In China, the competitive advantage of consumer staples companies selling through a traditional distribution model has been eroded by ecommerce, argues Richard Speetjens, co-manager of Robeco’s Global Consumer Trends Equities strategy.
“Local consumer staples companies [previously] had a massive distribution advantage as they had access to many distribution points in these local emerging markets,” Speetjens told our sister title Fund Selector Asia during a recent visit to Singapore.
As an example, he said one million diapers were mainly sold via mom and pop shops around China. As ecommerce grew, a slew of domestic and foreign competitors could suddenly by-pass that model and easily reach China’s consumers by selling on Alibaba.
However, in India ecommerce penetration is only 4% of the market compared to China at 20%. Therefore, online sales in India are “much less of a headwind for local consumer companies”, which make them attractive investments.
“We have to be aware of where the money is being made and in India we can make more money than in China,” Speetjens said.
Alibaba and ESG?
The Global Consumer Trends fund invests in three lowly-correlated growth trends – digital consumer, emerging markets consumer and loyalty to strong brands. Speetjens sees it as a differentiator from peer funds, which tend to focus on one specific trend.
Robeco integrates ESG factors into its funds. Yet Alibaba, a top ten holding, has been criticised for lack of transparency. Speetjens defends keeping Alibaba, in part because he believes it has reduced ESG risk.
“At the time of Alibaba’s IPO [in 2014] we didn’t participate because we didn’t feel comfortable on a lot of these ESG topics. Since then, it has improved quite a bit, and sometimes I think it is better than some Western peers.”
He explains that now they provide feedback during meetings, something that wasn’t welcomed until two years ago. “Now they feel the pressure of more investors, so we get more answers than we used to.”
In terms of geography, most of the portfolio is allocated to the US (63%).
Europe gets a 23% allocation. Europe has had continuously weak growth, but he said the European positions are companies that derive significant revenue from emerging markets.
“A lot are luxury companies, but also for example companies like Heineken, which make 60% of profit in the emerging markets universe”.
Risks to the theme
Speetjens said the portfolio holds strong brand companies (Mastercard and Visa are the fund’s two largest holdings at around 3% each), which he believes have the robust balance sheets and consumer loyalty to continue growing despite macro risks, such as slowing economic growth.
“The fund indeed sold off strongly in Q4, as there were increased worries about a US economic slowdown and worries about the US-China relationship,” he said.
However, “the defensive strong brands trend outperformed strongly in Q4 and offset most of the weakness in some of our digital and emerging consumer holdings”.
A sell signal is when “the fundamental story for why we got in is not valid anymore”, Speetjens said. That could be, he explained, because of a new competitor coming in, or a change in the business model. “It is never purely valuation.”
For example, in the gaming sector, the success of free-to-play games such as Fortnite has challenged existing business models.
“We have not taken action yet in terms of selling complete holdings, but have not added to our current positions despite the sharp selloff in some of these names,” he said.
Other positions were recently exited completely, according to the fund factsheet. In February, Samsung was completely sold “after another set of lackluster results”. The managers also sold the remaining position in Chinese beverage company Moutai due to expectations of slowing earnings growth.
Speetjens added that one risk the managers are watching is increasing regulatory pressure on big tech platforms, globally. Portfolio holdings such as Alphabet, Alibaba and Tencent are among those targeted by regulators, he said.
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