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Investment analysis: Consumption-driven investments: Slower or growers?

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Consumption-driven funds may seem a risky bet right now with slowing global growth but some managers are pointing to opportunities around the theme.

Developed economies are enduring austerity packages to reduce government deficits and emerging markets are showing they are not immune from the Eurozone crisis.

China, one of the world’s largest consumers, is recording slower growth, which does not look positive for those companies that are linked to its consumption. China’s economy slowed for the seventh consecutive quarter, recording an expansion of 7.4 per cent in Q3 on the previous year. Second quarter growth was 7.6 per cent.

However, Premier of the State, Wen Jiabao says that the worst is over, as retail sales jumped from 13.2 per cent growth in August to 14.2 per cent in September. JP Morgan Asset Management fund manager Peter Kirkman, who runs the £80m JPM Global Consumer Trends fund, says the China slowdown does not trouble him.

He says: “Despite all the negative rhetoric around China, the real mega-trend is that real income in China continues to grow at a double-digit rate. Emerging market consumption is around a third of global consumption and so it is the primary driver of global consumption. Any way you can play that is ultimately going to be a winning strategy.”

So strong is his conviction that Kirkman has more than a quarter, 28 per cent, of the portfolio invested in domestic China companies, where he is finding attractive price-to-earnings ratios.

Kirkman says: “Most of this direct China exposure is small cap healthcare, IT services and consumer companies. They have very cheap valuations.” He adds that 37 per cent of the portfolio is invested in companies that have a market capitalisation below £10bn.

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In contrast, Thames River co-head of multi-manager Rob Burdett (pictured) says he is concerned about China growth and has decreased his exposure to the region over the last two to three months across his multi-manager range.

This does not mean though that he is avoiding exposure to funds that are linked into consumption. Burdett holds the JPM Global Consumer Trends fund in the Thames River Equity Managed, Balanced Managed and Cautious Managed funds. He has around 2 to 2.5 per cent position in the fund in each.

He says: “Kirkman will play the faster and slower paces of growth with companies ranging from a very distinctive low end consumer business or a healthcare business in the US. The fund has proven over time to do well.”

Investec Asset Management portfolio manager Clyde Rossouw, who runs the Investec Global Franchise fund, has a defensive outlook.

Rossouw says: “We try to invest in businesses that sell products and services which people would not want to do without, which is those that do not have particularly high price points. We are not trying to buy companies that invest in high end restaurants or overseas exotic destination holiday.”

In terms of luxury goods, Rossouw says they are cyclical and therefore profits can disappoint. For instance, at present there is a significant stalling in luxury goods across the globe.

He says: “These companies are expensive and there are risks around the earnings. So we are not there at the moment. We will invest in them when the economic concerns are lower.”

In the last 12 to 18 months, Rossouw’s portfolio has shifted from the consumer to technology. He has doubled his tech exposure from 8.5 per cent to 17 per cent over the last year.

Now may be the time to move to a more aggressive stance, according to Dominion Fund Management chief investment officer Arjen Los. Despite the scepticism around China, it does not necessarily follow that portfolios should be defensive.

Los has found opportunities in the drinks sector, investing in companies such as Diaegeo in his fund, the £22m Dominion Global Trends Consumer fund. “These companies are less impacted by the slowdown. They are more defensive companies, which are consistently growing,” he says.

Los says: “We are probably going to get slightly more aggressive now by taking out some of this drinks companies exposure and putting it towards more traditional luxury goods. Some of these stocks have become cheap relative to the defensive names.”

Whitechurch Securities head of research Ben Willis says he sees consumption funds as “a good way of getting a relatively defensive emerging markets play”. “These funds are investing in the middle-class consumption story. China knows it needs to move from its current model to domestic consumption led model,” he adds.

Willis says buying funds that are consumption-driven is a good way to access emerging markets without the corporate governance risk and volatility sometimes associated with the regions.

He says: “There will be a dampening down effect though, as you will have exposure to other regions. If you are looking for wholesale, direct exposure to emerging markets, then you may be want to be buying an emerging market fund, but if you are the more balanced, cautious investor, this is a good way to play the emerging market theme.”

Chelsea Financial Services managing director Darius McDermott says: “Consumption-driven funds are a thematic play and if you want to have thematic plays in your portfolio, then it is a good one to have. I prefer funds to have a bit more flexibility.”


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