During periods of strong economic growth, people feel freer to spend money on the finer things in life. This is a global phenomenon. Think Prada, LVMH, or Rolls Royce, just to name a few luxury brands. With such an increase in demand for high quality products, a number of funds that invest in the luxury and lifestyle sector globally have emerged.
A HNWI is defined as an individual with liquid financial assets in excess of $1 million. The table above illustrates the growth of the HNWI (High Net Worth Individuals) from 2005 and 2006. Regions including Africa, Middle East and Latin America have seen their HNWI population grow by at least 10%. These same regions have also enjoyed strong economic growth the past two years, particularly Latin America and the Middle East. Both regions have benefited from the recent spike in commodity prices.
The next table shows the breakdown of the countries that have experienced the highest growth in HNWI. Singapore is at the top of the list, with the highest growth in the HNWI population. Coming in a close second is India.
What does the strong growth in HNWI mean for the luxury sector? It means that luxury goods are becoming more accessible to individuals from the middle-income class as they join the ranks of the HNWI. The young premium market is set to boom. The Worldwide Insights Report from MasterCard revealed this market will be worth over $1 billion by 2016.
Formally defined, there are four components in the luxury universe – perfumes & cosmetics, designer & ready-to-wear clothing, watches & jewellery, and leather goods & accessories. However, if funds were to only invest in luxury-related companies that fall into these four sub-sectors, the investment universe would be limited.
Hence, a broader definition is usually used – it covers all goods and services that stand out by virtue of their superior quality or brand image. In other words, companies under the theme would be those that share characteristics such as high entry barriers, price-insensitive demand, and good growth visibility.
Companies that fall into this segment include luxury and lifestyle brands such as LVMH, BMW, Las Vegas Sands, Nike, Porsche AG. These are just some examples of companies that we are more familiar with and which are typically included in the universe of companies that fund managers of luxury and lifestyle funds tend to invest into.