Talk Your Book: Investing in Luxury

0:00Today's Animal Spirits Talk Your Book is brought to you by CraneShares.com. to craneshares.com slash KLXY. That's for the CraneShares Global Luxury ETF. That's craneshares.com slash KLXY to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:36Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:44Welcome to Animal Spirits with Michael and Ben. Ben, you're a luxury shopper. No, I was thinking about this. I don't really shop luxury brands at all. You're rejecting luxury like I reject middle age. Embrace it. It's true. What do I do that's luxurious? J.Crew. See, J.Crew is like... I'm just kidding. That's not luxury. No. But it's hard to define where it's in line with luxury brands when it comes to clothes. It's true. I guess a lot of it is... See, I prefer stuff that doesn't have a name brand on it anywhere. Like, I don't want the name of anything on anything that I own. Unless it's like a sports team or something, I guess.

1:19I don't want to see anything written on any of my clothes. Fair? Well, that is fair. I mean, I used to just be pretty much... I'm wearing this right now. I used to be pretty much exclusively Gap t-shirts. But now I've, I've upgraded to, you know, Instagram shopping. That's your luxury purchases, Instagram. It is interesting. I feel like my wife's not super materialistic, but, but I will say I'll admit it. She just bought a super expensive vest. Like what the hell? Like a vest that was way more expensive than a vest should be. Okay. I feel like handbags for women are a big thing. Like a name brand handbag is a big thing.

1:57I don't know. But it obviously, like, luxury has, like, it just, like, has its claws dug into a lot of people. Like, I feel like when you get money, it's like the keeping up with the Joneses or whatever it is. Like, people who have money are willing to pay up for name brand items. Listen, I'm not going to luxury shame. I have no problem with luxury. No, no, no. I kind of get it. It's one of those things where it's like, gosh, this makes no sense. But everyone else is doing it, so it does make sense. So, but it is one of those things. I know it totally makes sense. I mean, isn't that what money's for?

2:30I'm not saying that the purpose of money is to spend on luxury goods, but if it makes you feel good, it's the way that you perceive other people's perceptions of you. Yes, it's advertising, right? It's brand advertising. And there's just this, you and I have talked about this for years now. One, I think one of our investment theses, is that a way to say it? Thesis is? Thesis, I, thesis. That we've talked about forever is like betting on rich people spending money. And it's almost like, it feels bad to say like we're betting on wealth inequality, but I think that's just the system that we live in.

3:03And it seems like that's a pretty good bet because the wealthy don't change their consumption habits that often because they don't have to. Now, I'm not to have a tension material as we discussed with Brendan Ahern, but the fringe or the aspirational wealthy, that's where, right? Like the marginal buyer and seller of people that are trying to buy a, I don't know. I was about to say a Tiffany bag, but I don't think they make bags. But I feel like that - A Gucci bag. That aspirational buyer has increased dramatically since the advent of social media. True. Don't you think social media - We didn't even talk about social media.

3:37Yeah, I feel like that's been a big part. It's also like it makes people go on more trips because you see people post pictures of these cool places. And I feel like the aspirational wealthy is another category that is being pushed into this category. For sure. Yeah. Hey, listen. When you're right, you're right. That's a good point. All right. With no more further ado, here's Brendan Ahern from Crain Shares talking about the global luxury sector.

4:03On today's show, we're joined by Brendan Ahern. Brendan is the chief investment officer at Crain Shares. Brendan, welcome to the show. Thanks for having me, Michael. You know what? I apologize. I feel like that intro is very low energy, which is not like me. It is a Monday. It is a Monday. It's a Monday. All right. We're going to talk today. about global luxury ETF. I saw an article actually recently in the FT, actually came out today, that there are now over 10 ,000 ETFs in the market. So far in October, 42 have been launched. This is a new one. This luxury ETF is launched in September. I'm actually, I'm surprised that a luxury ETF had not existed.

4:41Although I guess I'm making an assumption. Is this the first luxury ETF? It's not the first, but obviously what we wanted to do is kind of what I think what ETFs are supposed to do, which is to go out and get you the stuff you're not going to own yourself. So, you know, how we define global luxury is a little bit different from some of the predecessors in the space, which includes very widely held stocks like Apple and Nike, Tesla, which is only replicating what you already own, either through an individual security or through, you know, your broad U.S. equity exposure. So we wanted to do something a little bit different by trying to go further afield in garnering exposures that you don't already own.

5:26That's a good point. So one of the benefits of ETFs is it gives you the ability to be surgical. To your point, you're trying to create something that's not already loaded into our index vault and holdings. Like for example, this right here, the shirt that I'm wearing, the listener can't see it, but this is a luxury Gap cotton shirt. I don't see Gap in your top 10 holdings. No, no. In fact, only one of our top 10 is a US listed company, which is Estee Lauder, which I doubt many people own as an individual security. It's a de minimis weight in US equity benchmarks. The majority of these major companies are going to be French, Swiss, German.

6:06I was going to ask about that. So how much of the portfolio, because looking at the holdings, How much of the portfolio is outside the US? So about, you know, 27 % is US listed in the aggregate. So, you know, you've got obviously, you know, the majority is non-US. And I think even within that US, you know, obviously 27 % is, you know, not insignificant. It's more of, you know, those holdings are not commonly held securities. So it is interesting that 70, more than 70 % of the portfolio is international. When you think about what luxury goods are. Obviously, supremely high quality. But in addition, it's brands.

6:48And a lot of these brands have been around for a long time. Oh, yeah. I mean, Hermes dates back hundreds of years where it was originally a saddle maker in France. And certainly, these companies, it's really bespoke. You kind of have a mass affluent. And then you have this unique, you know, ultra high net worth that, you know, as we've seen, you know, during the pandemic was really immune to economic crisis. You know, these people were a small percentage of the total population or even amongst, you know, rich people, they are very different than the rest of us. I got to admit, there's no way in hell I could have pronounced the company that you just pronounced, or I would have said Hermes, probably.

7:39So let's just get that out of the way right now. But is that the idea here that this is a bet on, I guess, almost like wealth inequality in a way, but just rich people getting richer and their consumption patterns are different than the rest of the world or the rest of the economy in some ways. And it takes a lot to get them to stop spending money. It's one of the genesis or the real idea behind Craneshares was give people the growth element of China, right? You know, K-Web or broader emerging markets, KEMQ, where, you know, 10 plus years ago, 50 % of MSCI China, MSCI emerging markets was financials and energy, right?

8:20And, you know, you added industrials, materials, real estate. These benchmarks for China and emerging markets were basically value proxies. And that to me is why they underperformed. And so KWEB, KMQ, right, they give you that small piece of growth within these broader benchmarks. And that's, you know, I call it explicit exposure, right? It's, you know, you're explicitly buying EM China stocks. But at the same time, over the last few years, you've seen this dramatic underperformance of non-US stocks relative to US stocks. And you'd say, well, there's implied exposure to emerging markets and to China via US multinationals.

9:08And that is true in this luxury space where you have developed market companies that are doing a lot of their revenue in emerging markets like China. And that's kind of the genesis of KXLY was you can have developed market exposure. So this is well-known accounting firms and listing exchanges with highly regulated, give people the comfort of buying developed market companies, but are highly geared to EM growth and particularly China, which is very much the case is where a lot of this demand for global luxury is coming from. I saw a stat today or recently that the global luxury market, by the way, how big is the global luxury market?

10:03It's about 275 billion US in annual sales. Okay. That's a lot of money. So that's 25 % above 2019 levels, pre-pandemic levels. And a big reason for that, as we learned on some of the recently quarterly calls, is there was what they were calling, I think LVMH called them aspirational luxury buyers. And that pool of aspirational luxury buyers exploded, and it's probably now contracting. Ben made the point earlier that the ultra-wealthy, they don't change their spending habits dramatically. If they want to buy a Prada bag or a Gucci bag or a watch, whatever, They could afford, you know, price is not an object to them.

10:44But for the rest of us that are trying to break into that market, these are sensitive. These are definitely sensitive buyers. And if the economy softens, they're going to pull back immediately on luxury items. Yeah. Yeah. I mean, within that latest LVMH, it's interesting. Some of the headlines were like, oh, you know, China drags. I'm like, you know, this was, you know, the US was like 2 % to 3 % growth. I mean, the US, and so I think you had this helicopter money, the free stimulus, and a lot of that went into Xboxes and Bitcoin, but also Pelotons and iPhones, but also went into global luxury.

11:26And so it's interesting that China, which was still in lockdown, so China goes from being about a third of global luxury pre-pandemic, that baton gets handed to the US. And now China, what's China doing? It's it's it's reopening. And a lot of this global luxury that took place in China pre pandemic was actually on vacations. It was it was spending that took place when it was outside of China. And so I think you're having the baton being handed back from the U.S. to China as they as they open things up. And, you know, I kind of experienced this, you know, a few weeks ago, I was, you know, traveling in Europe for work and, you know, I took the red eye into Milan and there's some, you know, ginormous Chinese airline had just landed and these, you know, hundreds of folks getting off that plane, you know, they had to wait in this terrible borderline or customs line.

12:32I mean, in the US, you get this special line. But it was just like you had all these Chinese tourists are out getting about in Europe for the very first time. And I know, Michael and Ben, you mentioned when on the last Compound show that Josh was out in Las Vegas and he had some crazy luxury story. And I don't think he actually told what the story was. Well, can you give us an idea of how much wealth has been created for households in China? Like how many more wealthy people are there now than there were like 30 or 40 years ago? Because that's like the big sea change, right? Is that it's a lot of new money there.

13:09Yeah, yeah. I mean, that's that's a great, great question, Ben, where, you know, this goes back to some of our thesis in crane shares was that, you know, in 1980, 20 percent of China's population lived in cities. And today it's close to 20 percent. At the same time, the number of Chinese that just make between$10 ,000 and$40 ,000, the percentage of population, that's increased by 10x to now 50 % of their population makes between$10 ,000 and$40 ,000. Wait, is that good? Those aren't luxury buyers. Definitely not. It just shows that this urbanization has created this growing urban middle class and, you know, and then then apply it to something like, well, what about the rich people?

14:02And and that's where I think a lot of people would be surprised that there's there's actually, you know, the U.S. is definitely number one for billionaires. But who would think that the city with like the fifth largest number of billionaires is Beijing, followed by Shanghai, followed by, you know, Hartford. Yeah, well, I don't know about Hartford, but you have this wealth effect has taken place in China, disposable income increasing very, very dramatically. and specific to rich people, you know, it's it's it is a really, really meaningful effect in terms of the number of, you know, one of the studies that, you know, I've read was around the number of people who have more than 100 million and by city.

14:59And it's New York, you know, the Bay Area, L.A., London. But then it's Beijing, it's Shanghai, Singapore, Hong Kong. And so it's a real, real effect of China going to what's happened on its way to becoming the second largest economy in the world. So on the most recent quarterly call from LVMH, United States growth has slowed dramatically. Now I'm guessing that the US is a relatively small consumer of their overall pie, although I don't have that number. Oh, here it is. It's big. It's big. It's 24%. So in fact, you could delete what I just said from your memory. United States is a quarter of their business.

15:41But some of the huge growth, so Japan's only 7 % of their business, but they've had 31 % growth there. So pretty massive. Asia x Japan, which I'm guessing is primarily China, is 32 % of their business. And it's grown, looks like 19 % in the most recent nine months. So pretty explosive growth there as well, as you just mentioned. Yeah, yeah, yeah. And for LVMH, a part of - That's for LVMH. Yeah, which is definitely the big one. It's interesting for LVMH in the US, a lot of it is, some of it is liquor and wine and not necessarily luxury goods. That's right. They did mention that a big part of the slowdown was in the liquor liqueur.

16:33And the spirits, the spirits department. And most people probably don't realize he's the, I think he flip-flops or runs from out of the Elon Musk, but he's the second richest guy in the world. Yeah. Right? So that speaks to the power of luxury. So obviously luxury is a, well, it's a, I don't know how different segments of the luxury area, luxury market are. So I was just mentioning LVMH. They had, well, you know, certainly not a great quarterly call by any stretch of the imagination. The stock is in a 30 % drawdown, which is, you know, it had a hell of a run. So hardly catastrophic. But if you look at something like Ferrari, where Ferrari has no, there's no aspirational money in Ferrari, right?

17:09For a second, you had the Bitcoin bros buying Lamborghinis and stuff, but by and large, the market for this type of luxury good, that just is what it is. That's not going to necessarily ebb and flow with the economy. Although I'm sure rich people would think twice about buying a half a million dollar car if the economy goes down as well. Yeah, but Michael, all these millennials reaching middle age like you that want a sports car are going to be thinking about having that midlife crisis in a Ferrari. Think about it. No, the percentage of the population that can afford a Ferrari is very, very, very small.

17:41Well, my question for you is I agree with you that Apple, like I've heard a lot of people make the case that Apple's a luxury brand, but so many people have an iPhone. Like if you have the blue on your phone versus the green, it shows that you, you know, but so many people have an iPhone. It's luxury that everybody buys. Yeah, so many people have it. So how did you, so I agree with you about like, let's take away that kind of thing that people say is luxury, but it's pretty widely used. So how did you go about defining what luxury actually is for these companies? It's really, you know, we like to take, like we did with K-Web, is this bottom-up kind of subsector approach of actually finding these, you know, eliminating, you know, that kind of mass.

18:18I mean, and some of it is like, you know, as a developed market people, we're kind of, we're rich by a global standard just by being an American. But it's really about taking that kind of bottom-up approach in terms of getting the exposure to these kind of subsectors, these areas where you're basically eliminating these companies that, A, you already own. So you don't want any more exposure to them, which I think is one of the risks that you have. And one of the unknown risks when it comes to thematic investing is that you're just loading up on stuff you already own. And if it's, you know, what's the difference between the Magnificent 7 and the S &P 500 today, right?

19:01It's, you know, it's, you know, really, to me, it's even about that kind of growth factor more than anything else. So it's taking that bottom-up approach from an index methodology perspective. How does the methodology of a portfolio like this work? Because I would imagine this is rules-based, that this is, you're not picking and, you know, guessing which ones are going in? No, no. I mean, we're being very hands-on with the index provider because we want these very specific exposures. But then we're allowing an independent third party to maintain that. So that way, it's not like we're influencing their decisions or we're not self-indexing.

19:43We're not trying to be bottom-up stock pickers, right? If that was the case, we'd be charging higher fees. How does the valuations of these companies typically work? Do these companies treat it a premium kind of like consumer staples? Is that how it works? Yeah, I'd say that's one of the risks to KXLY and just would be that because these companies have been growing at very high rates relative to not necessarily the US growth or tech stocks, but to non-US equities, they've maintained very high rates of growth. And so they do trade at a valuation premium relative to their others. So that's one of the things we would say is the trading at a PE of 24 today versus the S &Ps at 21, right?

20:35So you are at a little bit of a valuation premium. And that might even explain an element of the drawdown we're seeing as higher for longer is hurting these higher valuation securities, including these luxury names. What's this Pernod Ricard? Am I pronouncing that right? Just kidding. But how do you really pronounce this thing? That sounds good to me. Most times, Michael, people are like, how's your Chinese? And I always say, I'm still working on my English. Yeah. I would imagine then the pool of consumers you're trying to tap into is the wealthy people that are coming up in Asia. But I assume most of these companies then are European based.

21:17Is that correct? Like you said, the ones that have been around for a long time? Yeah, definitely. The majority are going to be your French, Swiss, Italian. And yet they're selling the majority outside of Europe, as well as tapping into it's not just the growing urban middle class globally, but particularly within emerging markets. I think this isn't just it's not just a China trend. It is a broader Asia trend. It's India. But it's also a younger, a younger wealthier that, you know, certainly particularly one of the interesting is the demographic that this is led by female buyers. spend. It's also led by younger buyers, the proverbial kind of Gen X, Gen Y, where they have a higher proclivity.

22:11I'm sorry. I don't know how old you are, but Gen X is not a younger person. I'm sorry. I have to yell a flag, yell a flag. Well, as you get older, you start moving the goalposts. Wait, wait, hang on. Just so I'm getting it clear, what's the generation before millennials. Is that, that's a Gen Xer, right? Yeah. Yeah. Come on, dude. Sorry. Sorry. I don't make the rules. Everything's compared to the boomers these days. Well, I'm saying, yeah, not, okay. Above 50. I'm saying below, below 50. How is that? Um, I mean this, this to me, I don't want to get like too into the weeds here, but this, this seems like it's almost like a play on human nature as well, because, uh, people want to pretend like they're individualistic, but a lot of it is thinking in herds.

22:54And it's kind of like the, the narrative for a lot of these luxury brands is so powerful. And I guess the branding part of it, that it's like people are, you almost know that once you get some money, you're going to come to these brands, right? That's kind of what happens. Yeah, no, it's, and that's part of this younger generation as they're gaining wealth, particularly with the high rate of female employment and a lot of, you know, not just, you know, in China, in Asia, in the United States, you know, this is, this is, you know, their kind of go-to area to spend. And then combine it with another, you know, the downside of the demographic, which is, you know, true in not just in the US or China, but, you know, across the developed world is the aging population and the passing along of wealth to this younger generation.

23:42So the combination of those two factors is part of the growth story for these companies going forward. Brendan, can we talk generally about thematic investing when, When people are looking to add thematic exposure, whether it's luxury or whatever the case may be, how do you talk to investors about that? It's a good question. I mean, I think, you know, in general, you know, I've always felt, you know, ETFs supposed to do, you know, they either fall in this low beta bucket, right? You know, just get me the cheapest, low cost, tax efficient. And then it's supposed to be doing something that's very hard for you to do on your own.

24:24Right. And that's where to me, you know, it's more of to buy a company like LVMH in France or Prada, which is actually listed in Hong Kong. it's actually really hard. My personal account is that Charles Schwab and actually tried to buy a stock in Hong Kong. I literally had to call someone. I couldn't even do it online. And so I think on thematic, one, it's something that either you can't do on your own or you don't want to take that single stock risk. You're making more of a diversified bet on a subsector or sector. And so I think this fits really well for me. You know, where does this fit? It's kind of, you know, within that, you know, EM has just done so poorly.

25:15And that's that's true. That's not just true, you know, for China or it's true for all non-U.S. equities. Right. I mean, I mean, you know, for us, people like, you know, China's done terrible. You know, they're communists. They don't they're not capitalists. Where's the lie? Well, I'm just like, but then why is EM, you know, why is EM done just as bad? Why has non-US done just about as bad, right? You know, non-US has lagged the US by, you know, two thirds? Like, is the whole world commies? You know, like, no. So to me, this is almost a play on, you know, if the EM ETFs are not a good transmission vehicle for what's happening in EM, then like what's a better way to do it?

26:06And I think this is, you know, for luxury, I think it actually comes out of your traditional EM bucket. But to be clear, but this isn't, but this is not, this is really more developed market exposure than EM. Oh, 100%. Okay, but just want to make sure we're on the same page there. both in terms of the companies themselves, as well as certainly the consumers. Like, these are not emerging market consumers that are buying Ferraris. Yeah, I don't want to put words in your mouth, Brenda, but you're kind of saying, I think one of the things people have missed up is like, because I remember back in like 2009, coming out of the global financial crisis, a lot of people were saying, especially the institutional world that I was in, was, listen, U.S.

26:41growth is going to be slow. Emerging market growth is going to be way faster. Invest in emerging markets. And you're saying, well, even if they had faster growth, it didn't translate into better stock market performance. So maybe the consumption is the way that you play emerging markets as opposed to the stocks themselves. Yeah, exactly. Financials, energy, industrials, materials, real estate are just such a big component in these benchmarks. And these are low, slow, no growth value plays. And therefore, they've been very poor transmission vehicles for GDP. And the common areas are like, oh, well, you know, the China China market's done terrible.

27:23But I'm like, it's the sector, you know, the sector. It's a sector dysfunction issue of having this huge overweight to these sectors like energy and financials that never grow quickly. I mean, you know, if anything, if your financial stocks are growing really, really fast, like you probably should be really, really worried. And history has tended to repeat itself there. So we didn't talk about the types of companies that they are. We mentioned some of the names, but the industries are leather goods, jewelry, accessories, skincare, cosmetics, beverages, travel, and supercar businesses, to name a few.