Leading brands tend to be more resilient and stand the test of time. Why brands matter, how to gain exposure, and what pitfalls to avoid?
The world is constantly evolving, with consumer trends and preferences changing quickly. Digital transformation is allowing household names to modernise and increasingly pivot their business models to key growth areas. The leading brands can utilise their branding power, that comes with a good reputation and other key attributes, to quickly move into new markets with high potential.
Brands tell a story, give consumers aspirations, develop loyalty, and often enable companies to harness a competitive advantage that comes with substantial pricing power.
Strong brands have a magical twist that often brings comfort to long-term shareholders:
While each sector has its own leaders, sectors most exposed to consumers have the most visible brands, and those naturally develop a strong branding power. However, consumer discretionary tends to have the strongest brands, with companies able to ask for large premiums due to high perceived value and strong brand loyalty.
Brands within other sectors such as industrials and energy are often less visible and therefore lack a connection to the consumer.
Surviving the test of time and having the appeal to a wide audience are important aspects of powerful brands. For example, new tech such as Zoom may have a less ‘sticky’ branding power, than well-established household names such as Nike, Moncler, and the family of brands of Estee Lauder.
The main idea is that high quality companies built on dominant market positions, underpinned by powerful, hard to replicate, intangible assets can generate consistent returns over the long term due to strong pricing power.
Investors can gain exposure through a basket of stocks or through funds. Peter Lynch, one of the great investors, famously said “invest in what you know”, leveraging your experience of using certain products or brands to gain a competitive edge, in identifying future winners early.
Some asset managers such as Pictet, Gam, and Bank Sarasin dedicate funds investing solely in strong premium brands. A more straightforward method to gain exposure to brands is through investing in a S&P 500 index fund, such as a low-cost ETF.
S&P 500 components
Pictured above, top world brands hold a significant share of the S&P 500 index.
Identifying great brands can be a challenge as consumer trends and preferences change. However, a great brand should be able to do well without a stellar management – this is one of the criteria that Warren Buffet uses to identify generational above-average businesses. Other criteria are those companies that are somewhat recession-proof in the sense that, should consumers have less spending power, or should prices increase, they will continue to spend on these brands.
Portfolio diversification is not a myth, it truly is the only free lunch, and thus investors must be careful not to be over-concentrated in certain sectors or regions. Similarly, falling in love with a few companies can result in a portfolio too concentrated.
Brands offer investors the possibility to stick with high quality companies benefiting from substantial pricing power, to navigate the ups and down of market cycles. In today’s volatile environment it is particularly important for investors to build portfolios that are resistant, and leading brands could help to achieve that.