Infusive Asset Management’s Consumer Alpha Global Leaders UCITS received The Hedge Fund Journal’s 2020 UCITS Hedge award for best risk adjusted returns in the long/short equity — consumer sector specialist — category, based on its 2019 performance of circa 30.5% with volatility of circa 12.5% (this varies by currency share class, and also according to the fee structures of various share classes).
Infusive Asset Management was founded in 2015 but its distinctive strategy has been running for over 20 years, initially on a private basis for a family. The strategy is distinguished by its proprietary focus on consumer habits, its long term investment horizon, and a contrarian approach to risk management. Stock-picking on the long book is the primary driver of alpha, but a sophisticated option-oriented overlay has successfully reduced drawdowns during market setbacks including March 2020 and boosted the Sharpe ratio. There is also a long only ETF, which has a high degree of overlap with the long book of the UCITS.
The companies that Infusive invests in satisfy six core human desires: time, indulgence, entertainment, status, beauty, and health and performance.
Infusive’s investment philosophy is partly inspired by behavioural finance. This discipline is becoming increasingly fashionable as a framework for shorter term trading rules, but Infusive is unusual in using insights from human behavioural psychology to make longer term investments in stocks.
“The concept of consumer alpha is based on consumers’ behavioural consumption patterns, which display an emotional connection to certain products that they habitually repurchase. This provides inelastic demand and strong pricing power for resilient, high quality companies, that can satisfy these innate needs and deliver happiness,” explains Head of Research, Matthew Schopfer, who is based in the firm’s New York office. The firm has an institutional infrastructure, with 15 staff spread between London and New York offices, which are regulated by the FCA and SEC.
Infusive’s investment universe is selected from a mix of quantitative screens and qualitative judgement. The process systematically filters the equity market into companies that fall into naturally consumer-oriented sectors, which will come under the broad industry groups of consumer staples, consumer discretionary, communication services and information technology.
But the normal perception of consumer-facing companies is re-classified according to Infusive’s proprietary filters. “We look at it through a very different lens, based on human psychological and behavioural factors. We reclassify companies into six buckets based on the emotional impulse that drives the purchase, not the more conventional classifications or definitions,” explains Schopfer.
The companies that Infusive invests in satisfy six core human desires: time, indulgence, entertainment, status, beauty, and health and performance. Schopfer elaborates on each:
“Time. The individual is always looking to save time so that they can spend this finite resource on doing what they love. Several digital sub-industries satisfy or facilitate this, including e-commerce, digital payments, and search. One example is leading Chinese e-commerce player, Alibaba.”
“Indulgence. Consumers get joy from indulging in small daily pleasures, such as chocolate, coffee or eating out, and we think this will always be true in moderation. Examples include Lindt chocolate, McDonalds restaurants and Starbucks coffee.”
“Entertainment. Individuals have always desired to be entertained, and with more free time it only grows in importance. We seek this from media content, video games, and social media to name a few examples. Whether it is Disney or Netflix, they both deliver on the consumer’s desire for entertainment.”
“Status. The human desire to demonstrate success and portray a certain image can be seen in the purchase of aspirational goods. Luxury goods companies go to great lengths to nurture and protect their brand image. An example would be LVMH, which has a portfolio of high-quality brands.”
“Beauty. The consumer aspires to express her best image and goes to great efforts to ensure that she looks and feels the way she wants. We observe this in the regular purchase of cosmetics and skincare products, such as those offered by Estee Lauder for example.”
“Health and performance. Individuals desire to take care of their bodies and improve their personal performance. We see this consumer behaviour in areas like healthy eating or spending on athletic footwear and apparel. Nike for example is a company that taps into this consumer demand.”
From an alternative factor, style or risk exposure perspective, the portfolio is broadly skewed to growth and quality, and away from value and cyclicality, certainly avoiding deep value. “But the nuance here is that conventional factor definitions would need some fine tuning. Models to identify factors are not straightforward. We spend a lot of time studying this with the investment team. Infusive’s quality definition includes good corporate governance, intelligent allocation of capital, pricing power, high EBITDA margins and return on equity,” explains CEO, Andrea Ruggeri.
The investment universe – the so-called ‘Infusive Happiness Basket’ – comprises around 120 stocks, but the portfolio at any one time contains a subset of at least 40 names that reflects the desired industry and geographic allocations and has an attractive long term return expectation. The universe, which includes globally listed stocks, is reviewed quarterly but is largely static in terms of changes caused by Infusive’s methodology.
“There are always other reasons for changes, such as new IPOs, spin-offs, and delistings. For instance, 2019 saw several large consumer-facing IPOs such as Uber and Lyft and over the past few years several Chinese companies have been added. But overall, the universe is largely unchanged from quarter to quarter. The aim is to ensure that our investable universe has best in class companies that are satisfying human needs and delivering happiness to the consumer. By focusing on high quality, durable businesses with long term time horizons, we do not have to be pushed and pulled into selling and buying at times like this,” says Schopfer.
Therefore, it is unsurprising that Covid-19 has led to only marginal changes in the portfolio. Infusive are not market timers in the first place and are certainly not trading around economic data or coronavirus case numbers. ”We are of the opinion that our core holdings are best in class, resilient companies that are delighting consumers, and which should not only survive the crisis, but come out of it stronger than when they entered it,” says Schopfer.
That said, a few tactical adjustments have been made to some travel-related and more discretionary retail and restaurant related names. Digital consumption has been emphasised and luxury goods have been de-emphasised.
“Overall, we have positioned the portfolio to capture the upside from shifts in consumer behaviour and purchasing patterns that will ultimately create long term winners. Throughout the crisis, the companies that performed best had very durable business models, resilient customer demand, strong balance sheets, and plenty of liquidity. We are not bottom-fishing or looking for distressed assets,” stresses Schopfer.
Infusive firm assets are circa US$110m
Nonetheless, Covid-19 has afforded a strong opportunity to demonstrate how the RMP overlay works under extreme conditions. The core aim of the strategy is long term, buy and hold, compounding of returns through the long book. Most of this process takes place inside companies that can reinvest their retained earnings; these sorts of high growth compounders do not distribute very much through dividends.
“However, the RMP reduces short term risk in two ways. It reduces the strategy volatility from what would be 14-15% for the long book alone, to around 10-11% annualised. Plus it reduces downside volatility and drawdowns in extreme conditions by a much larger margin: average drawdowns can be halved. This worked very effectively in March 2020,” says Ruggeri.
“The RMP is tactical and opportunistic in its use of option markets. The approach to protection is contrarian. In good markets such as 2019, we accumulate protection when its price is below average. We then monetise the protection in bad markets, during disruptions such as March 2020,” adds Ruggeri.
For the first quarter of 2020, the Infusive Consumer Alpha strategy has lost 9% against broader market indices down 20% to 25%. This was partly due to the RMP overlay, but also because the quality stocks selected on the long book were relatively resilient. Infusive’s long only ETF, down 14% in the first quarter, also lost less than the market.
The strategy is net long biased: the option overlay tends to keep delta-adjusted net exposure in a range of 50-100%. It is unlikely to reduce the strategy’s net long to a market neutral let alone a net short stance. The overlay also allows more long exposure within the volatility target; gross exposure ranges from 100% to 250-300%.
The concept of consumer alpha is based on consumers’ behavioural consumption patterns, which display an emotional connection to certain products that they habitually repurchase.
Matthew Schopfer, Head of Research
The RMP is mainly implemented through buying put options on broad indices, such as the S&P 500, typically 6-8% out of the money. Some 80-90% of the protection is likely to be index protection.
At the secondary level, Infusive will buy protection on names owned in order to avoid trading around core long holdings, which can damage and undermine the long term compounding power. “From time to time we use single name options to protect holdings if we expect some short term issue or dislocation in the market, based on a misinterpretation of short term earnings. We would aim to monetise the hedge and then reinvest the proceeds in stocks,” points out Ruggeri. Occasionally, the VIX index of implied volatility could also be traded.
Infusive has recently integrated ESG into its investment process and has become a UNPRI signatory. Infusive’s ESG scoring of companies is based on a mix of in-house analytics, using company disclosures and filings; and external sources such as ISS Governance scores.
The ESG approach involves some positive filtering metrics but is not based on exclusion. Infusive does own alcohol producers including beer brewers. It could in theory own tobacco companies but does not own any at present. Gambling is not part of the investment universe, however.
The ESG policy includes proxy voting in line with ESG guidelines, and some engagement. The ESG policy also includes supporting “Room to Read”; a charity tackling the challenges of literacy and gender inequality around the world.
Infusive firm assets are circa US$110m of which circa US$100m is in a Luxembourg UCITS and US$10m in an NYSE-listed ETF, The Infusive Compounding Global Equities ETF.
The ETF is long only and does not contain the RMP overlay. The ETF (ticker – JOYY: NYSE) is based on the performance of the Infusive Global Consumer Champions Index (ticker: MXIGLCCN) which draws its constituents from the MSCI AWI Investable Market Index (IMI). The index is independently calculated by MSCI using Infusive’s systematic and fundamental filters, which is also partly used to identify the Infusive Global Happiness Basket, the investment universe for the UCITS fund. The index and the basket have a high overlap on a market cap basis but the index is calculated based purely on quantitative tools whereas the basket is subject to discretionary judgements on a quarterly basis. Therefore, the UCITS fund long book portfolio turnover at 5-10% annualised is slightly higher than the ETF turnover, which has been 5-6% annualised. The ETF is more diversified as measured by the number of holdings: as of March 2020, it contained 96 large, mid cap and small cap holdings, versus around 40 longs for the UCITS. Yet the ETF can also become more concentrated in its largest positions because it is not subject to the UCITS 5/10/40 rule. For instance, the ETF, being market-cap weighted, has nearly 14% in Apple in March 2020, but the UCITS could not go over 10% in any one stock. The ETF charges only a 0.50% fee covering all charges. The UCITS offers various share classes with combinations of management and performance fees. Infusive could contemplate launching a European listed ETF in response to investor demand.