Category Investments

The sweet spot of consumer-led return lies somewhere between X and Z

21 October 2020 Gareth Stokes

A few decades ago, your conservative clients would have stuck their spare cash in a fixed deposit at their bank; the more adventurous among them would have bought Kruger Rands or opened a discretionary trading account with a stockbroker. The size of the investment universe accessible to retail investors has grown exponentially in recent years, as evidenced by the programme at the annual Meet the Managers conference, held over three days. The event features a couple dozen local and international asset managers sharing their views on asset classes and investment trends to an audience of investment professionals, including independent financial advisers.

Earth’s most powerful consumer force

Attendees relish the opportunity to stay up-to-date with alternative investments, investment trends, and the latest thinking on asset allocation and portfolio diversification, among myriad other topics. Today’s asset managers have access to a wide range of financial market instruments that enable them to turn any investment strategy they conjure up into reality. Richard Wiseman, an executive director and portfolio manager at Goldman Sachs, illustrated the power of collective investment schemes (CIS) and Exchange Traded Funds (ETFs) during a dynamic presentation titled “How to gain exposure to the most powerful consumer force on the planet”. He told attendees how his firm had identified and harnessed the millennial theme as it rose to prominence worldwide. 

In 2016, Goldman Sachs launched a focused and unconstrained equity strategy with the sole purpose of investing in companies that resonated with consumers born between 1980 and 1999, nowadays global citizens between 21 and 40 years of age. “Our fund is widely diversified and comprises 40 holdings in companies that [we expect to] benefit as the global millennial population spends their money,” said Wiseman, adding that market analysts expect this generation to make up 75% of the global workforce by 2025. The power of basing an investment strategy on emerging millennial themes was illustrated by comparing the aggregate income of baby boomers, generation x, and millennials. We leave you, dear reader, to guess which of the three “lines” showed the greatest income potential. 

Aligning your investment strategy

“Millennials will become an increasingly dominant [component of the global economy] over the next five to 15 years,” enthused Wiseman, before commenting on the obvious limitations to income introduced by death and retirement among baby boomers (those born between 1956 and 1965) and the wind-down phase that many in generation x (born between 1965 and 1999) have embarked upon. The trick to delivering return from a consumer-focused strategy is to align the strategy to consumer spending patterns. Goldman Sachs made two observations about millennial spending patterns versus those of the preceding generations, namely that they were driven by technology and influenced by different value systems. 

The asset manager identified six focus areas where these observations intersected, including data consumption; social media; online entertainment; e-commerce; healthy living; and working online. As luck would have it, following this theme landed the firm slap bang in the middle of a global resurgence in technology. “We estimate that 67% of our millennial strategy is represented in online businesses,” said Wiseman. He agreed that recent price movements had pushed many of these shares into overvalued territory; but argued that high valuations were inevitable as many companies had achieved multiple years of growth in just a few months. 

“The millennial generation is the first to really care about the environment and phenomena like climate change,” said Wiseman. Younger consumers are also, on average, more concerned with the social constructs that contribute to corruption, crime, inequality, and unemployment. They put sustainability ‘top of mind’ when buying goods or services, when choosing an employer, and when investing. South Africa has already seen a step-change in the investment environment with more and more asset managers focusing on environment, social, and governance (ESG) and impact investing. The four stage process that Goldman Sachs used to turn its strategy into a successful fund are worth considering. 

Four stages of an investment strategy

  • Stage 1: Theme identification, to identify all sub-themes and stocks with exposure to the themes and sub-themes.
  • Stage 2: Identify high quality businesses that will benefit from the theme, making sure that they have adequate free cash flow and offer market-beating return on invested capital.
  • Stage 3: Consider the fundamental attractiveness of the businesses shortlisted in the second step, including analysing each stock from a bottom-up perspective.
  • Stage 4: Construct the final portfolio, with position sizes determined by the asset manager’s conviction on a particular stock and its thematic exposure. 

The Goldman Sachs Global Millennials Equity Portfolio is an example of thematic investing in action. It avoids concentration risk by spreading funds across sectors that align to the millennial theme. More importantly, it remains stubbornly committed to this theme. “We did not set out to be heavily invested in technology; but that is where the theme led us,” explained Wiseman. The theme may lead them elsewhere in the next five or 10 years, depending on the opportunities and valuations on offer over time. “What millennials want to spend their money on in the future is going to be different to what they spend it on today,” he concluded. “We follow a strategy that offers resilience, low volatility, and consistent performance [drawn from] the diversity of opportunity that the millennial lens allows us”. 

Writer’s thoughts:
Our hectic writing schedule made it impossible to attend all the sessions at the Meet the Managers event; but those we attended certainly lived up to our expectation. We learned more about equity strategies, fixed income, hedge funds, and thematic investing than we anticipated during the handful of 30 minute sessions we made time for. Do you find the content presented at forums such as Meet the Managers to be useful to your financial advice practice? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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