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BLOG: Funding (and manifesting) a Hermès Birkin bag

BLOG: Funding (and manifesting) a Hermès Birkin bag
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A number of Hermès handbags have doubled in value in a decade, leading some to claim they are a better investment than gold. But how do you pick the next hot brand without taking too much risk?

In October, a Hermès Birkin bag sold for $115,000 at Sotheby’s in Hong Kong. The fashion enthusiasts among us will know that a Birkin is the holy grail of handbags.

One expert went as far as to suggest that the bags were a ‘better investment than gold’ –I wouldn’t be one to argue – with some limited-edition bags doubling in value over 10 years (source: Fortune, 27 March 2024). While this sounds like a good excuse for a shopping spree, it may have some drawbacks as a path to riches.

Getting hold of one can be a problem. Even Hermès’ most loyal customers – think European royalty or Kylie Minogue – don’t necessarily get to choose the exact bag they want. The bags are distributed among the company’s boutiques at random. This is known as the ‘Hermès Game’. The chances are, you may not get your hands on the bag that is going to rise in value.

A less exciting, but easier and more financially rewarding, option would have been to invest in Hermès shares instead, which have risen from €250 in 2014 to €2,286 today (Source: Yahoo Finance, 15 May 2024).

If you had invested £10,000, you would now have £91,440, which you could put towards your next Birkin bag (or – perhaps more sensibly – your retirement).

Picking single shares is a high-risk option, and for every Hermès, there is a brand that has become uncool and sunk without trace. Nevertheless, it shows the astonishing growth of the luxury goods sector in recent years.

Last year, LVMH, which owns Tiffany, Christian Dior and Louis Vuitton, became the first European company to surpass $500bn in market value (source: CNBC, 24 April 2023).

Europe is the hotspot for luxury goods companies

Around two-thirds of all sales of luxury products are generated in Europe (source: Financial Times, 4 June 2023). It feeds directly into the fast-growing consumer markets in Asia, and European companies have a pedigree and brand management unparalleled anywhere else in the world.

The region has behemoths such as LVMH, L’Oréal and Hermès, but also EssilorLuxottica, which owns Ray Ban, Oakley and Persol.

There are emerging Italian brands such as Moncler, and even non-clothing luxury brands such as Ferrari. Kering owns Gucci, while Richemont has Cartier, Chloe, Baume & Mercier and Montblanc.

It also includes online luxury distribution group Net-a-Porter. These are some of the most powerful brands in the world, and their profitability rivals some of the major technology companies.

However, picking this year’s hot brand can be risky. Another option is to target a collective fund with exposure to the sector. There are a number of fund managers who hold luxury goods in their portfolios, alongside a number of other sectors.

These managers will aim to find the right moment to invest and analyse the individual companies in detail, so this is often a less risky way to invest in the sector.

Niall Gallagher, manager of the GAM Star Continental European Equity fund, for example, has LVMH among his top holdings. He says: “There is a long-standing trend of growth in the Asian middle class, which benefits premium consumer and luxury companies in Europe.” He believes this is a major long-term structural trend for Europe.

The team on the Comgest Growth Europe ex UK fund has a high weighting in the consumer discretionary sector, where many of the luxury goods companies reside. EssilorLuxottica and LVMH make up around 10% of the portfolio between them. They also hold Adidas and L’Oréal.

The FTF Martin Currie European Unconstrained fund also has a high weighting in consumer discretionary companies (21.5%). Its largest holding is Ferrari, which is 10% of the fund. It also holds L’Oréal and Italian luxury fashion house Moncler.

Luxury comes at a high cost

This may be a good moment to be looking afresh at luxury goods companies. Although they have had a strong long-term record of share price growth, their recent performance has been lacklustre.

Inevitably, they depend on people having a lot of money. While the super-wealthy may not be struggling with the cost-of-living crisis, the aspiring wealthy have had to tighten their belts. The Chinese markets on which many of these businesses depend have also been relatively weak.

The recent run of earnings reports from the luxury goods sector has been disappointing and share prices have dropped. Kering, for example, has seen its share price halve from its peak in 2021.

While this may sound like a reason to avoid them, it means these companies are cheaper than they have been for some time. At the same time, the European economy is picking up, and interest rates, potentially, are starting to come down. Demand for luxury goods may revive in this environment.

While buying the bag may be more pleasurable, buying the shares may be more profitable – and then, of course, you can always buy the bag afterwards!

Juliet Schooling Latter is research director of FundCalibre and Chelsea Financial Services

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