In his book, ‘The Psychology of Money’, Morgan Housel describes pessimism in financial markets as “easy, common and more persuasive than optimism.” And with risks at present that range from war, inflation, disease and famine it is perhaps even easier and more persuasive than ever to be pessimistic. However, a brief look at the history of financial markets tells you that a pessimistic mind set, whilst always seductive, is rarely correct. Fortunately, we still see plenty of reason for optimism.
As a reminder, money invested in the fund represents genuine ownership of genuine businesses - we share in their revenue, earnings and ultimately dividends. We believe it is the success or failure of these types of metrics, rather than the prevailing mood of investors that will drive share prices over the long run.
With this in mind (and despite the much discussed war, inflation, disease and famine), we were pleased to see two consumer businesses in the portfolio, who both compete at different ends of the price spectrum, deliver impressive results over the month. Clothing retailer Next reported sales in the 13 weeks to 20 th April up 21.3% and reiterated their expectations that earnings per share would increase by 5% over the full year. Similarly, Burberry reported full year results that included revenue up 21%, earnings per share up 40% and the dividend up 11%. Despite these impressive performances, share prices in these two businesses over the last year (to the end of May) are down 20.6% and 19.8% respectively.
It is this dichotomy between business and share price performance though that we believe presents opportunity for the long-term investor and we were pleased to also add Louis Vuitton Moet Hennessey (LVMH) to the portfolio over the month. As the largest global luxury conglomerate, LVMH needs little introduction. Its revenues are skewed towards fashion, most notably through Louis Vuitton and Dior, but LVMH also has leading luxury brands across wines, spirits, jewellery, watches, cosmetics and travel. We have purchased a share in the profits of these, in some cases centuries old brands (the oldest brand is Chateau d’Yquem that dates back to 1593) on a price equivalent to just 22 of next years’ expected earnings.
We do not profess to know what the short-term future will hold but owning enduring franchises with strong balance sheets and loyal customers on attractive valuations as part of the portfolio embodies our attitude towards the psychology of money – we are optimistic about the future but we are not complacent about the road that gets us there.
James Godrich, Fund Manager
James is the manager of the Coleman Street Investment Service
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
