Antares Equities, Ex-20 SMA Model Portfolio, Investment Manager, John Guadagnuolo, discusses the impact of demographics and technology on retail stocks and the importance of active stock management.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Joining me from Antares Equities is Ex-20 Model Portfolio Investment Manager, John Guadagnuolo. John, welcome.
John Guadagnuolo: Thanks Jessica, hi.
Jessica Amir: First up, technology and demographics are really changing spending trends in Australia. So maybe you can tell us why these trends are so critical?
John Guadagnuolo: They’re important because they tell us how things are likely to evolve into the future, why are these trends happening and are they likely to continue.So two things that we think are really important are the role that technology is played, in the way consumers can now choose the products that they want. There’s a lot more information available for consumers, that gives them the ability to choose things that they actually want.
The other thing of course is our population demographics are changing and that’s a really important aspect. Particularly with the so-called Baby Boomer generation, they’re now reaching a point where they might still be working, or they’ve just retired. Their children have typically left home, so they’ve got lots of money and they can make different choices with how they spend that, to what they used to do in the past.
Jessica Amir: You’ve previously mentioned that these two key trends have really led to a massive rise, in what’s dubbed as the experiential economy. Maybe you can actually define the term for us?
John Guadagnuolo:The experiential economy is one that’s people looking for experiences, be it travel. The really interesting thing that we’ve observed is the rise in spending of people, in cafes and restaurants. If you go back 30 years ago, around 10 per cent of peoples’ money was spent on cafes and restaurants, it’s now 14 per cent. People like going out.
Look at how strong a business like Bunnings (ASX:BWP) is. Bunnings is not just a hardware store, it’s all about what you do in your home. Creating different environments for different things to enjoy and experience, to be with your family, to be with your friends. So it’s the rise of the experience over and above the consumer goods.
Jessica Amir: When selecting stocks for your portfolio, such as Antares Ex-20 Model Portfolio. Why is it so vital to consider these key trends?
John Guadagnuolo: The first thing is to work out what not to invest into. Because as these trends continue to develop, the businesses that are losing share to these trends will continue to suffer, they won’t be good investments. We don’t want to invest in those. The most obvious that springs to mind is something like Myer (ASX:MYR), it’s difficult to see its relevance to how people will experience things into the future. It’s offer looks dated, there’re other reasons as well.
But then we need to know, okay where do we spend the money. Well we want to spend the money where the trend is going. If we understand the drivers of the trend, then we understand how that trend can continue and persist. We need to invest along with that. So people are looking for experiences, what types of experiences, sowe look at travel. Travel spending in Australia has been very strong for the past decade. we like to invest with that.
So we’ve had shares in a company like Flight Centre (ASX:FLT) from time to time, likewise we own shares in Qantas (ASX:QAN). This is a company that’s a direct beneficiary of people wanting to travel, because it’s not travelling down to the coast and having the weekend, it’s going overseas or it’s going to some new experience that they haven’t had before. That’s what we’re looking to invest alongside.
Jessica Amir: How do you see the way we spend money really evolving over the coming years?
John Guadagnuolo: We’ve spoken about demographics and how that will change things. But another trend that we’ve observed is the impact of technology, on the way that we spend money. In particular, if you look at the way that we spend money on everyday items, consumer goods, the share that’s held by the higher margin branded goods has been falling. But the generic home label as we used to call it, private label if you prefer, has been rising. This is not just in Australia,the same trend is observable in most developed countries.
In the United Kingdom ALDI and Lidl, we don’t have Lidl in Australia but they’re a very similar company to ALDI, they’ve gone to nearly 20 per cent of UK grocery share. In Australia we know ALDI’s gone to 10. Why is this, because people don’t want to pay a premium for consumer goods. Why? Once upon a time, you were reliant upon the consumer goods company to tell you what was in their goods,and why you’d have to pay a premium for them. But with the rise of the connected economy, in particular a mobile device, it’s very easy to find out the relevant details of any new product and whether or not, you’re prepared to pay a premium for it. Generally, the answer is increasingly no.
So people are not spending the money on the branded good, they’re saving it. That’s driving a shift into certain types of format, like ALDI, but in particular like Kmart. So we see the Wesfarmers (ASX:WES) owned Kmart doing very very well, because it’s got a very well defined offer around value and it’s authentic.
The one thing that you need to realise in a connected economyis that your offer must be authentic, because any falsity that you put forward can be discovered instantly, through a connected economy.
Jessica Amir: Last question John. How does this provide opportunities for fund managers?
John Guadagnuolo: It provides a lot of opportunities for active fund managers for stock pickers. Because we can decide those businesses that we think are going to fail, because they’re not going to adapt to these trends. Their business model won’t allow them to. At the same time, it allows us to pick the businesses that will actually profit from these trends. So once we understand the trends, we can apply those trends to businesses and we can work out whether businesses fail or succeed.
It’s a really good opportunity for active fund managers to add value to their client’s portfolio, by avoiding those businesses that have all the characteristics of failure in these trends. And meanwhile, diverting that capital to those businesses that will benefit. So therefore, buying businesses that are involved in travel, involved in leisure that have very well defined offerings, in terms of authenticity and value. Whilst at the same time, avoiding those that seem to be fake. That’s a really big aspect that you need to have, because you need to understand that business can no longer pretend. It needs to be true.
Jessica Amir: John Guadagnuolo, thank you so much for the update.
John Guadagnuolo: Thank you Jessica.