The luxury goods sector has been put through a rough time as a result of the recession but in the medium term, Julius Baer predicts the future looks bright for this investment area.

The luxury goods industry entered recession in 2009, with Bain & Co, a consultancy, predicting there will be a 10 per cent fall in luxury spending by HNW individuals by the end of the year. However, as far as funds investing in luxury goods firms are concerned, prospects look rosier in the medium to long term, with emerging markets driving some of the demand, argues Dr Scilla Huang Sun, co-manager of the Julius Baer Luxury Brands Fund.

“2009 will be a difficult year for luxury; most analysts have already reduced their earnings estimates a lot. There is a question mark over 2010. Will the industry grow again or continue to report lower sales? By 2011 we should see positive growth again, as three years of negative growth is a very pessimistic scenario,” she told WealthBriefing in an interview during a recent visit to the Swiss bank’s offices in Zurich.

The fund has not enjoyed the easiest of debuts. Julius Baer’s fund was launched first in Switzerland, in January 2008, and later that year in London during the September week that Lehman Brothers went bankrupt.

Though the $30 million fund started strong last year, it had fallen by 24 per cent by January 2009. However, it has since risen by 9.3 per cent between January and the end of April, according to latest available figures. There is no comparable benchmark tracking luxury funds, but a Merrill Lynch index of luxury goods companies, shows that the Julius Baer fund has lagged the sector slightly. From January this year to the end of April, Merrill's dollar-denominated MLEILIFD index rose by 11.3 per cent and the MLEILIFE index, in euros, rose by 15.9 per cent. 

Dr Huang Sun and co-manager Andrea Gerst like companies that are “big and beautiful”: internationally known brands with sound balance sheets, strong management and a flair for product innovation. Diageo, Richemont, L’Oréal, LVMH and Swatch are their five biggest positions in a portfolio of thirty stocks.

“The financial health of companies is key in a difficult and 'cash-strapped' environment. But most listed luxury companies have a very sound balance sheet, some of them are even net cash,” Dr Huang Sun said.

“The higher the fixed cost, and therefore the operating leverage of the business, the less financial geared the company should be to weather difficult times. We always look at the financial health of companies before investing,” she added. First quarter sales for this year at LVMH, her strongest position, were €4 billion, a 0.4 per cent year-to-year rise, she said.

Investment in firms with strong emerging market presence is also crucial to a luxury fund’s success in the downturn. A report on the sector by Bain & Company in October last year predicted a rise in luxury spending among emerging market consumers of 20-35 per cent between now and 2012.

Julius Baer said recent global turmoil does not detract from a longer term trend towards increasing personal wealth, growth expectations in global GDP and increasing tourist flows that it expects to drive luxury spending.

“The emerging markets have been one of the most important growth drivers for this industry in the past. This will continue in the mid and long term because of the impact of economic growth and GDP per head on spending power. China, with its growing luxury consumer base, will do especially well,” she said.

By 2015, China is expected to have more than 4 million wealthy households, making it the world's fourth-largest country in terms of its number of wealthy households, according to a recent report by McKinsey, the global consultancy.

Dr Huang Sun focuses intensely on the sector, monitoring prospects for any brand, included those produced by unlisted companies, and maintains close relationships with the industry. To get a strong feel for how companies are faring, she frequently visits firms to meet with management and staff.

She is a luxury fund veteran. She launched the Clariden Leu Luxury Goods Equity Fund, one of the first of its kind, in December 2000. The fund is currently run by Juan Mendoza. Luxury options are also available from fund managers at KBC, ING, SG AM and Dominion Funds.

Such was her reputation, that when she left Clariden Leu in 2007, the UK fund of fund manager Forsyth Partners withdrew it’s a-rating from the portfolio. In a statement, Forsyth called Dr Huang-Sun “essentially the leading force behind the fund’s success.”

Julius Baer’s offering is much younger and has had to cope with exceptionally rough economic weather. Investors will hope that its highly regarded manager can navigate this fund into a prosperous future.