There is a portfolio construction technique known as a “barbell strategy” which bond traders often use. It involves focussing the portfolio on only very short maturity bonds and very long maturity bonds in order to take advantage of mispricing.
So as opposed to putting all of your portfolio in a 10 year bond, you might put 50% in a 20 year bond and 50% in a 3-month bond. The 3-month section gives flexibility, as it will behave like cash – which gives the opportunity to take more risk with the other 50%. Ideally, you end up with a portfolio that performs better than just holding a 10 year bond.
There seem to be similar trends going on in everyday life at the moment too – albeit with quality rather than maturity. By this I mean that people seem to be flocking towards a combination of basic and luxury goods, rather than focussing on the middle ground.
The first example is of supermarkets in the UK, a topic which continues to spark discussion in the media. The giants of old, the “big four” of Tesco, Morrisons, Sainsbury’s and Asda, all had a business model based on carving up the “middle ground.” Historically, I suspect, the appearance of competition on price was more important than actually undercutting rivals across the board – what Asda may have lost on baked beans versus Tesco, it made up for on spaghetti hoops.
Now however, both supply and demand have changed. Aldi and Lidl have been in the UK for over two decades, over which period they have given consumers meaningful, long term exposure to low prices. People have begun to realise that the difference between the prices of the traditional supermarkets and the new discounters is an indicator of how much profit Tesco et al have been making – without necessarily providing better service or choice. Now, after twenty years, the demand profile has switched, to the barbell mentioned above. So alongside the lower end, the top end is doing well, with Waitrose growing market share too – the three combined have taken around 4% of market share from the big four over the past three years. This may sound meaningless, but in reality is worth around £5 billion of business. Additionally, although the data are less available, it would seem that local delicatessens/butchers/grocers etc are also benefiting. If you are efficient in buying your basics, then you can spend a little bit more on the special treats.
The same thing is happening in non-supermarket retail. Direct sales information and comparisons are more difficult to come by, but just looking at the clothing sector gives some idea of the change. The recent rise of both the internet retailer (ASOS, Boohoo.com) and the continued success of the discount provider (Primark, H&M, TK Maxx) has provoked difficult times for middle-ground clothing lines (Marks & Spencers, River Island). However, the higher-end clothing brands (Boss, Barbour) have continued to flourish – in fact some of them have even managed to introduce slightly less expensive lines of clothing, whilst maintaining their exclusivity, in order to attract the buyer toward them. Again, lower everyday costs leaves more around for a splurge when appropriate.
Somewhat more tangential, but still noticeable to my mind has been the increase in quality at dining establishments. Head to most pubs or bars at the moment, and there are almost guaranteed to be a wide selection of “craft” ciders, or new and locally brewed spirits whilst the choice of beer on draught is much wider, and changes more often than previously too. The array of drinks on offer seems to have become conspicuously more exclusive in recent years – with price increases to match. Similarly, the food on offer has been subject to an upgrade – burgers, hot dogs, fish and chips are all still on the menu, but now prepared as if for display in an episode of Masterchef, rather than a quick bite to eat on a Saturday afternoon. What has changed on the menu is the adjective count – dishes are now almost always individual, inspirational, organic, hand-picked and home-made.
Once more, perhaps this shift is due to demand changing. Now, if people arrange to meet somewhere away from home, the quality level expected is so much higher – otherwise there is no point in leaving the house. That would go some way to explaining the high rate of local pub closures still occurring in the country; if the business can’t go higher up the quality spectrum, the other option is to become cheaper than staying at home, which isn’t really an option at all (especially when the low-priced drinks at Aldi and Lidl come into play).
There are a lot of other examples of this kind of thinking out there. The key thing to watch is whether it is becoming more ingrained, more of a behavioural habit. If that is the case, then companies around the world will have to adapt, if they are able. It may not be prevalent everywhere yet – the personal technology sector, for instance, still seems to be focused on producing the best quality, highest spec item, rather than worrying about the trade-off on the bottom end. These are the kind of trends that can, over time, make or break a company. No investor can spot all of them. Many can’t spot any. But managing to spot a few can make the difference between a good investment and a bad one.
Ben Kumar, Seven Investment Management
This article is for information only and does not constitute advice. Please obtain professional advice before making financial decisions. The views contained in this article are those of Seven Investment Management and not necessarily those of Wren Sterling.
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