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With French luxury goods group LVMH now the largest company on the European stock market, how are portfolio managers thinking about the rising power of fashion? Dominic Wallington, Senior Portfolio Manager & Head of European Equities, RBC Global Asset Management (UK) Limited, shares how he is positioning his portfolio to match the current trends. [14 minutes, 53 seconds] (Recorded May 13, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and we have a special guest on today: Dominic Wallington, head of European Equities at RBC Global Asset Management. Dominic, always a pleasure to see you. How are you and your family doing?

You know, we are really well actually, Dave, given the circumstances. It's been nice to be working from home for a while. How about you?

I'm doing great. They can't see you on the podcast— it's only audio, they tell me— but you look fantastic. We're going to talk about looking fantastic today. Stu Kedwell, who comes on every Tuesdays for (S)Tuesdays, has got me hooked on this television show called Ted Lasso. Have you ever heard of Ted Lasso?

I think Ted Lasso is my hero.

There you go. I was binge watching it last night, and it got me thinking that I could probably just hop on a plane as a North American fellow, and just go over and manage a European equity portfolio.

I think that's entirely possible.

Well, it likely isn't, because you're the best and there's no way that I could do what you do. And we’ve just been talking before we started recording. LVMH is now the largest company by market cap in Europe. It got you thinking about a number of things. Why don't you share with the audience what it brought to your mind, and what it says about European fashion?

Yes, I think Europe is a wonderful centre for fashion and France has a very specific position within that. Very, very successful, indeed. De Gaulle asked the question: is it possible to govern a country with 400 cheeses? Perhaps he's correct. But let's look at how successful France is in terms of its soft power. It is rated number one in the world in terms of other countries wanting to emulate, or visit, or respect it, or respect its way of life. LVMH is this fantastic group that sits within the European marketplaces, run by a gentleman called Bernard Arnault, who's a remarkable entrepreneur. A very powerful individual. He's one of the richest people in the world. I looked at Forbes this morning, he's number three on the list. Very different from the others, inasmuch as he's the only person who doesn't live in America. He's the only person who's not running a technology company. He's also probably the only person on that list that doesn't want to live on Mars. So, there are differences between him and the other people. Yes, he's a great entrepreneur. But also, we think that the underlying luxury market has tremendous long-term growth because it's not just about discretionary expenditure, it's about giving meaning to people's lives. Clothing has been an area where that's been the case forever, really. If you look at pictures of Queen Elizabeth I, she spent a huge amount on her appearance. She cultivated this sort of otherworldly magnificence. If you go to the seven-year war in the 18th century between Britain and France, the officers tended to carry lip rouge and powderpuff into battle. Louis XIV, shortly after that, made all of the men in his court wear high heels. So, fashion has always been a wearable language. It's something that puts you into a category and also gives you skills and benefits that most people don't think about when they think about fashion. In order to flesh that point out, I read a consumer survey which was set in China. One person had answered the question, what do you think about the price of Hermès accessories? They’re incredibly expensive, as you know. He said that was cost effective. That's because it gives kudos. It implies professionalism, sophistication. So, the price that's being paid is cost effective in terms of the cachet that it provides to wear it. We need to think about this when we think about luxury, because it's a very important factor in terms of the luxury market.

Yes, I read somewhere last year that for the twelve months, Hermès bag was one of the best returning investments that you could make. A Kelly bag, one of the very specific, very expensive Hermès handbags that are sold. So, you can actually almost look at some of these high-end luxury items as investments like antique cars, art, that type of thing.

Yes, that's a really interesting point, actually, because we think also that luxury could grow and still sustain this kudos that I'm talking about, relative to other parts of the fashion market. One of the reasons for this is that luxury can talk about provenance. It can talk about where the materials come from and it can value those materials. It can value its provenance in a way that fast fashion finds very difficult indeed, because fast fashion is about cheapness of the clothing. There's always somewhere in the supply chain where something is happening and workers are not being rewarded or whatever, and it’s a consequence of the fact that the model is all about speed and low cost. So, we think luxury might well benefit from this provenance issue. There are lots of technological opportunities now to sell luxury. Lots of internet sites that now sell on luxury and you can buy top-end stuff; Hermès, LVMH, all of these incredible brands. You can buy the same sort of mid-range luxury products. And we think this will be part of the circular economy as a consequence.

And so, Dominic, how does this play into the way you're building your European portfolio or the way that you have positioned your European portfolio in the past?

Well, we do think it's an area of proper advantage, regional advantage within Europe. We think that everything has a cyclicality to it, but the idea that this is very discretionary is wrong and proven so. There’s huge growth to be seen, we think, for some considerable time in China. It's expected that the Indian market will pick up as well. But funnily enough, the USA is a great area of growth, newfound growth. The Hispanic cohort within the USA is very young and loves luxury. So, we think there's all sorts of ways in which the baton can be passed on a global basis. That means that we will see plenty of future growth, and therefore, in a number of companies that we invest in within Europe. LVMH is one of them. There are a number of other similar type companies. But also, and this is really interesting, we're seeing this within the spirits industry and within all sorts of different industries. You'll have seen tequila, the way in which top end tequila has become very popular. In the USA, I don't know about Canada, but it's something that's happening in the drinks industry as well. So we have quite a lot of exposure.

It strikes me and I've heard some people think about the fashion industry and the luxury markets as, yes, they can command a premium price for their products, but there's also a large cost associated with the research and development and basically the build out of that brand, the advertising, the image, everything. Is this an area of good profitability and the potential for long-term profit growth?

Yes, again, a great question, because scale is key within this industry. LVMH doesn't break out the numbers, but it's estimated that Louis Vuitton, the brand itself— which has been around since the 1850s, opened its doors in Paris in the 1850s— has got 13 billion euros of sales and the EBIT margin is mid 40s. So it's an incredible engine of economic compounding. But there are other areas of the group where there's a huge amount of investment to grow them. It's this huge scale that means that things like the Rimowa acquisition, which is a high-end German luggage manufacturer that was acquired in 2015 or 2016, that was subject to a substantial level of reinvestment and it didn't affect the top line profitability of LVMH. So, I think it's a great point, scale is a really key consideration here. And as you said at the beginning, LVMH is now the biggest company by market capitalization in Europe. It's got a sensational voice. It's got this scaled up means that investment can happen in all sorts of parts of its portfolio without hitting the profitability of the business. It's got one of the most stable return on invested capital of any company in Europe as a consequence of that.

Yes, and that's really a central tenet of the way that you think about investing money. Thinking about even beyond fashion, these brands or these companies that have built— for lack of a better term— a moat, and are very strong with the return on invested capital. So, in terms of your philosophy, this goes beyond just luxury. This is just a very easy way to demonstrate your viewpoint, because these are brands that everyone knows and recognizes, and understands that premium value, but it goes beyond fashion. Is that not correct Dominic?

Yes, absolutely. Fashion is a great area for brands because these brands have very high profile. Many of them have been around for a very long period of time. But the key here is brands and the kind of power that brands provide on a long-term basis in terms of drawing an economic moat around the business. Brands can be very agile. They can adapt very quickly. They can be innovative. But they also always keep some elements of their past, the cachet associated with it, and the fact that within our portfolios, many of them have been around for a very long time.

Yes, I know that you've got companies that have been in existence for hundreds of years and continue to build on that legacy and the value of that brand and recognition continues to pay back shareholders. Dominic, one last question, with the pandemic and what happens post pandemic, any concern in terms of people working at home, as they have for the last year and a half? Does that maybe take away the importance of fashion? If I'm sitting at home with a nice shirt on but a pair of shorts, because I'm on a video call, does that in any way change the thesis or do you think these are trends that have gone on for hundreds of years and are going to continue?

Yes, I do think they're going to continue. I think we're in a hyper connected world now. And in many senses, it's become even more important in terms of being able to describe yourself and where you fit within society. I think appearance has become doubly important. There might be some short-term headwinds, although many of these companies have been remarkably resilient because they've got an online presence. But I take the point; we're at home more and there might be some short-term headwinds, but I think the longer-term trends are likely to accelerate, to be honest.

Yes, and that's what we're always trying to think of and talk a lot about on the podcast, investing is something that takes place over the long term. We don't want to speculate. We don't want to gamble. We can be successful by investing in brands that have long-term success and value that builds and grows and compounds is how we build through wealth. You certainly demonstrated that in the way you're managing money in Europe. And even beyond that, Dominic, it's always fascinating to hear what you're thinking about at any given time. Thank you so much for taking the time to stop by today.

It's a pleasure, Dave, and we look forward to you coming over Ted Lasso like, at some stage in the future.

I will make my triumphant return to the UK as soon as the Prime Minister allows me out of the country. We're not sure it’s going to happen any time soon, but we can be hopeful. Anyway, Dominic, thank you.

Thank you.


Recorded: May 13, 2021

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