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A Goldman Sachs Asset Management fund’s bet on companies favored by millennials is paying off during this global coronavirus crisis as lockdowns push consumers of all ages to embrace technology and switch to online services.
“The world is being forced to adopt millennial consumer tendencies and that’ll likely lead to an acceleration in adoption rates for those technologies and platforms in an even more significant fashion than we were seeing otherwise,” said Luke Barrs, head of GSAM’s fundamental equity client portfolio management for EMEA, in a phone interview.
With its portfolio focused on communication services, IT and consumer discretionary sectors, the US$362-million Goldman Sachs Global Millennials Equity fund has gained 25 per cent in the past month through Thursday in U.S. dollar terms, beating 95 per cent of peers, according to data compiled by Bloomberg. This has helped the fund trim its year-to-date losses to 4.9 per cent from 24 per cent just a month ago, which compares with a 16 per cent slump in returns for the MSCI All-Country World Index since the start of 2020.
The spreading pandemic and resulting lockdowns across Europe and the U.S. are fueling a change in consumer and corporate behavior, as online retailers and video communication platforms see a surge in new users and companies expand their internet presence. This is offering a boost to businesses and sectors that are usually associated with the younger generation of people in their 20s and 30s, such as technology and e-commerce.
The Goldman fund’s managers used last month’s sell-off to buy retail stocks, including luxury names, as well as Chinese companies that are benefiting from the easing of lockdowns in the country, according to Barrs, who declined to name individual stocks. About 20 per cent of the portfolio is dedicated to e-commerce companies in the U.S., China and Latin America, while luxury firms constitute “only a few percentage points.”
The Goldman Sachs Global Millennials Equity fund has also cut back on its exposure to consumer discretionary companies focused on experiences, such as restaurants, travel and events, to less than 10 per cent of the portfolio from about 20 per cent, said Barrs. During this crisis, the fund maintained “reasonable” exposure to firms concerned with health and sustainable living, he said.
“One of the consequences of this crisis will be that people will become more thoughtful about how they live everyday lives, but also you’re likely to see companies pushed to be more sustainable in their practices, moving away from plastic packaging or trying to find more sustainable ways to improve health and nutrition,” Barrs said.
Fears over the economic damage from lockdowns sent global stocks to a 2016 low in March, prompting investors to rush into cash and wiping out many fund managers’ returns. Global equities have been rebounding since the end of March on optimism spurred by extensive monetary and fiscal support measures and the easing of virus cases.
The fund managed to avoid being hurt by the recent collapse in oil prices because it had no exposure to the energy sector. Another industry that the Goldman team had been avoiding prior to lockdowns and that’s currently coming under pressure is big-box retail, said Barrs.
When selecting stocks for the fund, co-portfolio manager Laura Destribats says the team looks for businesses that are exposed to millennial themes but are also quality companies that aren’t overvalued. The fund has a growth tilt, focusing on firms with strong balance sheets, and is underweight large-caps and overweight mid- and small-caps, she said.
“We’re definitely focused on longevity, you don’t want to create a fund around a fad that might only work for a short period of time,” she said. “Millennials are the most powerful consumer force today. We felt that their coming-of-age was creating disruption across industries.”
According to the fund’s March factsheet, some of its biggest holdings included Amazon.com Inc., the Chinese internet giant Tencent Holdings Ltd., NextEra Energy Inc., which provides sustainable energy generation, Illumina Inc., which makes DNA sequencing machines, and Taiwan Semiconductor Manufacturing Co., Apple’s partner for iPhone and iPad processors.