A brand investment strategy - Update
The BrandZ Global Top 100 report was released at the end of June, and it showed that Apple maintained the honours of being the most valuable brand in the world for a second year running. Generally, brand values fell, however, as Covid-19 fuelled spikes in brand value normalised to more realistic levels. The Top 100 brand values fell 20%.
Apple's brand value fell 7.0% but remained at more than twice its pre-Covid-19 level. Google's brand value fell 29.5% (+78.5% from pre-Covid-19 levels), and it remains the second most valuable brand in the world. Microsoft (-17.9%) leapfrogged Amazon (-33.6%). The top five was rounded off by McDonalds (-2.8%).
The fastest growing brand this year was telecommunication provider airtel (+24%). airtel is the trading brand of India-founded Bharti Airtel, which operates in eight countries in South Asia and Africa. It was also one of the 11 new entrants and re-entrants to the Top 100. Others included fast-fashion on-line retailer Shein, Sony, and Shell. Interestingly, beverage brands also showed strong growth with Pepsi (+17%), and Coca-Cola's Fanta (+15%), Sprite (+12%) and namesake brand (+8%) being among the Top 10 fastest growing brands globally. In terms of general themes, food and beverages (-3%) luxury goods (-4%) and fast-food brands (-4%) held their brand value best - indicative of their defensive appeal. Conversely, media and entertainment (-32%), retail (-27%) and technology (-24%) saw the largest declines in brand value.
We have been running a concentrated 20-stock mock portfolio for the last 10 years based on this survey. Brand remains a key consideration in valuing the investment and financial potential of companies. According to David Muir of WPP, in 1977 intangible asset values (brand, trademarks, patents, etc.) were roughly comparable to the tangible values of companies. Twenty years later, intangible values stood at more than three times that of tangible values and 36 years on, the value difference is even more pronounced. The reason for this is that if a company delivers on its brand promise, it can experience a "herding effect" in sales growth. People are more likely to purchase or use a product if others are doing so to. Theoretically, this sales growth should then filter down to earnings and translate into higher shareholder returns.
Portfolio modelling methodology
We model (by way of an exercise) a portfolio consisting of the top 20 brands weighted according to brand value as measured by BrandZ. The portfolio is reweighted and realigned annually according to brand value approximately a month after the rankings are released.
Portfolio performance
The Brand Portfolio added 21.7% between 31 July last year and 31 July 2023, comfortably outperforming the S&P 500 and MSCI World Index this year. This was mainly due to the strong performance of the US tech sector (particularly Apple, Alphabet, Microsoft, and Meta) and semiconductor specialist, Nvidia. The portfolio has also strongly outperformed the MSCI World Index and S&P 500 index across a three, five and ten-year investment horizon. Over the past year, the MSCI World added 14.1% and the S&P 500 is 13.0% higher. Over ten years, the Brands Portfolio delivered an annualised return of 17.1% (MSCI World: +11.2% and S&P 500: +15.2%).
Changes to the portfolio for the coming year
For the 2023 portfolio, we have Nvidia, Nike, Adobe and UPS exiting the top 20 and Oracle, AT&T, Hermes, and Home Depot entering the portfolio. Per our methodology, Apple will carry the largest weight in the portfolio this year followed by Alphabet and Amazon.
Conclusion
The Brands Portfolio appears to offer relatively steady returns over time - for the most part due to the combination of new, exciting brands and mature, iconic brands. The former provides impetus for stock price appreciation, while the latter is expected to offer stability and downside protection to a certain extent. The portfolio is therefore expected to underperform during periods of rapid stock market appreciation and outperform during periods of contraction or uncertainty.
As we have always highlighted in the past, this strategy does not come without its fair share of risks. Concentration risk is a key concern - the portfolio is heavily exposed to North America and Industrial counters, particularly those with a technology or telecoms focus. Perhaps most important to note is that brands can fall out of favour quickly - consider the demise of BlackBerry after the launch of the iPhone as one example, or more recently how the rise of Netflix has disrupted cable companies like HBO and ABC.
Longer term, the overall return is higher, or in line with our benchmarks, and the strategy has proved superior on a risk adjusted basis.
