LBS Investment Management Club
Happy New Year and welcome to the first IMC Newsletter of 2023!
Today’s Topics
● Student Investment Fund (SIF) Plan for the Year!
● Having completed another wonderful festive season, it seems suitable to do a deep dive into the largest luxury conglomerate of the world, LVMH!
● With this year’s crop of new year's resolutions, how is Europe’s largest gym chain, Basic-Fit faring?
Before we kick off, the SIF and the IMC would like to thank all the participants of the November Stock Pitch Competition! We saw many great pitches, but eventually there was one that exceeded all - AT&T. We’d officially like to congratulate Gustavo Mendonca, Devank Sriram, and Laercio Alves da Silva on their fantastic work. Additionally, many thanks to the organizers and of course the judges - we truly appreciate you taking the time to share your knowledge and experience with the student body.
Overview of the SIF
The SIF is a student led public market investment fund which was the first of its kind in the U.K. The fund currently invests AUM of approximately £800,000. The seed funds of the SIF were generously donated to the SIF by LBS Alumni who wanted to give students practical, real money security analysis and portfolio management experience. Since then the SIF has managed to grow its capital by 200% through student-led investment decisions. Each year the SIF accepts applications from new and returning LBS students to join the fund’s Investment Committee and gain experience as an Equity Analyst, Macroeconomic Analyst, Asset Allocator, or Investor Relations Manager. Please be sure to join the pitches and share ideas for the following newsletters!
SIF Moving Forward in 2023
New Year, New Us! Well, not exactly, but we definitely have implemented some changes to the structure of the fund. From now on the fund will follow a base Strategic Asset Allocation that is composed of 75% equities and 25% fixed income (US Treasuries). This distribution can change if the investment committee (all of the members of the SIF) want to employ a tactical asset allocation to adjust the portfolio’s risk profile and take advantage of short-term opportunities in the market.
75% of the fund is invested in the MSCI World Index by default. As analysts pitch stocks to the committee, the fund will invest a fixed amount - either 5% or 10% of the total fund into these stocks (provided that a majority of the committee agrees during our bi-monthly meeting.) Towards the end of the school year we hope to have most of the fund invested in individual stocks - with continuing coverage by the analysts who pitched them as long as they are in the portfolio. Additionally, the fund will automatically invest 10% of its capital in the winning stock of the pitch off.
To offer new investment opportunities for the fund to invest in, we have closed our positions in Airbus, Baidu, IG Group, Netease, Next and TI Fluid Systems.
The Booming Luxury Market
Those who haven’t been able to catch a glimpse of Harrods lately, it has been transformed into a giant gingerbread house branded “The Fabulous World of Dior”. What exactly has made LVMH (Louis Vuitton Moët Hennesy) the giant it is today and what will they do next?
Over the past 5 years, Dior has been LVMH’s golden goose. Having expanded into new categories such as luxury dinnerware sets and even AirPod cases, LVMH shows no signs of slowing down. But what is fueling the next wave of growth in the luxury industry? Men’s Jewelry!
Currently 80% of necklaces, rings, bracelets and earrings sold in the world are unbranded, (in the high-end segment this percentage is a bit less) mostly because the value of the product comes from the commodity itself (e.g. Gold or Diamonds) and less from the brand name. As a result, jewelry is naturally a lower margin business than say apparel, where a brand like Dior can charge $760 for a simple T-shirt.
Despite this, men’s jewelry is growing fast from a low revenue base. Historically, jewelry is associated with female fashion, which is still the bulk of jewelry sales, whereas men traditionally will only wear a nice watch or signet ring. However, as men take greater care with their appearance, they have realized that accessories such as rings, chains and necklaces can also be very stylish - as well as good investments. This presents an opportunity for brands like Dior and Louis Vuitton to offer their loyal customers the option to buy hard luxury. In turn, these brands can now charge more for their “branded” jewelry products and try to reach a similar 34% EBIT margin as the prestigious Cartier and Van Cleef & Arpels brands.
Of course, LVMH is one of the first to jump on this trend, most notably through the acquisition of Tiffany & Co. in 2020. We can see from the visual the financial impact that Tiffany & Co. has had on LVMH’s Watches and Jewelry business; as revenues have increased from $4.4 billion to over $10 billion during that time period. Here at the SIF, we are curious to see how this hard luxury push will play out for LVMH. Considering LVMH’s owner Bernard Arnault just took the top spot on the Forbes 400, our bet is that he is on track to once again repeat the feat.
* In collaboration with Marco Minoli
Exercise More, the #1 New Year’s Resolution
The Dutch company Basic-Fit is the largest health club chain in Europe with over 1100 gyms - operated mostly in France, the Netherlands and Belgium.
Basic-Fit operates a low-cost model where people can get a membership for as low as €19.99. At this price the company loses money since depreciation and operating costs are high. As such, they incentivize customers to spend on add-ons such as on vending machines, day passes and personal online coaches. This business model follows a similar approach as cruise lines and low-cost airlines who lose money on their basic fares to lure customers into their ecosystem, and then break-even using other revenue streams.
As a result customers stay at Basic-Fit fitness clubs an average of 22 months, almost double that of 12 months - the industry average. Basic-Fit focuses primarily on large urban areas and uses a cluster strategy (multiple gyms grouped together as opposed to one club on its own) so as to increase market penetration. The company relentlessly reduces their operating costs, and through economies of scale have been able to gain capex efficiency. Similarly, their experience in site selection has allowed them to scout the best locations - further reducing their cost per member overall.
Lastly, the European fitness market is still rather immature with a penetration of around 10% versus 20% in the United States. Basic-Fit will try to act on this by increasing the amount of gyms they own in France and Spain, launching in Germany, and increasing memberships per club company wide to improve their ROI.
Thank you for reading and we wish you a Happy (and Healthy :) New Year!
Written by: Wybe Harms (MAM 2023) and Robert Scott (MIF 2023)
January 2023
Sources:
● Jewelry Market : Branded Vs Non-branded - the French Jewelry Post.” The French Jewelry Post by Sandrine Merle, 17 Feb. 2022
● Investors.” LVMH, 20 Apr. 2023, www.lvmh.com/investors
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