A Luxury Affair

What could a Chinese dumpling maker named Li Wei and Bill Gates possibly have in common? They're among a record number of wealthy people who held the title of billionaire in 2006. And, according to Forbes magazine’s annual tally, the billionaire club is growing.

Forbes identified a record 946 billionaires with Microsoft founder Bill Gates ranked No. 1 for the 13th straight year. Twenty are from China, 21 from Hong Kong, 24 from Japan, and India takes the lead with 36 members of the Asian Billionaires Club. How’s that for you’re A B Cs? The 2006 list’s total net worth – an astounding US$3.5 trillion.

And the wealthy aren’t just keeping it in the bank. Forbes says that the rich in China and India, the world's two most populous nations, have also manifested their prosperity in a growing demand for luxury goods - from Louis Vuitton bags to Porsche cars.

China is already the world’s third-largest consumer of luxury goods, behind the U.S. and Japan. The Richemont Group, which is home to prestigious brands including Cartier, Van Cleef & Arpels and Montblanc, witnessed a 64% increase in Chinese group sales for the six months ended September 2006 alone.

Chinese consumers are projected to overtake their U.S. counterparts as early as 2009. What’s more, the fundamentals and longer-term growth trends for most of these economies appear sound, says Song Seng Wun, Regional Economist at CIMB-GK Research.

“The emerging markets have learned from the Asian financial crisis, and are more resilient now,” he says. “Even the Chinese government is constantly tinkering to ensure its economy and markets do not overheat.”

In any case, Song says the wealthy are usually the least affected by economic slowdowns. “Even if their assets lose half their value, most will still be rich enough to buy luxury goods.”

The producers of luxury goods are well aware of this unique situation and are expanding into the lucrative Asian market. Rolls-Royce, for example, is increasing its workforce by roughly 25% to meet demand from China. And Merrill Lynch plans to open more private banking centers in India to tap its growing cash-rich population.

And herein lies an opportunity for investors to cash in on the lifestyles of the Rich and the Very Rich.

The Fund

SGAM's Global Luxury & Lifestyle Fund

Fund Size US$200 million
Management Fee 1.5% per annum
Front End Load Up to 5.0%
Minimum Investment S$1,000/US$1,000

A number of global funds, including Clariden Investments and Credit Suisse have launched luxury funds, to allow investors to buy into Asia’s growing wealth. But in Singapore, SG Asset Management’s Global Luxury & Lifestyle Fund(GLLF) is the only luxury fund available to the public.

GLLF is a feeder fund that invests in the Luxembourg-registered SGAM Fund/Equities Luxury & Lifestyle, which is managed from Paris by Philippe Lasnier de Lavalette, Senior Portfolio Strategist for SG Asset Management. The fund is worth US$200 million and was also recently launched in Malaysia and South Korea.

Lasnier says that the Fund first defines what the luxury universe is. This is very much based on the quality of a product or service as well as its brand image. If both of these factors rate well, and exclusivity (otherwise know as high barriers to entry) is thrown into the mix, a company can charge a premium for its products and services. And people will pay.

With this in mind, SG’s luxury universe comprises over 140 stocks of which it is invested in roughly a quarter. These companies provide not only traditional goods and services like perfumes, couture fashion, leather goods, and luxury vehicles, but also non-traditional items like travel services, home accessories, medical services and even premium banking.

The fund’s top ten holdings include the LVMH Group, Christian Dior, Porsche, and Pernod-Ricard.

SGAM's Global Luxury & Lifestyles Top Ten Holdings

% of Fund
1 Richemont B 7.9
2 Christian Dior 7.6
3 LVMH 6.8
4 Coach 6.7
5 Pernord_Ricard 5.9
6 Nike CL. B 5.0
7 The Swatch Group 4.9
8 Essilar International 4.8
9 Luxattica Group 3.5
10 Polo Ralph Lauren ‘A’ 2.8
Courtesy of SG Asset Management

Lasnier says anyone interested in the Fund should look at it from a medium to long-term investment of between five to fifteen years.

The Fund’s objective is long-term capital growth through investment primarily in shares of companies, which carry out most of their activities in the luxury or prestige goods and services sector. The key selection rationale is – whether in the short term and/or the long term – will the company’s image be more valuable in the future than it is now?

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The Fund has an average annual growth of 7% (1995 – 2005). According to Lasnier, the one year the fund experienced a loss was in 2002, when the global macroeconomic slowdown and decline in tourism hit the luxury sector hard. But the sector’s growth recovered to 5% in 2004 and 9% in 2005, and SG is expecting steady improvement this year and next.

The Affair

A luxury fund is a highly specialized product. Mah Ching Cheng, Research Manager at fundsupermart.com says, “There is some demand but I wouldn’t say it is overwhelming though.” Investors already have their money in a number of the core funds such as Asia ex-Japan funds, European funds and Emerging Market funds.

Mah thinks interest in luxury might be stirred if investors want to further diversify their portfolios. “They may choose funds that are sectoral based such as agribusiness and commodities, May says. “A luxury fund is also one choice for them.”

Mah sends out a word of caution. She says that luxury funds are typically invested into cyclical stocks - for example luxury cars such as BMW, Mercedes or branded watches such as Piaget. If the economy is doing well then such companies will tend to do better as well with earnings being stronger as demand for luxury goods improve. However, if the economy goes into a stage of slowdown or recession, such cyclical companies will be hit first. This is clearly seen during 2003 recession.

But Vasu Menon, Chief Editor of finatiq.com reckons the Singapore market is now ready for a fund like GLLF. “Five to 10 years ago, investors would not have been interested in them. But now with far wealthier and savvier investors, the timing is right.” Menon says.

Menon reckons luxury funds in general could average returns of 10% to 15% over the longer term.