Kinsey Grant: Hello everybody and welcome to the Public Podcast. I'm your host Kinsey Grant and today's show is brought to you by Tema ETFs. Tema ETFs is an issuer focused on bottom-up investing in unique structural themes like their Lux Ticker, that's the, excuse me, their Lux ETF, that's the ticker $LUX and that's what we're gonna be talking about today with our wonderful guests. I'm so excited to welcome Javier Lastra, who is a PM at Tema ETFs to the Public Podcast. Javier, how are you today?
Javier Lastra: Hi, good morning to everyone. Thank you for having me on the show.
KG: Yes, absolutely. I'm excited to chat with you today. We certainly had a very fun and interesting conversation on deck today. We're going to be talking about investing in luxury, specifically around that $LUX ETF that I mentioned. But I want to start with a little bit of a higher level question here. I want to start with just general luxury as an investing theme. I think often when we, as investors, consider luxury, we're thinking bags, shoes, cars, fancy expensive items that we spend disposable income on, but not necessarily stocks. Now, as the PM of this $LUX ETF, which invests in companies that are operating in the luxury industry, you know, the $LVMH and Mercedes-Benz, et cetera, tell me a little bit more about why this is an appealing sector for retail investors to consider. Why is luxury investing up there with, you know, spending on luxury items? Tell me a little bit more about that.
JL: Yeah, sure. I mean, luxury as a theme is a very interesting one from an investment perspective, because there are certain structural tailwinds that help the growth in the space. I think we've all heard many times how, for instance, in Asia, the emerging middle class has been driving the growth of the sector for many years. And there is expectations that will continue to be a tailwind. A sector where it's helped by the fact that, for instance, women, which are the, you know, by and large, the biggest purchases of luxury, they continue to participate in the workforce, they continue to gain further financial freedom, and that's unleashing a lot of financial firepower to spend in luxury goods. We also see across the Western economies that women are also having less kids. That means that there's also increased spending that is unleashed that can be spent, women can spend on themselves. And this is something that is demographically going to help the sector going forward. And that's why we think it's such an interesting thing from an investment perspective.
KG: Yeah, certainly, certainly interesting aspects to consider. I like this idea of thinking about the tailwinds that might impact this sector. Now, one question that I have that I'm sure a lot of people listening are probably wondering the same thing. You see headlines all the time that say, you know, an Hermès Birkin bag outperformed the S&P 500 by X amount as an investment over, you know, X number of years. I'm curious why invest in an ETF like Lux instead of investing in the actual item itself, investing in a luxury handbag, a luxury car. Why invest in the stock instead of the thing?
JL: Well, an ETF gives you the diversification and the benefit of with one purchase having exposure, not to just one bag, one brand, but you actually get exposure to many different brands, many different objects in many different sectors that actually can, we argue, behave, can behave in a very similar fashion. So, the diversification benefits that bring the fact that you can invest in our fund are not present when you buy an Hermès bag. Clearly, if you're a big fan of Hermès and you want to invest in one, I highly suggest that you do, but I think there are different motivations for it rather than just pure investment.
KG: Yeah, and certainly a little easier to buy an ETF than it is to buy an Hermès bag at the current moment. So I wanna talk about that, that idea that attaining these luxury goods is often something that is not necessarily in the question for a lot of people who might be listening to this at this current moment. We aspire to be luxury consumers, but we might not be in that income tax bracket quite yet. Tell me a little bit about how aspiration plays into luxury as a sector, into its desirability. How does that aspirational quality impact the way that we invest in luxury items and in luxury stocks?
JL: Yeah, this is a very good question. I mean, it comes down to the definition of luxury, right? At the end of the day, if you look at watches, you can either buy a, I don't know, a Apple watch or something even cheaper than an Apple watch, a Seiko or a very standard watch that gives you the time and probably very accurately nowadays. Or you can go all the way to the other end of the spectrum and buy a Patek Philippe, which costs in the tens of thousands of dollars or even sometimes in the hundred thousands of dollars. The reason that you're buying that watch is not because you need the time on your wrist, right? The reason you're buying that watch is because it's giving you a status, it's giving you something that no other object is giving you. And that desirability is really what defines a lot of these luxury items. I've made the example of watches, but I think we can think of cars, we can think of boats, we can think of bags, fashion, shoes, anything. There are many industries where this gets repeated with brands that are positioned in that luxury spectrum, which I think they get defined normally by craftsmanship and desirability. Desirability that usually creates demand over and above the supply of the product. And that's why normally you have this second aftermarket where the prices can even be higher than the actual product when the price of the product is new.
KG: Totally. And I was just the other day speaking with a co-worker. We had listened to, not to plug another podcast on this podcast, but I had been listening to a podcast about the story of LVMH and the Arnaud family. And it came to my attention that this stable of brands that LVMH has collected are all the kinds of brands that have existed for, in some cases, a century plus and have maintained such staying power. And it's really interesting to consider what the next iteration of those kinds of brands might be that stand the test of time, that have this reputation for craftsmanship and for reliability and for that desirable luxury quality. Those tend to be those aspects that really make a brand something that can stand that test of time. It's a very interesting idea to consider what might be the next version of those companies and something I've just kind of been toying with. And one aspect of that conversation around how a brand creates staying power and maintains that desirability, of course has to do with the economic situation that we are in at any given moment. So that's my segue to talk about how luxury stocks might potentially be, you know, something that are recession proof. Tell me a little bit more about the chatter around the idea that luxury can still stand the test of economic time, if you will, and maintain that desirability, maintain that value, despite what might be going on with GDP or unemployment or any economic indicator, what have you. Tell me a little bit about that.
JL: Yeah, absolutely. I mean, this comes from the perspective that the average customer is in an income bracket on a wealth bracket that doesn't really get impacted by economic cycles. And therefore, whether they buy one or two Ferraris or three Ferraris doesn't get decided by which part of the economic cycle we are in. Obviously, there are parts of the luxury space. So when you get to the more aspirational side of it, which we've had a little bit of it in the last two or three years, that is more cyclical. And that's, I think, what we've seen at the moment as inflation has spiked. Some of those aspirational consumers that were able to purchase the first luxury item and the last two or three years, they're no longer there. And that part of the market has already been struggling, I think, for a few quarters. Again, there's a big part of the luxury customer base that in revenue terms, that is, as I said, individuals with wealth and income that are in the top 1%, if not higher. And those are generally quite resilient through the cycle. And that's, I think, what most people that talk about this resilience are referring to. There are some numbers that floated around suggesting that around 20% of the top customers generate around 60% of the total revenues of some of these companies. I think that varies across sectors and across companies, but I think that would be an interesting rule to keep in mind that the top customers, the most wealthy customers tend to account for the vast majority of the revenue generated by these pure luxury companies.
KG: So with all of this in mind, I'm curious about what you would say to investors who might be considering this space, adding luxury to their portfolios. What would be some of the either homework they should do or questions they should ask themselves before investing in luxury?
JL: Well, from a US investor perspective, one of the things that we've highlighted is that the access to some of these companies that we invest in is quite limited. The vast majority of the global luxury consumer groups tend to be either trading outside the United States, or they tend to not have also sponsored ADR. So the access to these investments is limited. I think we've calculated that it's around 70% of the pure luxury place globally are actually not accessible for the average retail investor in the United States. So if you are attracted by this luxury, let's say mega trend that we think is very interesting to tap into. I think you really should consider, I guess, our fund, which is giving you access to that exposure. In terms of the questions you need to ask yourself, obviously, you need to look at your portfolio and look at what your exposures, your asset allocation proportions are. We could be, let's say, bundled into consumer discretionary. But as we've argued earlier consumer discretion generally tends to be a lot more cyclical, whilst our subsectors should be, or sector within consumer discretion, should be a lot more resilient through the cycle for the reasons we discussed earlier. So I think this is an interesting angle they can think of if they are concerned obviously about the economy in the next two or three years or even more short term. So I think the qualities of the space, I think it's something to consider.
KG: All right, well, certainly very interesting and has been an illuminating conversation, obvious to understand a little bit better how and why luxury might be a little more, I guess, recession in elastic than maybe people might consider at first glance. So, thank you so much for your time today and for sharing all of this wonderful information with us. I really appreciate it.
JL: Thank you, thanks for having me.
KG: Of course. With that, I want to thank our guests one more time, Javier Lastra from Tema ETFs for joining us today. We will be back soon with even more updates from the world of luxury and beyond. Once again, I'm Kinsey Grant. This is the Public Podcast and thank you so much for tuning in.