GAM Investments Fund Manager Swetha Ramachandran on the Expanding Universe of Luxury Purchases
Swetha Ramachandran of GAM Investments
Oct 29, 2021
As another five people join the world’s middle classes roughly every second, and as their average age drops year on year, the world of luxury goods and services is expanding apace. The sector is today worth an estimated USD1 trillion and spans hand-made bags and watches to luxury cruises, Ferraris and Bentleys, fine wines and health & wellness. And there are few as knowledgeable as Swetha Ramachandran, Investment Manager and a member of the Global Growth Equity team at fund management firm GAM Investments. Swetha has been responsible for managing the firm’s dedicated luxury brands equity strategy since March 2019. She herself spans the East and the West, the emerging and developed markets, with over 20 years of investment experience across Asian and European markets and in consumer and luxury stocks. Her resume also boasts experience at leading institutions where she honed her skills, including Goldman Sachs, Credit Suisse and Alliance Bernstein. Hubbis ‘met’ with her recently to learn why the luxury goods sector has been performing so well, despite the seeming headwinds from the pandemic, rising inflation and global economic and geopolitical uncertainties, as well as why the outlook is so positive.
Hubbis: Clearly, you have some great insights into the luxury sector globally from your vantage point. It seems odd that luxury goods should be performing so well amidst so many headwinds worldwide at this time. Why?
Swetha: We look long-term and at the big picture. And Asia is crucial to this vision. The growth of the aspirational middle class in emerging markets, particularly in Asia, is phenomenal. Our data indicates that five people around the world join the middle class every second, and by 2030 two-thirds of the global middle class will be in Asia, of whom over 40% will be in just two countries alone, China and India.
Accordingly, we expose ourselves to equities that we believe will benefit from the rise of the aspirational emerging middle class, particularly in Asia. And we identify luxury and premium brands that are particularly relevant for this consumer demographic. Typically, they are entering the middle class for the first time, and their purchases shift much more towards discretionary purchases than staples, which is what people spend the vast majority of their consumption budget on at a lower income level.
So, our outlook for the luxury segment worldwide is essentially predicated on the growth of the middle class, especially in emerging markets and particularly in the vast and populous Asia region. And that drives our selection of investments. I should clarify that we invest globally, and ours is not by any means an Asia-only theme; it is an Asia-dominated theme.
Hubbis: So, is this a case that most of the companies come from Europe, the US and other fully developed markets with a long history and well-established brands?
Swetha: Mostly, yes. The appetite for long-established, trusted, quality brands from the developed markets among Asian or other EM consumers is immensely strong, but over time we also see that there are local Asian brands, for example, which are also making significant inroads in certain categories. We think success can be achieved through focussing on specific brands that cater to that middle class and higher-end consumer to benefit from their aspiration for higher quality products across all spheres of life, and primarily discretionary consumption.
We believe there is opportunity in developed market companies that enjoy a lower cost of capital – equity or debt – and that are then able to generate higher returns because they are exposed to the rapid growth in emerging markets. These developed market companies also enjoy robust and long-established governance structures, which is an advantage.
Hubbis: What are they buying? Handbags? Watches? Ferraris?
Swetha: A major misconception is to think only of stereotypes – the Louis Vuitton handbag or the Rolex watch. That is more of a caricature of what luxury is, and the scope of luxury is much wider. This spans clothes, handbags, watches, jewellery, but also travel, leisure, experiences, wines and spirits, cars, boats and so forth.
The luxury goods industry overall is roughly a one trillion dollar industry, of which personal, wearable luxury goods make up less than a quarter of that, and the vast majority, in fact, is made up by luxury cars, followed by hospitality, wines and spirits, health and wellness, sports, experiences, art, yachts, cruises, and so forth. So, it is not just about buying goods; it is also that the rising middle class and wealthy worldwide are also availing of the experiences that the luxury sector is able to offer them.
Hubbis: To many, this all sounds rather impactful on the planet, in terms of luxury cars, travel, cruises and so forth. Does ESG factor in your decisions?
Swetha: Interestingly, this is not the case, and the luxury sector offers a plethora of opportunities to invest sustainably. While it's easy to take a puritanical view of what people and people we know will or will not do in terms of behaviour, our point is that the middle class is growing, and they are going to be availing of discretionary consumption opportunities. What we want to do is invest in companies that are on ESG terms doing the sustainable thing and are substitutes for less sustainable behaviour.
For example, clothes from mid to lower type retailers are often worn only a few times and discarded. Nobody is doing that with luxury items such as a Rolex watch or fine handbag. The idea at the heart of luxury is to buy less buy better, which is exactly why it plays into the heart of sustainability. All the evidence points to luxury being more environmentally friendly.
Moreover, the companies we invest in have very good governance structures. In most cases, they're run with a long-term view. We did some research last year on how luxury companies were among the better corporate citizens during the Covid-19 crisis, particularly in relation to how they treated their employees. ESG is about the environment, but also about the social angles; some of these companies have been around for 200-plus years and are much more socially cohesive as organisations than many other firms. So, from all of these points - E, S and G - these companies tend to score very highly.
Hubbis: What impact has the pandemic had on purchasing trends for this sector?
Swetha: Consumers may have been more experimental in pre-Covid times, but during times of crisis, consumers flocked to brands they know and trust. And e-commerce boomed, with many older consumers embracing e-commerce as a great means of shopping safely, and that helped boost the luxury segment, as these older consumers generally have more money.
The other effect of the pandemic was increased awareness of the importance of sustainability. During the crisis, a lot of people had clear-outs at home and realised just how many throw away type items that they had been buying. We also saw luxury at home rise in importance. As people spend more time at home, they are spending more on their homes, so we saw a huge explosion in everything from cooking equipment, home decor, home entertainment and so forth.
And we have studies that suggest that at least half of total consumers worldwide are now rethinking their consumption along more sustainable lines. This has really breathed new life into avenues such as luxury resale, which is a great way to get consumers acquainted with the quality and the artisanship behind luxury goods so that in the future, they may become first time consumers. So, I would say those represent several types of behaviour that have been quite materially different since the pandemic hit.
Hubbis: What do you see as your key priorities in the year ahead?
Swetha: We are focusing more on the expansion of luxury to include the concept of wellness. Luxury for many people now is having time and being healthier, so this includes premium sporting goods and clothing manufacturers, especially those linked to work from home. These are not overnight sensations that are gone tomorrow - there's a long-term structural tailwind for companies that are tapping into that type of appetite among consumers to be healthy, to participate in outdoor activity, and to spend more of their leisure time on health and wellness, including from their homes, such as Peloton.
And of course, being outdoors lowers the risk of catching the virus. Hence we have seen an explosion of winter sports, particularly amongst the Chinese. And so, companies like Moncler and Canada Goose, which make that very functional, yet also fashionable outerwear, are doing very well as a result.
Another priority is to assess the M&A potential in the sector. This has historically been a sector where there's been a lot of value creation through mergers and acquisitions, in addition to organic growth. There has historically been a long tail of smaller brands that are not profitable as independent companies, but that can become much more so when they're part of well-established conglomerates, which is really behind the strategies of companies like LVMH and Kering, which is to keep hoovering up smaller brands. However, in 2020 we saw a real slowdown in M&A as companies wanted to conserve cash, to preserve their balance sheets as much as possible. Now that we are exiting the crisis, these companies are recording very healthy profit growth as well as cash generation, and I expect that M&A activity will heat up in the sector going forward. And that should be a theme for many years to come. And while the last deal of any meaningful size was LVMH buying Tiffany, I expect more large deals ahead.
Hubbis: You talked about the expansion of the middle classes worldwide and especially in emerging Asia and particularly India and China. But what about the younger demographics and their influence on changing demand profiles?
Swetha: There are major demographic changes taking place. In addition to the rise of the middle class, a key influence driving the rising appetite for luxury brands is indeed the younger generations, millennials, as well as Gen Z consumers. They are much more brand aware because of social media, and this is causing a real shift – the average age of a luxury consumer in Europe and the US, for instance, is someone in their 40s. But in Asia, it is much younger, and they are really the future drivers of this sector.
And that also means that their behaviour will influence the industry. For example, two-thirds of younger consumers say that they care about sustainability when making a luxury purchase. And what fascinates me is that younger consumers in Asia are even more conscious than younger consumers in the rest of the world. This might be due to the fact that the effects of climate change and pollution, for instance, are particularly evident in Asia, for example in China, where there are major problems. In short, this is driving the interest in the buy less buy better approach among the younger generations.
Hubbis: Finally, what particular skills or background do you think influence your approach to this sector?
Swetha: I am Indian by birth and grew up and enjoyed my education there, in Malaysia, Singapore, France and the UK, so I am well versed in the developed country and emerging nation mentalities and cultures. Luxury has historically centred on the developing world, but in terms of demand and the future direction, as I explained, it is being driven by the emerging world, especially Asia.
I joined GAM’s European equity team in 2012, covering the European consumer and luxury sectors, before taking over management of a luxury brands portfolio in 2019. The training I went through as an equity analyst with leading global banks and brands, the rigorous nature of the job and the attention to detail that it requires have all been helpful in my carving out a successful role here as a fund manager.
And I love thinking about the trends, analysing the current environment and looking for the future developments and fascinating drivers that will lead to change in this vast business sector, spanning so many areas. Although not a lover myself of social media, I am attuned to this as a key driver of change and opinion, especially amongst the younger luxury consumers. Lifestyles and psychology have evolved rapidly in recent years, and the pace of change is accelerating. Luxury is more successful than ever before, and will be even more so in the future, in my view. And as I said, this fits in well with another major global investment trend around sustainability and credibility, as measured by ESG metrics. This is most certainly an exciting sector to be investing in.
Getting Personal with Swetha Ramachandran
Swetha was born in Chennai, India and grew up in New Delhi, as well as in Malaysia, Singapore, France and the UK. She holds a BSc (Hons) in Economics from the London School of Economics and Political Science, London and she then moved to Paris to attain her Magistere (the French equivalent of a Master’s) in French Literature from the Sorbonne, Paris, before moving to Singapore to begin her career.
“I first worked for Goldman Sachs in Singapore in equity research, it was really exciting,” she reports. “I was covering the airline sector, which is a relatively small sector, with roughly one airline per country in Asia. I learned so much about Asia and about the companies and business activity and characteristics in the region. I later moved to Paris and then to London where I covered consumer stocks at Credit Suisse, primarily focusing on the beverages sector, after which I then moved to the investing side, enlarging my coverage of the consumer sector to include luxury.”
Leisure activities include travel in more normal times, and especially hiking, with past trips to exotic places such as Tibet, Peru and Ethiopia. “More recently, I have had to satisfy myself with places such as Greece and Portugal, but those have been wonderful as well. High on my wish list right now is Chile, but that will have to wait, I guess.”
Other hobbies include a passion for reading, and a love of the French language, keeping up her skills listening to the radio in French, reading French books and watching French language movies. “Actually, this also helps in my work, as there are some major luxury goods companies that will do their conference calls only in French, so it is nice to follow clearly without relying on translation.”
Swetha reports that her idea of luxury goods for herself centres on anything to do with cooking. “I recently bought a Sous-Vide but have yet to try it out. It used to be only for the pro chefs but is now more widespread, and is all about utilising precise temperature control to deliver consistent, restaurant-quality results. The technique produces results that are impossible to achieve through any other cooking method. I am about to start experimenting at home to see if I can achieve pro-style result. I hope so!”
As to her preferred cuisines, she has a soft spot for French food, but as she is Indian and has lived in India, Malaysia and Singapore, Singapore and the UK, she has a wide range of culinary skills and creativity. “There are so many cultures and different influences that have shaped my interest in cooking and food,” she says. “I guess I have a particular fondness for French and Indian food but like to try my hand at anything I can.”
GAM Investments – A Snapshot
GAM Investments offers Swiss heritage, global coverage, and differentiated strategies. It is an independent global asset management firm built by investors, for investors and focuses on truly active management of differentiated investment strategies. With a 36-plus year heritage, GAM invests clients’ capital using active strategies across discretionary, systematic and specialist solutions.
Collectively, GAM manages CHF103.0 billion in assets for institutions, financial advisers and private investors. The firm’s investment professionals, who on average have more than 14 years of industry experience, manage CHF33.4 billion in client assets. In addition to investment management, GAM also offers private label solutions to third parties – a business that has grown to CHF69.6 billion in assets over the past two decades.
Portfolio Manager at GAM Investments
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