It’s a simple enough strategy. Buy the world’s biggest brands and your shares should move higher as their glowing brand brings dollars flowing into their coffers.
It worked for investors in Apple, which is now the second most valuable company in the world – far surpassing Microsoft as the biggest tech company. The share price of the American multinational that creates computer gadgets like the iPod, iPhone and iPad as well as personal computers has risen by 11,580 per cent since 1984, and 490 per cent over the past five years. As the world coughed and spluttered following the global financial crisis, Apple shares walked on ahead by another 155 per cent.
Apple is as much as a public relations powerhouse as it is a technology powerhouse. It carefully constructs its image with media coverage – images of people lining up for days to buy its ‘scarce’ products (another branding strategy), and its phenomenal advertising clout across magazines, television and billboards. Even the latest Apple news has all the hallmarks of a well-constructed brand campaign. Almost every major newspaper reported the press release that Apple was poised to beat oil Exxon in the next six months to be most valuable company in the world. Exxon currently brings in four times Apple’s annual revenue. Indeed, it’s the power of the brand that’s bringing home the bacon for Apple.
A well-known Australian fund manager, Platinum Asset Management, has adopted this exact strategy to buy stocks. The fund, aptly named the Platinum International Brands fund, just buys stocks with recognised consumer brand names. It knows the secret to many multinational’s success:
“Successful brand management allows a company to earn superior profits from what otherwise might be a commodity. This process entails the creation of an emotional bond between the consumer and the product/product provider, which allows the latter to charge a premium price. As such, successful brand owners have a tendency to achieve superior growth and profitability (than purveyors of commodities).”
It’s marketing 101, but it’s an area of company analysis that investors – fixated on financial statements or spurious news releases – are prone to forget.
Apple is just one example of what Platinum sees as the emergence of “mega brands” – which will pervade markets globally, selling the same consumer products across the planet to both developed and faster-growing emerging economies. The rise of the middle classes in countries like India and China are untapped markets for these mega brands.
Platinum International reported in its most recent note that sales of luxury watches over the first five months of this year were up 41 per cent in China and 24 per cent in Hong Kong. “In 2010, Asia accounted for more than half of the value of sales of Swiss watches…with growth of 34 per cent.” Cognac and luxury cars such as BMW are also experiencing unpredecented growth from emerging economies, mainly in Asia.
Platinum mentions that the best returns have generally come from businesses with the greater exposure to the demand for luxury or premium products from the emerging markets. “Not all consumer companies are fortunte enough to be so well-positioned,” it says. “Many have large businesses in difficult Western markets or may have underestimated the potential in the emerging markets.”
Not surprisingly, returns in the International Brand fund have way outperformed the benchmark averages. The fund returned 10.7 per cent for the year compared to 2.7 per cent for the MSCI World Index, and posted a stunning 17.6 per cent for the past three years, ahead of the MSCI World Index, which fell by 2.7 per cent over that period – smashing the index by an outstanding 20 per cent.
Clearly, there’s something to be said for investing in the world’s biggest brands.
Platinum believes that many desirable brands will become takeover targets. It highlights Mulberry Group as one example, which it believes is on the radar of the larger luxury goods companies.
The fund’s top 10 positions at 30 June 2011, were BMW, UK retailer Mulberry Group, French beverage maker Pernod Ricard, Henkel AG, Pepsico, Piaggio, Luk Fook Holdings International, Remy Cointreau, Estee Lauder and Grendene. The table below provides a snapshot of healthy share price gains from some of the world’s big brands.
|Company||1 year Return (%)|
|Mulberry Group (UK)||519%|
|Pernod Ricard (France)||6%|
|Henkel AG (Germany)||22%|
|Pepsico Inc (United States)||7%|
|Piaggio & C SpA (Italy)||42%|
|Luk Fook Holdings International (Hong Kong)||235%|
|Remy Cointreau SA (France)||29%|
|Estee Lauder Co (United States)||74%|
|Grendene SA (Brazil)||0%|
* The share prices are based on the respective country exchanges.
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