Luxury in the Portfolio

Luxury companies play a significant role in European equity markets. By market capitalisation, some of the listed companies rank among the largest stocks across the entire continent.

That alone has long kept luxury stocks in a class of their own, but the glamour of the industry has always made it a sector we watch closely.

The luxury goods industry can look back on impressive growth over the past 30 years. While the sector is not entirely immune to economic downturns, every period of weakness has so far been followed by a phase of robust recovery. The personal luxury goods market has grown at an annual rate of more than 5%, and rising prosperity worldwide continues to expand the potential customer base.

But what makes the sector so compelling?

In many respects, the strategies pursued by luxury companies genuinely differ from those of other consumer goods businesses.

The cornerstone is what the industry calls "desirability." Luxury products are designed to inspire longing and have always served as a symbol of social status. Purchasing a well-known luxury brand allows consumers to make that status visible.

Many leading brands deliberately keep distribution in their own hands, through their own boutiques and stores, with little or no wholesale involvement. This largely eliminates the kind of price erosion that comes with discount-driven competition.

Longevity and superior craftsmanship are central to the proposition. Unlike parts of the sportswear or fashion industry, luxury brands rarely have their products manufactured in low-wage countries; production frequently takes place entirely within Europe. Chinese consumers are playing an increasingly important role, and virtually all major players have an established presence in the country. A recovery there would naturally provide a tailwind for the market as a whole.

What does this mean for us as investors?

Many companies are family-owned and take decisions with a long-term horizon, an advantage when it comes to sustainable value creation. Profit margins are high: within the broader consumer goods industry, few segments can match the margins found in luxury. Luxury houses are often longstanding institutions that have been in the market for decades, and their brands command exceptional recognition. That strength creates high barriers to entry and shields established players from new competition. Taken together, these factors make the sector particularly attractive for investors.

We recently added LVMH to the Gutmann Equity Strategy and Richemont to the Gutmann ESG Portfolio.