Manager focus: Scilla Huang Sun
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The luxury goods sector is still suffering, according to Scilla Huang Sun, the manager of the Julius Baer Luxury Brands fund.
Yet valuations are below historical average and luxury stocks tend to outperform in a recovery, she says.
“Consumers are buying less but better, and this trend is improving despite a challenging environment as strong brands gain market share.”
Although earnings will be down this year, Huang Sun expects many companies to show double-digit operating margins.
“Consumers are buying less but better, and this trend is improving despite a challenging environment”
Scilla Huang Sun
Huang Sun, who also heads the equities team at Swiss & Global Asset Management, recently positioned the portfolio more defensively. She says that within the luxury brand sector, bags and shoes are holding up well, whereas watches and jewellery are suffering.
Strong brands such as Louis Vuitton, Hermès and Tod’s continue to perform well. In fact, the strength of the brand is the key factor that determines Huang Sun’s investment decisions. “It’s not exactly measurable in numbers,” she says. The positioning, management and potential of the brand are all important, she adds.
As an analyst, she checks valuations, whether a company’s financials are sound, and whether there is room for expansion.
Some 45% of the fund is invested in fashion and accessories. Fashion, Huang Sun says, is the most difficult sector, and accessories the most profitable to invest in. She holds 18% in jewellery and watches, and another 18% in speciality food and beverages such as champagne or chocolate.
Her top holding is 6.8% LVMH, one of the biggest players in the luxury brands space. The company’s portfolio includes brands such as Louis Vuitton, which, according to Huang Sun, has weathered the crisis well. “The brand is very well managed and extremely profitable. Its handbag division is estimated to operate at a profit margin of over 40%,” she says.
Louis Vuitton is also investing in new markets, most importantly in China. So is Richemont, which makes up 5.3% of her portfolio. Although its watch business has been hit by the recession, Huang Sun expects the conservatively managed brand to do well in the long run because of its high exposure to Asia and other emerging markets.
Asia is the most important region for growth. “Asians are traditionally quite fascinated by European luxury brands,” Huang Sun says. “Of course there will be Chinese brands, but high end luxury brands from Europe have a special position.”
Consumers from emerging markets account for the majority of growth
Consumers from emerging markets account for the majority of growth. China, for example, accounts for 15% of the share of the global luxury market. However, according to Huang Sun’s calculations, it accounts for 49% of the contribution to luxury brand growth. Western Europeans, on the other hand, account for 25% of the global luxury market, but contribute only 16% to growth.
Some 75% of the fund is invested in European luxury brands. Of that, 25% is invested in France, 17% in Italy and 15% in Switzerland.
Huang Sun also holds the Swatch Group (6.1%) that owns premium and high end products. “In difficult times, people are still looking for strong but cheaper brands,” she says. The Swatch Group is defensive on the financial side, she says, and has net cash on its balance sheets.
Huang Sun has managed the Luxembourg-domiciled Sicav since launch in January 2008.
