Infusive Asset Management’s Consumer Alpha Global Leaders UCITS Fund has received The Hedge Fund Journal’s UCITS Hedge award for Best Performing Fund in the Long/Short Equity – Consumer Sector, two years in a row, in respect of both its 2020 and 2019 performance. The UCITS was launched in June 2016 and the strategy has a 20-year track record.
Infusive has navigated the Covid pandemic well. Its contrarian Risk Management Program (RMP) employs an option-oriented overlay, buying put option protection mainly on broad indices such as the S&P 500 but also sometimes on single names. This limited the 2020 drawdown to just 9% against the S&P 500 that swooned by 25% in Q1 as of 31st March. The RMP on average reduces strategy volatility from 14-15% for the long book alone, to around 10-11% annualized, and has cut drawdowns by even more. Infusive actively trades around the overlay, having bought cheap protection in 2019, and monetized part of it in 2020.
What Covid has not changed is the definition of joy and pleasure, in terms of Infusive’s six core emotional drivers: time, indulgence, entertainment, status, beauty, and health and performance.
Infusive has also been sensitive to style and risk factor exposures. In 2019 and the first half of 2020 the growth style was clearly a tailwind for the strategy, which made 30% and 43%, respectively. The extreme bifurcation between growth and value led to some nuanced adjustments in 2020. “In the second half of 2020 we transitioned more of the portfolio towards reopening oriented names, which made up about 58% of the portfolio by the end of Q1 2021. But no matter how we tweak the portfolio, our criteria for selecting the companies in the ~150 name investable universe remains consistent and does skew to growth and quality stocks. Even after tilting the portfolio towards more cyclical companies, we remain very growth oriented,” says Head of Research, Matthew Schopfer, who is based in the firm’s New York office.
The growth bias has somewhat slowed the pace of returns in the first half of 2021 but Infusive remains consistent in their long-term style and philosophy: “In the short term, inflationary expectations have contributed to some internal market rotation into the value style, but if inflation proves to be more than a short-term blip, companies with strong pricing power should be well positioned. They focus on pleasure, happiness and emotional connectivity with the consumer, brand and product,” says CEO and board member, Andrea Ruggeri, who is based in the firm’s London office, and previously worked for Goldman Sachs in equity research, wealth management and prime services.
What Covid has not changed is the definition of joy and pleasure, in terms of Infusive’s six core emotional drivers: time, indulgence, entertainment, status, beauty, and health and performance. “These are based on innate demand and underlying beliefs. They have been true historically and will be true in future. Covid did not require them to be redefined,” says Ruggeri.
The Consumer Alpha Global Leaders UCITS Fund has received The Hedge Fund Journal’s UCITS Hedge award for Best Performing Fund in the Long/Short Equity – Consumer Sector, two years in a row.
These innate human desires, which are inspired by a mix of human psychology and behavioural factors, have proved persistent before, during and after the pandemic, and some related trends have even accelerated: “Covid acted as an inflection point and caused an acceleration in existing secular trends such as the digitisation of consumption. E-commerce penetration, for example, we believe was pulled forward by 3-5 years. We expect this will be a permanent change in consumption behaviour, as consumers discover the superior value proposition of e-commerce, and start using it for more categories such as groceries. Digital payments are another natural beneficiary from growth in e-commerce given cash cannot be used online. Additionally, tap to pay cards are increasingly taking market share from cash in physical retailers,” says Schopfer.
“Increased desire for content on demand through streaming video platforms is another important trend that was accelerated during Covid. We expect new users will be retained as they realize that streaming video provides a better experience versus linear TV. Exercising at home is another trend that we expect to turn into a stable habit. In contrast, panic stocking and pantry loading of household goods has been unwound,” says Schopfer.
A less obvious pandemic trend was companies adapting and seamlessly pivoting their business models. “Traditional media and entertainment company Disney was able to leverage its direct-to-consumer offering, Disney+, to remain relevant during Covid. This was a great pivot in their business, which would otherwise have suffered. Consumers’ demand for happiness from entertainment remains unchanged, but the mode of delivery – streaming on demand – has changed. We are also seeing companies such as Nike and Lululemon accelerate their direct-to-consumer offerings, while their core store-based business was disrupted,” says Schopfer.
Giant companies have proved to be agile and adaptive: “Firms with the largest R&D and sales and marketing budgets are best placed to stay at the cutting edge of trends. We do not stress about chasing unproven start-ups whose products might prove to be a fad. Capturing disruptive change does not require owning small caps. We would rather own select large caps that have a successful history of being able to adapt, invest and make acquisitions,” Schopfer adds.
Capturing disruptive change does not require owning small caps. We would rather own select large caps that have a successful history of being able to adapt, invest and make acquisitions.
Matthew Schopfer, Head of Research, Infusive Asset Management
The best companies are constantly reinventing themselves, not only to take advantage of technological change, but also to embrace ESG: “Consumer-facing companies are disclosing much more on sustainability, because the best companies need to have sustainable business practices and to communicate clearly to their stakeholders. There is a natural relationship between focus on sustainability and value for stakeholders. Companies’ ESG reporting feeds into our own ESG report, which highlights a broad understanding of companies’ ESG values, rather than fixating on specific metrics such as carbon emissions,” says Ruggeri.
ESG is clearly a growing trend, with many companies in Infusive’s universe offering more environmentally friendly products and services. “The biggest and best in class companies will take the lead in areas such as plant-based food, reducing plastic use, and being carbon neutral,” says Schopfer. “We expect ESG and sustainability broadly to be an increasingly important part of a consumer company’s offering,” he stresses.
Infusive has an active ownership policy on proxy voting. “We vote all proxies consistent with our sustainability values, and sometimes abstain if it is in the interests of long-term shareholders. We have voted for increased transparency, disclosure, and board diversity, and for separation of CEO and chairman roles. This voting is reported in our annual ESG report,” says Ruggeri.
Infusive became a UNPRI signatory in 2020. In terms of evolving EU regulations, the fund is currently classified as article 6 under SFDR. However, Infusive is open to launching a more narrowly focused ESG strategy in response to investor demand.
The highly liquid and scalable strategy is attracting strong interest from investors. Firm assets have grown to $700 million thanks to net inflows of around $450 million in 2020 and positive performance. The UCITS manages $410 million, the long only NYSE listed ETF (ticker: JOYYY) runs $45 million, as of May 2021, and there are separate mandates run pari passu.
Key client groups include private banks, single family offices, and medium sized independent asset managers, especially in the UK, Switzerland, Germany, Spain and Italy. The fund has recently been added to some leading global wealth platforms.