most.

“By 2042, Baby Boomers are poised to hand over as much as $70 trillion in inheritance to their heirs…this will be the most significant transfer of wealth in American history, turning the spotlight on a newly minted nouveau riche multiracial consumer base equipped with considerable buying power“. Source: Mckenzie Research.

Demographics Matter

I have written about the historic wealth transfer that’s just begun in the U.S. many times and with this year’s volatility across consumer stocks in particular, I thought it was important we all keep our eye on the prize so we don’t lose sight of one of the largest investment opportunities we will see in our lifetimes. Millennials and Gen-Z are likely the primary beneficiaries of the wealth that’s being transferred from Boomers & their parents. I’ve seen it firsthand across my friend cohort, a handful of friends have been the beneficiaries of some large pools of assets as their parents and grandparents pass away and their assets get passed down. Cash, real estate, art, and other monetizable, tangible assets are coming to younger consumers and the process is not expected to be completed for another 20+ years. If I could teleport myself to 2045 and inspect macro datapoints like retail sales, personal consumption expenditures (PCE), and the top line revenues from the most relevant brands, I would bet you a taco they would be among the most robust & stable data series across markets. The wo0rld has been underestimating the consumer for as long as I can remember and most of the time, that’s been a very bad bet. With trillions passing from savers who spend to spenders who save, this slight nuance should offer a significant x-factor to the consumption theme and the companies that serve this theme. Brands have always mattered, but they will really matter over the next 20 years. This is one of the reasons our team created the brands investment strategies in 2015. We were excited to build a portfolio dedicated to stable & predictable themes like consumption. Importantly, there is still no other brands-dedicated equity strategy for investors and we hope it stays that way.

Below, I have highlighted where the collective wealth exists in our society. As you might expect, older people hold all the wealth, but younger people will receive a wall of money and assets over time. Remember, as we age, our spending begins to fall. Historically, our spending begins to peak around ages 55-60 and it deteriorates each year thereafter. Younger cohorts, however, really hit their earnings and spending stride beginning in their late 20’s as they get married, have kids, buy houses, invest in their 401(k)’s and save for college and retirement. If you want to see what happens to the economy when a large population group reaches the sweet spot of spending and earning, look no further than what the Baby Boomers did to the economy and real estate prices beginning in the early 1980’s! That was a very robust 20-year period.

The Wall of Money & Assets Coming to Younger Consumers is Historic.

Retail Sales and PCE has always been lumpy at times, but the trend with very few and short exceptions has been up and to the right. That’s what makes this investment theme so powerful. It’s also the reason the Consumer Discretionary & Tech Sectors have typically been outperformers over time. The most relevant brands tend to cluster in these two sectors making them solid long-term bets in our opinion. The best opportunities to invest in the greatest consumer brands have always been when they are in one of their underperforming periods. That’s where we are today. These rare periods never feel good, but opportunists should be licking their chops. When you know how the movie ends, you get a wonderful opportunity to buy great businesses serving U.S. and global consumers on sale. Aside from the trading community, that cares about nothing other than the next 5 days, most of us are investing for a long period of time. So, having a core allocation to the global consumption theme and adding to it during weak periods offers a wonderful one-two punch for part of the investment portfolio.

The below graphic highlights who will be inheriting the assets along with an estimation of how much in aggregate is likely to be transferred. This one graphic illustration could be one of the most powerful hints at the future I have ever seen. The key to benefitting from the wealth transfer phenomenon is to understand which companies or brands Millennials, Gen-X, and Gen-Z are fiercely loyal to. It’s these brands that have an extraordinary opportunity for strong growth and subsequently, attractive total returns for investors. That’s where our team spends a massive amount of time. To be sure, this is a slow-moving train. But if you see the big picture clearly, any weakness in these brand beneficiaries can be used to increase the positions at better prices.

Which Brands Have High Brand Love With Millennials & Gen-Z?

The holy grail of investing in brands happens when you can identify the brands that young, middle-aged, and old consumers love and when the phenomenon is global in scope. There’s 8 billion people on the planet, so if a company delights a massive demographic cohort on a global basis, the revenue and free cash flow opportunities can truly be enormous. If you want evidence, simply look at Apple with $394 billion in trailing 12-month revenue, Amazon with $502 billion, Walmart with $600 billion, and Google with $282 billion in annual revenue. These are staggering and historic levels of revenue and brand love is at the center of this operating metric excellence.

Our team does extensive research on brand relevancy and high brand love. This work is one of the inputs we use to select which brands to own in our portfolios. Today, I thought I would highlight some third-party research highlighting which brands are really resonating with younger consumers along with our own. Many of these also resonate with my generation (Gen-X) and even my parent’s generation (Silent Generation). So long as these brands continue to listen to their loyalists and continuously endeavor to build a broader, more global list of buyers, their businesses should remain attractive, and their stocks should be strong performers.

Based on our research along with the research from brand analysis firms Comparably, Morning Consult, and Moosyvania, the following brands keep rising to the top from a brand love and brand relevancy perspective where Millennials, Gen-X, and Gen-Z are concerned:

Peloton, Amazon, Google, Netflix, Apple, Costco, Delta Airlines, Uber, Zoom Video, Nike, Spotify, Southwest Airlines, Target, Walmart, Microsoft, Nintendo, Airbnb, Adidas, Starbucks, Coinbase, Domino’s, Shopify, Chewy, Zillow, T-Mobile, Coke, Marriot, Disney, Home Depot, Pepsi, Square, Tesla, McDonald’s, Sephora (LVMH), Instagram & WhatsApp (Meta), Doordash, Snap, Visa, Roblox, Lululemon, Chipotle, and Estee Lauder to name just a few.

There’s a lot of overlap across the demographic groups and not surprisingly, these brands have been stellar performers over the years. But, not all brands will hold their brand relevancy over time. That’s why it’s vital for investors to continuously pay attention to how brands engage with consumers. Once a brand becomes irrelevant, it is very difficult and expensive to try and regain relevancy. Those stocks tend to be melting ice cubes and a source of serial underperformance. Our team owns a collection of the brands above and would love to own a handful more if the prices pulled back to our buy zone. Our comprehensive research has allowed us to identify some real “emerging brand” opportunities which often offer significant returns from a stock perspective. The real magic happens when you identify an emerging mega brand or brands early and before the market sees the high brand relevancy. That’s where I enjoy spending a good portion of my research time.

Bottom line:

• There’s significant alpha to be generated when you invest with demographics in mind.

• The current wealth transfer opportunity is the largest in human history.

• There are a few dozen brands that stand to benefit the most. Their futures are very bright and their stocks are likely being under-estimated by the market today.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Lessons From Peter Lynch: Invest In What You Know

Key Points

• Peter Lynch is one of the most successful investors of all time. He ran the Fidelity Magellan Fund.

• Fidelity Magellan was the best performing active fund in the industry under Lynch.

• To generate outsized returns, Lynch advocated embracing volatility & staying invested.

“I’d rather invest in pantyhose versus communication satellites or hotel chains versus fiber optics”

” I love volatility…Take YUM Brands (Taco Bell)… I knew the company was in great shape and market volatility allowed me to buy more shares as it fell from $14 to $7 to $1 per share only to be acquired by Pepsi for $42 a few years later.

Here’s a quick three-minute link to an interview with Peter Lynch where he talks about market volatility: Peter Lynch: “I love volatility”

Peter Lynch…Invest in What you Know.

There are a handful of investors that have risen above everyone else over time. Peter Lynch was one of the titans of investing. Peter ran the Fidelity Magellan Fund from May 1977 to April 1990. Over that period, the Magellan Fund was the top performing equity fund. His “invest in what you know” approach is quite similar to what we preach with the top global brands approach to investing. Many things have changed in markets since Peter’s retirement in 1990, but nothing is more timeless than investing in companies you know, trust, and love and in the products and services you consume on a frequent basis. There’s a lot more research involved than just “investing in what you know”, but this ideal is a great first step in identifying potential strong investment opportunities. Peter preferred businesses that were easy to understand. He constantly stated that individual investors had an advantage over fund managers because they knew what brands were dominant in their local communities. It was like having insider information he used to say. He clearly believed in top brands given the holdings he had over his tenure, a testament to the fortitude of the thematic. He also clearly loved industry leaders as well as interesting turnaround situations. He preferred growth companies that could be bought for reasonable valuations and was keenly focused on important profitability metrics and competitive advantages. We whole-heartedly agree.

There are so many similarities between our approach and his that it’s uncanny. Brands matter as much today as they did when Peter was running Magellan. Brand relevancy changes over time but being the dominant brand in important spending categories tends to lead to very positive investment outcomes over time.

The Magellan Fund Under Peter Lynch’s Direction:

Wow, is all I can say. The Fund was the #1 performing equity fund during Peter’s management. Here’s a chart of the fund versus the S&P 500 over this 13-year period.

Source: Morningstar

Massive, annualized outperformance with similar volatility of returns when compared to the S&P 500. Perhaps there’s something to this “invest in what you know and understand” approach? I’ve looked at a number of holdings during his tenure and it reads like a who’s who of top brands of their time. It’s fun to look at these brands to see how relevant they are today or if they have become parts of other highly relevant brands. The great returns were generated through investing in some iconic brands like: Toys R Us, Taco Bell, La Quinta Resorts, Cracker Barrel, Home Depot, Albertson’s Fed-Ex, Coca-Cola, Ford, Chrysler, Pep Boys, McDonalds, Philip Morris, Disney, Delta Airlines, and many others.

Timing the Market is Difficult, Stay Invested & Add on Dips

There have been many stories written about the success of Peter’s approach and his track record at Magellan. What few people talk about is the path that investors had to follow to receive those returns. Like today, there was plenty of market volatility and frequent drawdowns, yet Peter somehow compounded people’s capital at a very high rate. The trick he said, is to use volatility to your advantage and stay invested for the long-term. In theory that is easy, in practice, it is difficult and requires fortitude and conviction. When stocks are volatile and have drawdowns, like today, the emotional response is to get to the safety of cash because we extrapolate the short-term direction of stocks well into the future.

We tend to do that after a big drawdown has already occurred and typically closer to the bottom in stock prices. Every economic situation is different, but the results seem to be the same: we love holding stocks when markets are calm and stocks are going up and we extrapolate disaster when markets are volatile and the media is painting a bleak picture. This forces us to make irrational, emotional decisions that run counter to our long-term goals. Let me be very clear, when great businesses go on mega-sale, you buy more. So long as the big picture of the business hasn’t changed much, the weakness should be bought.

There is always renewed demand for great brands when they go on sale. Use that knowledge in times like today when some of the greatest businesses the world has ever seen are 20-50% off their recent highs. As you’ve seen from my former blogs, implementing a systematic cost averaging strategy can add significant value around the core position and helps you recover quicker over time. Here’s that recent blog if you haven’t read it: Cost Averaging Adds Significant Value

Being a long-term investor means you will occasionally see some drawdowns. Some are just shallow pullbacks in a bull market, some are more event-driven corrections, and some are inflation and interest rate driven bear markets like we have today. I analyzed Magellan Fund returns while Lynch managed the fund and below are the number of times the fund saw different types of pullbacks.

Data source: Accuvest & Magellan returns via Ycharts

That’s a lot of pullbacks over a 13-year period and if your emotions got the better of you, you lost the ability to generate the returns many of the great brands of yesteryear generated.

“If you can’t banish forever the fatal thought “when I’m down 25%, I’m a seller, you’ll never make a decent profit in stocks” said Lynch in his book, “One Up On Wall Street.”

Peter Lynch had many famous quotes but this is another one of my favorites: “when the market went down, so did the fund, most of the time it went down more than the market, it’s just that simple…expect it.” The graph from Morningstar highlights this fact. The blue line is the Magellan Fund and the green line is the S&P 500. Typically, when markets went lower, the fund also went lower, and it lost more value than the index during those drawdowns.

In the end though, the fund that was driven by one of the greatest investors of all time using a simple, common-sense approach of “investing in what you know”, somehow managed to go on to reach new all-time highs again and again. From a top brands perspective, I have seen this same movie happen over and over for the last 30 years and I expect the same to be true going forward. Great companies that dominate their industries find new ways to win over time. That’s what makes them great brands.

There’s always going to be something to worry about, but remember Peter Lynch’s words:

“Buy great businesses, embrace volatility, be willing to buy more of what you completely understand, and stay invested for the long-term.” This simple process will serve you well during your investment career.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

The Last “Lost Decade” Favored Top Brands

Key Points

• The calls for another “lost decade” in stocks are getting louder.

• A historical look-back from the last “lost decade”, 2000-2010, shows brands mattered.

• A brand’s relevancy is vital to a company’s success. Brand relevancy changes over time.

“In good times, brands matter. In difficult times, brands really matter”

Predicting the Future is Difficult

Absolutely no one knows what will happen in the future. When you come across a person or firm that says they can predict the future, ask yourself why they aren’t sitting on a 100-foot yacht in St. Barts versus talking to the media or you about their knowledge of the future. The future is un-knowable because variable always change. Even the most well-thought-out macro view that connects the dots from one factor to another to arrive at an end-projection requires every dot to jive with the others. One breakdown in the macro dot-plot changes every other prediction making the entire prediction less likely. So why try to predict the future at all? Attention is the answer.

The world likes to hear from “smart forecasters” in times of high uncertainty. Not having any ideas about the future is a control-freak’s worst nightmare so these “experts” try to gain attention and to make money catering to your fears.

Here’s a key truth: success in the stock market is more about keeping your emotions in check than actually picking the right stocks. Great companies just win over time; there’s ample evidence of this, along with it being common sense. When investors finally can’t take the volatility and drawdowns anymore, they tend to make the absolute wrong decision at the wrong time. I’ve seen this movie play out over and over in my 30 years of investing. Just remember, buying great companies when they go on big sales is what one is supposed to be doing, not panic selling. Here’s a recent blog talking about that where I show real world examples of the gains that could have been generated if ones emotions were in check: https://catalyst-insights.com/analysis-cost-averaging-adds-significant-value/

As you are well aware, there’s plenty of uncertainty and lots of forecasting going on today. Some very smart, very successful investors have recently been predicting a potential “lost decade” in stocks going forward, Jeremy Grantham (GMO) and Stan Druckenmiller to name a few. We will not comment on the future because it’s un-knowable and therefore a waste of time to try forecasting it. What we do know: human beings earn money, save money, and spend money. Our brand loyalty or brand loathing tends to drive how and where we spend our money. The same is true at the corporate level, it’s less about the emotional connection though, and more about corporate innovation & finding productivity gains. That’s why our team created the Brands 200 Index and why we run an actively managed equity strategy based on B2C and B2B consumption. In good times and bad, consumption is happening. It changes in size and scope according to different parts of the business cycle but the companies that are driving innovation and delighting customers always win in the end.

In great economic environments even average companies perform well, but in more challenging times, arguably like today and potentially in the next few years, only the best companies even have an opportunity to thrive. We have confidence that the most relevant and admired brands serving consumers and businesses will do what they have always done: survive and thrive.

History as a Guide: 2000-2010

As Jim Cramer likes to say, “there’s always a bull market somewhere.” With that thesis in mind, let’s look at the last “lost decade” in stocks, which was 12/31/99 to 12/31/09. Here are some facts:

Lost decades tend to happen when the prior decade was abnormally positive and likely unsustainable.

The 10-year period from 12/31/89 to 12/31/99 saw the S&P 500 Index annualize at about +18.1% versus the normal, long-term average of +9-11%. Based on that statistic alone, one might expect the next decade to be something closer to normal or less than normal. As it turned out, the 10-year period from 12/31/99 to 12/31/09 saw the S&P 500 Index annualize at about -0.95%. (Source: Ycharts.com)

The 2000’s was not a great decade for the market overall. In keeping with this wide lens return thesis, the secular bull market that began March 9, 2009 until the recent highs on November 20, 2021 was also much better than average at an annualized +18.8% return for the S&P 500. The growth stocks from the Nasdaq Index performed even better. Based simply on this historical performance look-back, one could assume the next 10 years might be lower than what we are used to. In fact, as policy rates are normalizing, we should indeed expect more volatility and potentially lower returns than we are used to, at least while the normalization process is happening. In the end though, a world without zero interest rate policy and free money is a very positive development for markets and stocks.

Let’s go back to the 2000-2010 lost decade period and show how a hindsight-focused top global brands basket performed versus the market. It was a tough early part of the decade for tech brands and many other consumer stocks, but overall, an iconic brands basket performed admirably in a tough decade. This all occurred while brands like Apple, Amazon, Microsoft, Disney, American Express, Home Depot, Este Lauder, Coke, and Schwab were down a minimum of 35% of that period. Already I sense the current period is rhyming with yesteryear. As you can see from the Ycharts image below, the 43-stock portfolio, equally-weighted annualized around the long-term average for the lost decade as the overall market struggled. The best companies tend to do much better than peers in the worst of times. They have the brand awareness, the balance sheet, the free-cash flow to invest through the cycle, and they often have the best operating metrics. And all this when we had the Internet bubble bursting, a recession, the 9/11 terrorist attacks, and then the great financial crisis and housing bust of 2008/2007. It’s pretty impressive that a group of companies, let’s call them top brands, somehow found a way to perform over a wild decade with two very bad recessions. Here’s the actual performance of the brands basket and the S&P 500 during the lost decade.

Brand Relevancy Matters Today As Much Or More Than It Did In 2000

As I write this week’s commentary, some of the most admired, most profitable companies (brands) have fallen 30-60% in less than one year. That is a very rare occurrence. You can thank your politicians and the Federal Reserve for this ugly year of returns. Multiples have come back to earth and estimates have been reduced with likely a bit more reductions to come as the effects of high inflation work their way through corporate earnings. If you read last week’s blog, you saw the chart of the 1973/1974 bear market with similar issues as we have today. The market ultimately bottomed as earnings were peaking. That’s counter-intuitive for sure and there’s no way to know if the same will occur this time around but the message from that blog was: markets don’t discount a recession twice. The poor market we have today is in the process of discounting a lot of bad news and stocks will likely bottom well in advance of your fear of these news items. Here’s the link to last week’s blog: https://catalyst-insights.com/where-will-stocks-bottom/

The discounts on great businesses we have today makes investing in the most admired brands a lay-up for investors with a little time. Aside from that observation, let’s get back to a period of difficulty like the 2000’s decade. When looking at the performance chart above, clearly something worked in the last lost decade.

Here’s a few observations from the chart and the holdings in the brands hypothetical portfolio:

• The brand leaders of this period seemed well positioned from a business perspective.

• The highest quality companies always invest through difficult times because they can.

• Investing for market share when peers are re-trenching tends to drive future gains.

• Being balanced between offense and defensive business models seemed to work well.

• Bubble stocks tended to lag when the bubble popped and valuations mattered again.

Here’s a look at the hypothetical “most relevant brands” basket that performed so well:

Let’s call that the “sleep well at night” portfolio!

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

Analysis: Cost Averaging Adds Significant Value

Key Points

• Core strategies are designed to track core mega trends around the world.

• Industry leading brands serving important consumption industries win over time.

• Cost averaging into a basket of brand leaders can add significant additional value.

Brands: The Ideal Core Equity Decision

In last week’s blog, I highlighted the positive long-term track records of a handful of the most admired brands to show how important the consumption thematic is for investors. I also showed the corrections that happen along the way as a reminder that stocks do not always go straight up, nor does a basket of stocks always outperform. Over the long-term, however, the data is very clear. The Consumer Discretionary & Tech sectors have a very strong track record versus the overall market as measured by the S&P 500. Today, it’s important to widen the lens as the Consumer Discretionary & Tech sectors struggle with rising rates and a difficult macro environment. The important point, however, is to not get shaken out of owning great companies when they are underperforming. If you loved these companies and sectors when they were outperforming, you should love them even more now that they are experiencing a rare period of underperformance.

The definition of “core” is the “central” or most important part of something. As a U.S. investor, one of the core parts of our economy is the consumer and household/business consumption. This important component accounts for ~70% of U.S. GDP. To track the beneficiaries of a consumption led economy, the ideal proxies are the leading brands serving this $14 trillion a year thematic. There is no other thematic bigger or more important than consumption. Do you have a consumption-focused core allocation? If so, good news: the leading brands, these key leaders of industry, are on sale. So now is an opportune time to start building positions in these well-positioned businesses. Many of these highly admired brands are trading at levels not seen for many years and their operating metrics are much better than the stock action might indicate.

Track Records Matter. Brands Matter.

For perspective, I have posted a 30-year look-back of the performance of some of the most important consumption brand leaders across key spending industries. When a brand stays highly relevant and continues to dominate its industry, big weakness in its stock has historically been a gift for investors. As you can see from the chart below, there’s some wonderful excess returns to be had if you understand how to identify brand relevancy and hold a core basket of brand leaders. Most importantly, investors only received these stellar long-term returns if they were committed to holding them through good times and bad. I’m sure you’ve seen the Morningstar studies of long-term returns versus the actual returns received by investors. The actual returns tended to be considerably lower because investors tended to panic sell in volatile market conditions like what we are seeing today versus adding to positions when they go on sale.

Data source: Ycharts.com

What I find most interesting about the chart above is the strong excess returns that were generated even through very difficult market environments. Over the last 30 years, we’ve had to endure multiple recessions, bear markets, flash crashes, 9/11, multiple Fed-induced taper tantrums, the European debt crisis, the 2020 Coronavirus, and today’s current high inflationary environment. I can guarantee there will be more turmoil in the future, it’s simply the nature of markets. When you’re sitting in the middle of the hurricane, it always feels like the world and markets will never recover and yet they always have.

Cost Averaging into Additional Shares of Core Holdings Adds Even More Value Over Time.

Having a strong buy-and-hold mentality regarding leading companies has served investors well over the long-term. Remember, the equity markets deliver positive returns roughly 80% of the time. It’s the periods when market leaders are underperforming that offer the best additional long-term opportunities. Catching the absolute bottom is less important than having a systematic approach to adding to great brands, funds, and ETF’s when they are experiencing periods of weakness. Being committed to adding capital during deep corrections has helped to speed up the ultimate recovery time. To illustrate this, I will use two key brands serving the important spending category of restaurants and fast casual dining. The same results would have occurred if I used other leading brands for this analysis. It wouldn’t have mattered if it was Home Depot, Lowes, Lululemon, Nike, Apple, Amazon, Costco, or Estee Lauder. The results were all the same.

Exhibit 1: Chipotle Mexican Grill, CMG

Investing a hypothetical $100k in your favorite burrito brand after their IPO on 1/31/2006 would have turned into a cool $3.6 million by mid-September 2022. Over the same period of time, an investment in the S&P 500 with the same $100k netted an investor ~$431k. I think you would prefer the $3.6M over the $431k!

Cost Average Benefits:

Using this hypothetical example, let’s see if adding to your core position in CMG would have added value to the end result. Let’s say you systematically invested an additional $10k in CMG stock when it was down 25% from the last 12 month high or from the most recent cost average buy level. In the image above, the additional $10k investments when the stock was on sale are noted as blue dots. It’s important to note that you did not have to time the bottom perfectly to receive a huge additional benefit.

The result from this hypothetical is that you would have invested an additional $10k seven times since 2006. This would be worth an additional roughly $284,000 net of the $70k initial investment. Since 2006, your vote of confidence in Chipotle with the core $100k investment and the additional $70k cost average investment would be worth roughly $3.9 million, much better than an investment in the S&P 500.

Exhibit 2: Starbucks, SBUX

Investing a hypothetical $100k in your favorite coffee house brand 30 years ago would have turned into roughly $23.7 million by mid-September 2022. Over the same period of time, an investment in the S&P 500 with the same $100k netted an investor ~$1.6 million. I think you would prefer the $23M over the $1.6M!

SUMMARY:

Thematic investing is a commonsense decision. Global consumption and business investment is a roughly $44 trillion a year thematic. That makes this an ideal core allocation given the definition of core. Identifying the dominant brands in consumption categories and holding them so long as they stay relevant is another logical decision. Adding to these great companies when they experience normal corrections can add even more value to the portfolio over the long-term. If you know how the movie ends (brands tend to outperform over time), being savvy and cost averaging into great businesses when they are on sale, has shown to be a very smart decision. Warren Buffett likes to say, “volatility is the friend of the long-term investor”. We agree whole heartedly and are excited to invest in great brands when the market puts them on sale.

Disclosure:
This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.

The Chipotle hypothetical cost averaging example highlights the potential power of holding core positions in industry leading brands and being committed to adding to these positions when the market acts irrationally. Cost averaging leading companies can add significant value to your long-term portfolio even if you do not catch the absolute bottom in the stock. Details on this hypothetical are below.

Thematic Investing: A Look into Key Megatrends Driving Global Economies

Megatrend #1: Trillions of Dollars are Migrating to Alternative Assets

Mega Brand: Blackstone (BX), the Biggest Beneficiary of this Megatrend

Key Points

• Thematic investors focus on megatrends and the brands that stand to benefit most.

• There is no bigger megatrend in financial services than the migration of assets to Alts.

• Blackstone, the Apple of the Private Equity Business, benefits most from this pivot.

“There is an undeniable secular pivot in asset management allocations …non-correlating assets are being added to retail and institutional portfolios and this is a multi-decade secular opportunity”
- Stephen Schwarzman, Founder, Chairman and CEO of The Blackstone Group

Thematic Investing

As you know, our team at Accuvest created the Dynamic Brands Strategy to invest in the global consumption primary thematic. Consumers and institutions spending >$40 trillion per year is the largest addressable market opportunity there is. Within the primary thematic, there are a few mega-trends that offer investors significant investment opportunities. There are not many global consumption-focused investors and there are even fewer dedicated mega-trends investors. We think that’s a big mistake and in the next few posts I’ll highlight a few of the multi-decade megatrends we see for investors. To be clear, a megatrend is a secular shift in a current industry or sector that will alter the landscape and usher in a massive opportunity for the leading brands serving the megatrend. The Dynamic Brands Strategy is very unique because the portfolio contains leading brands serving multiple megatrends within a general theme of global consumption.

Megatrend #1: The global pivot in asset allocations to non-correlating assets.

If you have not added any non-correlating and alternative assets to your portfolios, you will eventually. Why? Because they can add a significant amount of value, return and risk mitigation to the overall portfolio mix. The current traditional fixed income market offers more risk than ever because rates are more volatile and returns and yields have never been this unattractive. The partial shift away from traditional fixed income is early in its infancy and the fixed income market globally is greater than $120 trillion in size. Equities have always been volatile at times and with valuations higher than normal, future returns broadly could be less than average over time. Cash earns nothing and there is over $5 trillion sitting in cash being eaten away by inflation. Now compound that globally and you will uncover a solid opportunity for the alternative asset managers around the world.

Why will assets continue to shift? Let’s use one of the top Endowments as a guide. The Yale University portfolio holds about $43 billion in assets and is consistently a top performing Endowment in a very competitive peer group. Generally, if the smartest firms around the world are doing something consistently, we should all endeavor to emulate their approach. Here’s a few statements from the Yale Investments site:

Over the past 30 years, relative to the median endowment, Yale’s asset allocation has contributed 1.9% per annum of outperformance and Yale’s superior manager selection contributed an additional 2.4% per annum.  The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.

If virtually every institutional investor, the most sophisticated ultra-high net worth investors, and major insurance companies have made the decisions to pivot away from the traditional, stocks, bonds, and cash approach to asset management, shouldn’t every investor consider it? This megatrend is in its infancy which is why Blackstone is raising assets and fee revenue at a scale I have never seen in my career.
We think this will continue for many decades and the assets these PE firms will raise over the next few decades will truly be astonishing. Just to drive home the total opportunity, below is a look at Blackstone’s market share in the U.S., and you’ll see there’s so much room for market share gains here:

New strategies are continuously being created and this will continue as the world evolves. When an attractive thematic presents itself, the savvy PE firms often create funds so investors can gain access to what they see as an opportunity. The more credibility a firm has, the more repeat business they get when they create new funds. This creates a wonderful network effect and a recurring revenue, cash flow machine. These factors often drive a stock to be a superior outperformer.

Generally, these PE firms employ some of the smartest, most connected professionals around the globe. These super-smart investors see future trends before most others and they have epic amounts of capital to capitalize on these opportunities. In fact, these firms benefit most during every period of turmoil because they are often the buyers of last resort and get the best prices for assets in distress. They capitalize most on the concept of “buying when there’s blood in the streets” even when some of the blood is their own. Because these firms currently have staggering amounts of dry powder at their disposal, they stand to benefit most, over the long-term, from every single worry that we all currently have. Example: are you worried about inflation? Why not invest in the areas of the global economy that benefit from rising rents and inflationary pressures. See the opportunity in climate change innovation? Invest in a fund that holds the significant beneficiaries of the global flows into climate change including being the private credit provider for these technologies. I cannot think of a better allocation today than turning some of your hard-earned money over to the smartest investors in the world. These firms now manage hundreds of billions in permanent capital. They benefit greatly from management fees, incentive fee’s, follow-on investment decisions, and the compounding of the assets via strong performance over time. I’m not sure most investors understand how powerful this flywheel is and I’m very confident most investors do not own the stocks of these great PE firms in their portfolios.

Blackstone: BX

This 36-year-old investment firm now manages $881 billion and has stated it is confident in hitting the $1 trillion mark in assets by year end. In our opinion, Blackstone has an unprecedented amount of runway for additional AUM growth given the sheer size of the global assets market. Case in point: there’s about $125 trillion invested in global equities and about $128 trillion in the global bond markets (sifma.org). Additionally, if Blackrock can manage >$7 trillion, Vanguard >$6 trillion, J.P. Morgan Asset Management >$2.5 trillion, Goldman Sachs >$2 trillion and they are largely focused on the markets that are net losers of assets to the alternatives market, why can’t the 800lb gorilla in the PE business, BX, eventually manage $2-$5+ trillion? This impressive brand is already generating significant amounts of management and advisory fee’s (FRE)

At $881 billion as of 12/31/21, the business has scaled to the point where recurring revenue and earnings predictability will be high and stable. Businesses with high recurring revenues and strong earnings stability are awarded with higher earnings multiples. Blackstone currently trades at a 15 p/e, yields 3.5%, is growing that dividend handily, has incredible profitability with unprecedented growth opportunities, and currently has over $135 billion in dry powder to take advantage of future dislocations and secular opportunities. The business is simply too cheap when compared to the secular opportunities they are benefitting from and the stability of the earnings that will be generated over time. That’s why BX is the top holding in the Dynamic Brands strategy. To be clear, BX is still a stock and given the nature of their business, it can be volatile at times when economic growth is in question. But when you see a secular growth opportunity like the migration of trillions in assets, you use volatility to your advantage, and you continue to accumulate shares like an opportunist should.

Blackstone stock has been a monster outperformer since the 2007 ipo.

Since June 2007, Blackstone stock generated a total return of ~950% as of 3/1/2022 versus the SandP 500 return of roughly 294%. That’s an annualized gain over the SandP 500 of just over 800bps per year that could have been generated if an investor simply understood the secular trends under way. That is why we focus on megatrends and own the Mega-Brands that dominate these industries.

We think the future is very bright for the industry and leaders like Blackstone.

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