Artemis Funds (Lux) – Leading Consumer Brands fund update

Source for all information: Artemis as at 31 December 2024, unless otherwise stated. 

Performance

Markets delivered another strong year of investment returns in 2024, driven by the tech-heavy US. Following the announcement of a stimulus package at the end of September, Chinese equities rallied, pushing returns higher across emerging markets. Retail sales in the world's second-largest economy have rebounded since then, with consumption vouchers provided by the government the next measure to benefit discretionary spending.

The long-awaited easing of monetary policy began in 2024 but at a lower clip than had been hoped for, given stronger-than-expected growth in the US. The eurozone, seeing lower growth, has cut rates aggressively compared with other regions.

Against this backdrop, the fund lost 0.3% in the final quarter of the year, although this meant it outperformed its MSCI AC World index benchmark, which fell 1.0%. The fund delivered a positive return over 2024, with gains of 5.2% in dollar terms; in euros (60% of the fund's holdings are listed in Europe), it comfortably made a double-digit return.

Positives

Amer Sports, owner of the Arc’teryx, Salomon and Wilson brands, was a standout performer in Q4 after a surprise trading update revealed sales in China over the Golden Week national holiday increased by 60% compared with the previous year. Notably, sales of its flagship Arc’teryx brand accelerated meaningfully in its higher-margin retail channel.

When we first invested in Amer in Q3, we felt the company would exceed conservative expectations, but since then it has placed shares in the market to optimise its capital structure by paying down non-tax deductible debt, creating further tailwinds for earnings, valuation and the share price. Following a trip to China in October, we added to our position.

Two other sportswear companies, Deckers Outdoor (owner of the Hoka and Ugg brands) and On Holding, were also strong performers over the quarter. Nike’s continued struggles to re-excite customers has allowed these younger brands, which each have about a 10th of its revenues, to forge strong links with third-party retailers and reach escape velocity. With just a 1 to 2% share of the market, they have substantial white space to grow into.

Travel holdings Accor and Hilton benefited from continued strong, albeit normalising, travel demand, with an acceleration in hotel expansion boosting growth and share buybacks boosting returns.

Negatives

Davide Campari reported worse-than-expected Q3 results, mainly due to a combination of one-off events such as poor weather across Europe and a hurricane in Jamaica. We do not believe these factors affect the company’s long-term prospects and note its stock is trading at its cheapest level for a decade. However, we are monitoring two additional issues that have come to light: first, the US Surgeon General has linked alcohol consumption to a higher risk of cancer, which may affect sales in the long term; and second, the impact of tariffs on Mexican imports to the US, which could be significant with tequila accounting for 10% of Davide Campari’s sales.

LVMH came under pressure in Q4 from a series of unexpected management changes at the divisional level and France’s one-off 'surtax' on profitable companies. Together, these are expected to shave 2 to 3% off its EPS (earnings per share). These headwinds followed a trend of normalisation in luxury demand over the course of the year, which led LVMH’s shares to fall out of favour. Although we trimmed our position in the company, we think it could now be close to a cyclical bottom, which would give us a reason to buy back in.

Profit margins at premium chocolatier Lindt & Sprüngli were affected by high cocoa prices.

From a relative point of view, we suffered from not holding Tesla, Amazon or Nvidia, which all rallied.

The fund's objective is to increase the value of shareholders’ investments primarily through capital growth over a five year period. The fund is actively managed.

Purchases

We initiated two new positions in Q4: American Express and Eicher Motors (owner of the Royal Enfield motorcycle brand).

With payments becoming more commoditised, consumers need a good reason to pick one method over another. High-income customers choose American Express because of its brand, reward benefits (funded by partners) and the ‘sunk cost’ of having paid a membership as you would for a service such as Amazon Prime.

Meanwhile, card network revenues, membership and absolute spend per card continue to grow, while counterintuitively, a large increase in card fees as higher rewards kick in appears to be increasing usage.

It is our view that the strengthening ecosystem around Amex's network should be valued at a higher multiple and the lending side of the business at a premium to a bank. Earnings should also grow more quickly than historical levels.

Eicher Motors has a 45% share of the Indian premium motorcycle market. It has seen an acceleration of sales volumes from new model launches, particularly on the 450cc platform. We believe volumes can accelerate further from here, a contention that is not priced into consensus forecasts.

Perfumer Puig reported better-than-expected Q3 results on the back of sustained strength in global fragrance demand, so we added to this position. We also added to our existing holding in Prada after our China trip highlighted market share gains in the Miu Miu brand, which subsequently reported a sales increase of 97% in Q3.

Sales

This quarter saw us complete our exit from Estée Lauder – our trip to China at the end of last year revealed ongoing problems in its travel retail operations.

Staying in the cosmetics sector, we reduced our position in L’Oréal ahead of the US elections on concerns over the potential impact of US tariffs on European imports and higher French taxes.

We took some profits from Inditex on valuation grounds, with limited potential for near-term upside even though the long-term growth trajectory remains attractive.

Outlook

The US and China will remain pivotal for growth in leading consumer brands. In the US, moderating inflation, rising asset prices and improved consumer confidence suggest a rebound in spending, especially at the premium end.

Meanwhile, China's economic recovery, driven by policy support and high household savings, should reignite consumption, albeit more selectively. Chinese consumers are becoming more discerning and gravitating towards brands perceived to deliver authentic value, with market leaders outperforming their peers.

The good news may be offset by the inflationary impact of any tariffs that US president Donald Trump applies to Chinese imports. However, members of his inner circle claim these are little more than bargaining chips and suggested figures of 60% are likely to be watered down in negotiations. We also take comfort from his first term, when the tariffs introduced were much lower than the level he threatened.

Europe may fare worse given previously imposed tariffs on its champagne and whiskies, supporting our cautious outlook on spirits companies. Other continental exporters to the US could also be at risk, especially those with limited ability to pass on price increases and high substitutability (mass market cosmetics, for example). Individual companies with demonstrable pricing power (such as Ferrari) should fare better.

While challenges remain, our outlook for 2025 is cautiously optimistic. With strategic adjustments and consumer-centric approaches, the leading consumer brands sector is poised to rebound, albeit selectively. This means a top-down approach may not prove sufficient and a careful analysis of growth prospects, quality and valuation will be required to identify the differentiated players likely to seize the lion’s share of growth in the medium term.