Monthly fund manager commentary

June was another strong month for most equity markets, as macro economic data remained broadly resilient despite the impending threats from tariffs. This meant that, when measured in US dollars, Q2 returns were also strong despite many markets falling by 10% or more in the early days of April as the the US announced its strategy on tariffs. However, the US dollar was weak, posting its worst H1 performance since 1973, so returns in other currencies were more modest.

The only 2 major company reports were full-year results from companies in the spirits industry, Brown Forman and Remy Cointreau. Whilst the US spirits market remains under shorter-term pressure, it was encouraging to read of a recent report by IWSR (a well-respected industry observer) talk of a recent improvement in demand for alcohol amongst the Gen-Z cohort. That generation has said that lower alcohol consumption had been caused by cyclical factors (wages relative to prices) rather than the much discussed focus on health & wellness. Remy Cointreau (which we don't own) has also struggled due to weakness in China and concerns over possible tariffs on cognac, a factor which has highlighted how narrow its portfolio of brands & markets is. We would not be surprised to see the company attempt to diversify its exposure away from a focus on one category (cognac), mostly in just 2 markets (US, China). The industry is likely to see a number of brands for sale, with Diageo in particular announcing a 'significant' disposal programme. Whilst many of these brands will not be of interest to Remy (due to their low price points), we do think Diageo may also choose to reduce the number of Single Malt Scotch brands it owns due to the need for maturing stocks and an inability to scale most of these. For Diageo (which we don't own), this process is likely to be highly dilutive to earnings, and may result in little growth over the next 3-5 years.

With limited company-specific events in the month, we attended the annual Deutsche Bank Consumer conference in Paris, the biggest event for investors in the Consumer industry every year. We were able to meet with a considerable majority of our portfolio companies and generally encouraged by the comments we heard. Perhaps the most notable meeting was a first chance to meet with the new Estee Lauder CEO, Stephane de la Faverie. Although its current fiscal year has been very difficult, he was able to remind investors of early signs of progress under some (very sensible) new initiatives. Having lost share in a number of key markets (China, Japan, US), the company has looked to address this by making its brands available in more channels (adding e-commerce, especially Amazon) and being available at more price points. This has led to share gains in all of the key markets, with the US improvement coming after many years of losses. The new financial year (EL has a June year-end) should also benefit from an end to the significant de-stocking process (mostly in China/Travel Retail) the company has gone through in the last 12-18 months.

Elsewhere, we were encouraged by Campari (our biggest holding in the spirits industry) and the way in which it expects to outperform the sluggish trends in the spirits industry. Under new CEO Simon Hunt, it has organised itself into 4 Brand Houses, and we believe this focus on its premium brands can drive above-industry growth. It was also good to hear Reckitt confirm that it would return the proceeds from its (considerable) disposal programme to investors, likely via buy-backs given the current depressed valuation of the shares. Whilst Reckitt is likely to be the biggest buyer of its own shares in the next 2-3 years, we are encouraged that over 60% of our portfolio is buying back shares, taking advantage of what we believe are very attractive valuations.

The only notable trade in the month was to take some profits in Amorepacific after its very strong performance this year (up over 50% year-to-date in USD), and re-invest the proceeds in BellRing Brands, which had fallen over 20% from its highs (where we had taken some profits). The share price decline came despite H1 sales growth of over 20%, well ahead of its annual guidance for 12-15% growth, and continuing evidence that US consumer demand for protein remains strong. The strong performance of Amorepacific is an early example, we believe, of the upside in some of our investments in the Beauty sector. Given how depressed the valuations are (often trading at around 1x sales, against L'Oreal on 4x), we see considerable upside once trading improves. The decline in China appears to have stabilised, and for the Korean beauty industry in particular, their well-known agility has seen markets such as the US, Europe and Asia ex-China become (in total) 3 times larger than China.

The top 3 contributors for the month were Estee Lauder, Shiseido and Fever-Tree. The bottom 3 were Beiersdorf, Unilever and Heineken. For Q2, the top 3 contributors were Amorepacific, Estee Lauder and Glanbia. The bottom 3 were Beiersdorf, BellRing Brands and Brown Forman. For the year-to-date, the top 3 contributors were Amorepacific, Fever-Tree and Lindt. The bottom 3 were Beiersdorf, Kose and BellRing Brands.