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The chart that could keep investors in ‘low-risk’ stocks awake at night

23/06/2017

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

For years it has been an undisputed fact of investment that people tend to prefer having big-name brands in their kitchens, bathrooms and elsewhere – yet this could now be changing

Among the various qualities we look for in an investment, here on The Value Perspective, ‘source of a good night’s sleep’ tends not to feature that high up the list. Of course we are confident adhering to a value strategy means our investments should, on average, outperform over the longer term but, as contrarian investors, it is very much part of our job description to take uncomfortable decisions.

That being so, we have always found it odd that so many investors are willing to pay a premium for low-volatility assets that supposedly, as the cliché goes, ‘allows them to sleep at night’. We find it odder still that some are willing to pay up for the kind of premiums these investments – the so-called ‘bond proxies’, such as big-brand consumer stocks – now command, all in the hope of an uninterrupted eight hours or so in bed. 

If you happen to be such an investor, you may want to ignore the following chart and yet – regardless of what it may do to your sleep patterns – we would urge you read on. Taken from the 2017 version of the influential Internet Trends Report assembled each year by Silicon Valley venture capitalist Mary Meeker, it illustrates the inroads Amazon is making into the market shares of the global giants of baby wipes and batteries.

 

 Amazon Basics Market Share,  August 2016 USA

Source: KP Internet Trends 2017. Images: Amazon, 1010 Data. Data collected from September 2015 to August 2016.

 

Now, the big reason investors buy consumer staple stocks – essentially, the businesses behind items people are generally unwilling to leave out of their shopping baskets, regardless of their financial situation – is the stability their brands consequently enjoy. It is why Huggies manufacturer Kimberley-Clark trades on 21x its estimated earning for this year and Pampers manufacturer Procter & Gamble trades on 23x.

And it is why no less a figure than Warren Buffett, through his Berkshire Hathaway investment vehicle, bought Duracell from the self-same Procter & Gamble in 2014. For years it has been an undisputed fact of investment that people tend to prefer having big-name brands in their kitchens and their bathrooms and indeed in their electrical goods and yet this chart suggests that is now changing.

A false sense of security?

Granted, an important caveat here is the above chart only relates to online sales but, these days, where online leads, other markets tend to follow. With Amazon powering past Duracell and threatening to wipe the floor with Huggies and Pampers, then, there would appear to be a serious risk investors have been paying significant amounts of money for tomorrow’s own-brand or generic items.

More than a century of data strongly suggests that when you pay a premium price for an investment, you greatly reduce the number of future outcomes that will give you a positive return. Conversely, if you pay a low price, you should have more outcomes that give you positive returns – and knowing that means, here on The Value Perspective, we do not sleep too badly at night.

Author

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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