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by  N.Abbott, RBC Global Equity Team Feb 1, 2023

Senior Portfolio Manager, Neil Abbott, RBC Global Asset Management (UK) Limited, spends his days looking at consumer companies. As an incredibly large and diverse sector, featuring everything from traditional car manufacturers, to hotel groups, to e-commerce companies, it is well-placed to illustrate our decision-making process and highlight how our clients’ capital is managed.

What makes the consumer sector compelling?

The sector is vast and has always been defined by its wide range of businesses; to our minds, that is what makes it so fascinating. Companies range from those that are over 250 years old, including well-known beer and food businesses, to the likes of Amazon that are yet to reach the 25-year milestone. There are cyclical businesses, such as Toyota and BMW in the autos sector, non-cyclical businesses, such as food retail, large, global companies and small, domestic businesses. There are those with in-house supply chains and those that are more reliant on third-party suppliers. There are companies we want to be invested in during periods of economic growth and companies we prefer during times of recessionary fears. In sum, the whole remit of the investment challenge is visible in the sector.

As you say, it is evidently an incredibly diverse sector. Where do you begin to assess the various industries, and the companies that define them?

We start our research by looking at industries with attractive profit pools, asking questions such as: ‘Is a particular industry growing or shrinking? What are the prospects for industry margins? Is the overall size of the investment opportunity increasing?’

Assuming that is the case, and we want to take our research forward, we look at the players in that industry and assess whether we are in a favourable part of a cycle, as there are both cyclical and non-cyclical industries within the consumer universe.

We then look at individual companies, finding those that display a strong, sustainable competitive advantage. This is a significant part of our investment philosophy and at the heart of what we do. Crucially, we engage with the management teams of the companies that we invest in, as ultimately it is management who are responsible for delivering financial returns to shareholders.

We believe that the ESG component is also very important to the sustainability of companies and the financial returns they can generate. We aim to work with management teams who we trust, who understand and commit to ESG, and who seek to build a successful company culture.

It takes time to understand the culture of a company, and as an intangible, it is not reflected in the financial accounts of a company. However, we believe that companies with competitive extra-financial factors, a strong culture, for instance, deliver better returns to shareholders over the long term.

In such a dynamic sector, it would be good to hear some ‘real-life’ examples. Can you highlight a few industries that exhibit ‘attractive profit pools’?

There are a number of industries which are benefitting from structural change and also those which have long-term, fundamental attractiveness.

In our view, the Electric Vehicles (EV) industry will be an important part of the consumer universe over the coming decades. The transition from internal combustion engines to EV is a fascinating challenge for the auto industry, both for traditional companies, such as Ford, Toyota and General Motors, which are working hard to manage the transition, or a new-entry company like Tesla along with a few others that are following along. It is a very dynamic industry, with significant investments to be made, a wealth of technology and in our view, change potential that offers an interesting opportunity for finding financial returns.

Another such industry is Travel & Leisure. This industry typically grows at around two times GDP, is slightly cyclical and reflects the growing middle class. It is also a beneficiary of technology, as technological developments have meant that people can work less, earn the same and have more leisure time. The rising numbers in China and India’s middle classes play a particularly prominent role, as those nations have a very high propensity to travel.

Health and wellness is a trend which has an impact on food, drink and fashion, and there is a whole industry which has grown up around this concept. The pandemic has added some impetus to that, and as consumers becoming increasingly inclined to spend more money to keep themselves healthy, so we try to find opportunities to benefit from that.

There is also the Luxury industry, which we find interesting due to its lack of cyclicality, E-commerce, which is bringing about structural and technological change, and Streaming, which offers new ways to consume media, be it music or videos, through new players, new industries and fascinating business models.

We believe that all of these are likely to account for a larger proportion of consumption over time.

Can you talk about an industry which is exhibiting a growing profit pool where you do not currently have any exposure?

EV is an area where we haven’t yet invested in any companies. ESG is one reason why we won’t buy into a business. By way of an example, we’ve looked at Tesla a few times over the last decade but we haven’t been comfortable with the management style, the very high levels of turnover and the board structure. While the Tesla story has been fundamentally successful, there are still issues that we are not comfortable with. However, there are other ways of gaining exposure, for example industrials stocks with supply chains into the sector or traditional auto companies that are coming to market with EV.

We continue to analyse such companies and re-evaluate our work on an ongoing basis, being mindful of the industry profit pool potential and where we are in a cycle.


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