That’s why hedge fund Infusive Asset Management says the best way to make money during the health crisis is to invest in companies that cater to indulgences like Big Macs, KitKats and Johnny Walker as well as convenience like Amazon (AMZN) and Netflix (NFLX).
“People want to spoil themselves and treat themselves to something that is enjoyable,” Andrea Ruggeri, CEO of Infusive Asset Management, told CNN Business.
Infusive created an ETF – with the appropriate ticker symbol JOYY (JOYY) – based on this strategy of betting on companies that meet “the deepest emotional needs of the global consumer.” Major holdings of the ETF include KitKat king Nestle (NSRGF), Big Mac maker McDonald’s (MCD), Oreo owner Mondelez (MDLZ) and LVMH (LVMHF), the luxury goods company that owns Louis Vuitton, Sephora and Hennessy. The fund also owns beer and spirits company Diageo (DEO).
That playbook is working.
The ETF, formally known as the Infusive Compounding Global Equities ETF, has surged 20% this year despite the deep recession and double-digit unemployment. That’s four times better than the S&P 500.
Created before the pandemic
The ETF launched last December – months before the pandemic that reshaped the world. It was based on a strategy known as consumer alpha that emphasizes six key trends: indulgence, entertainment, beauty, health, efficiency and status
“We created the strategy totally oblivious and without even thinking about COVID-19. It didn’t even exist,” said Ruggeri. “It’s amazing how it played so well into the pandemic and lockdown. The strategy is emerging even stronger now than it was in 2019.”
Infusive’s goal is to find the companies that matter the most to consumers.
“The health crisis has validated our strategy,” said Matthew Schopfer, Infusive’s head of research. “Our consumer companies are doing great because at the end of the day, they cater to innate human desires, whether it’s simply convenience or indulgence.”
To measure the success of consumer stocks, Infusive looks for companies with stable revenue streams that reflect repeat purchases. Using Big Data, the hedge fund also detects brands that have enough pricing power to charge more than their rivals.
“We’re just trying to find companies that are providing joy to consumers,” said Schopfer.
Betting on e-commerce
One reason Infusive’s ETF has performed so well is because it owns the tech titans that are thriving during the pandemic. And since the fund is market cap-weighted, that means these mega stocks play an outsized role in the portfolio. Four of the top five holdings are FAANG stocks: Facebook (FB), Apple, Amazon and Google owner Alphabet (GOOGL).
Amazon’s share price has skyrocketed more than 80% this year as Americans lean on e-commerce more than ever. With many people working from home, Apple’s (AAPL) iPhones and Mac products have never seen more relevant.
“This isn’t a FAANG portfolio,” said Schopfer. “It’s hard to argue these companies shouldn’t be part of the portfolio given how dependent the global person is on many of them.”
Part of the strategy emphasizes the desire by consumers to find the most efficient way to shop and make payments. In addition to Amazon, major holdings include Visa (V), MasterCard (MA) and Etsy (ETSY).
Schopfer added that the rise of online shopping isn’t a trend that will go away after the pandemic.
“These are permanent changes. They won’t snap back if a vaccine were suddenly to appear,” he said.
What if the economy doesn’t bounce back?
Of course, one risk posed by betting on consumers is the risk of a weak economic recovery – or worse.
Just 17% of fund managers expect a V-shaped economic recovery, according to a Bank of America survey released last week. More than twice as many (37%) are bracing for a double-dip recession.
At 10.2%, US unemployment remains above even the worst levels of the Great Recession.
Although consumer spending has been strong – with US retail sales returning to pre-crisis levels – there are concerns that could change as emergency relief like enhanced unemployment benefits fades. Goldman Sachs economists say consumers have already begun cutting spending after the $600 federal unemployment benefit expired at the end of July.
But Infusive is betting that the powerful interventions by the Federal Reserve and Congress will successfully lower unemployment. And that Americans are going to stick with the products and services they love, even in tough times.
“Consumers get so much joy from Netflix and Amazon Prime,” said Schopfer. “These are the last things to be removed from daily spending habits.