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One of the most iconic sketches in TV comedy was the John Cleese, Ronnie Barker, and Ronnie Corbett class system sketch from the The Frost Report in 1966. Ronnie Barker is the “vulgar” middle class man with money who looks up to upper class, but poor, John Cleese and down on working class Ronnie Corbett. You may wonder why I am starting an article about investing with mention of a TV sketch 55 years old; the simple answer is this article is all about the middle class.
The meaning of middle class for investing purposes is people who have disposable income left over each week or month to spend on discretionary items. Using this definition, someone in the UK earning £50,000 each year could be middle class, as could a Chinese person earning £15,000 per annum and a Nigerian on £8,000. By the way, GDP per capita in Nigeria was $2200 in 2019, $10,000 in China, and $42,000 in the UK.
How many middle-class people do you know? 10, 50, 200? It may surprise you to learn there are an estimated 3.3 billion middle class people today on planet earth and this group is set to grow to 5.5 billion by the end of the decade. Many of these new middle-class spenders will be from the emerging markets. It is this huge burgeoning part of the global population that Anthony Eaton, manager of the VT Downing Global Investors (DGI) fund, is targeting.
DGI was launched at the height of market turmoil last March and exploited the strong recovery, gaining 60% at the time of writing. Timing can be everything in investment! Before we come on to what Anthony is doing with this fund it’s worth talking of his past and the evolution to get to this point.
He launched his previous fund 16 years ago as a "big picture", thematic fund, with a relatively straightforward theme. At that point Anthony invested in companies set to benefit from global industrialisation and urbanisation. He believed demand for energy, infrastructure and commodities would be substantial in order for the developed world to maintain levels of consumption and to cater for rapid progress in developing nations (such as China, Brazil and India). He therefore invested in firms able to supply the essential raw materials, goods and services that accompany urbanisation and economic growth.
Now it might be pertinent to ask what this has to do with middle-class spending. The simple answer is that the theme of today’s fund is a natural evolution of the phenomenon Anthony engaged with 16 years ago. Urbanisation and globalisation are increasing income per head on a broadening and more inclusive basis worldwide. More disposable income amongst a multiplying middle-class population ratchets up demand for higher margin goods and services. Anthony invests in companies that supply the needs and wants of this demographic.
There are six key, and evolving themes, within the fund: healthcare, transition from carbon, 5G, digitalisation, consumer goods, food and raw materials. The common link is the driver of all these markets; rising middle class demand.
Anthony Eaton believes most of return is driven from top down asset allocation. He is constantly looking for recurring patterns of capital formation. Classic “applied capitalism” if you like. He identifies sectors attracting investment, both on the ground and through valuation in listed markets, and then typically, seeks out the leaders, or winners, in those groups. He wants the winners of today not tomorrow, as they are more reliable. Normally he will look to buy a few companies in each area to spread the stock specific risk.
As an example of when he won’t buy something Anthony highlighted Unilever, which he says is a great business and taps brilliantly into rising income levels in emerging markets as well as being a stalwart in developed markets. The simple problem in his view is that it has been a terrible share and the market isn’t interested in it today. Capital is being drawn to other areas. A business like Unilever does fit into the thematic approach pf the fund and Anthony would want to engage should sentiment or conditions improve.
This isn’t a traditional developed markets or emerging markets fund, it’s a true global fund that sees the global middle class as a single homogenous entity and caters to its ‘needs and wants’. Today it has about 40% invested in the US, 30% in Europe and 30% in Asia, but Anthony believes over time the US proportion will decrease in favour of a rising allocation to Asia. The fund’s exposure to India, for example, is gradually rising as businesses of scale emerge.
Finally, Anthony Eaton thinks this is the most exciting period ever in his investment career. The combination of financial pump priming of developing countries through trade, their vast populations, leaps in productivity and inclusiveness offered by digitalisation, ample supplies of affordable money and the rapid emergence of brand new massive scale industries (decarbonised energy for example) make for a fascinating decade for companies with global reach and desirable products.
Fairview Investing Ltd 9 February 2021
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