- Brand Consulting firms like BrandZ have highlighted the power of top brands for decades.
- The BrandZ Top 100 Brands list continues it’s outperformance of the S&P 500 & ACWI.
- The brands that rise the most in year over year value perform even better than the 100 brands.
Clearly I am a believer in the investment thesis of investing in the most powerful and relevant brands. It’s nice to see some third party validation on a regular basis and as of last week, we have an updated datapoint via the 2020 BrandZ Top Global Brands Report. 2020 Top 100 Most Valuable Brands Report
BrandZ is one of the world’s most important brand consulting firms and part of WPP, a top three global advertising firm. BrandZ has been publishing their top 100 brands report for over a decade and their analysis of brands and their competitive advantages is second to none. They track consumer behavior, changes in that behavior and the brands that are resonating most with global consumers. I have been utilizing their sophisticated formula for many years and find it very helpful. In fact, the yearly results of the BrandZ report are one of the 60+ datapoints used in our proprietary Brand Relevancy Scoring System. It’s a very informative yearly report and one of my favorite reads of the year. I think you’ll enjoy the report, link above.
Brands have Historically Delivered Strong Shareholder Returns
There’s real logic behind the investment thesis of adding a dedicated allocation to the most relevant brands. If the largest addressable market opportunity on the planet is consumer spending at $44 trillion per year roughly (60% of world GDP), naturally the brands that resonate most with as many of the 7-billion consumers around the world should have pretty robust businesses. The single highest correlation to strong equity returns is high and sustainable revenue growth. So when you analyze a massive and growing addressable market and identify the companies that are leaders in the important consumption categories, the results tend to generate strong long term idea generation and alpha in a portfolio. Sometimes logic does not translate into stock performance over the short-term but long-term, we should expect the leading brands serving the most global consumers to be wonderful investments. That’s exactly what the BrandZ Top 100 Most Valuable Brands Report proves.
Strong brands are often more resilient in times of high market volatility. Why? Because even though there’s fear, uncertainty, and doubt consumers stay loyal to their favorite brands and there’s an embedded comfort level in owning highly recognized and relevant brands in tough times. I might add there’s also a persistent interest in adding to great companies when the market acts irrational on a short term basis. In my 26 years experience, I have found the most beloved companies tend to have buyers waiting in the wings when the fire sales happen. Here’s what BrandZ reported in this year’s report relative to the Pandemic volatility. Bottom line, these great brands dipped less than the indices.
Let’s see how BrandZ ranks the leading brands in key consumption categories.
Tech is a key driver of our lives whether we like it or not. Unfortunately we are not going backward so keeping up with the top tech trends and consumer habits is key to understanding which brands should be great investments. Not surprisingly, the Mega Cap Tech brands continue to dominate the top of this list as consumers huddle even closer to them and their suite of products and services. Apple remains the most important consumer staple in history. I see nothing that changes that any time soon. Microsoft is getting more powerful as it builds trust and loyalty across key consumer and business categories like personal computing, video gaming, social media, and corporate cloud computing. Tencent in China has become a behemoth across social, gaming and mobile payments across Asia. I like to peruse these lists to see if there’s some emerging trends that can be added to portfolios. For me, Accenture rising each year tells me a lot about how valuable the IT Consulting business has become. I suspect at some point, Service Now will enter these rankings.
It should be no surprise that Nike stayed at the top of the apparel rankings given their size and scope but my favorite, Lululemon is rising fast. It is not a surprise that LULU has radically outperformed Nike stock over the last 3 years. In fact, LULU stock is +436% versus NKE +68% versus the S&P 500 +38% over the last 3 years (source: stockcharts.com). Lululemon has consistently been rising in the BrandZ reports for the last 3 years which was a great indicator that the stock could be an outperformer. As you could see from the above performance chart, the top 20 riser brands has been an even better performing group of stocks. The top 10 list shows that Nike, Adidas and Lululemon seem to be taking big market share from most other brands. That’s very valuable information for investors. Witness Under Armour’s -34% change in brand value year over year. If you want to know what happens to a stock that loses brand relevancy, UA stock is down 82% from its highs in mid 2015. That’s precisely the reason I built the brand relevancy scoring system. This quant/qual system allows us to understand when a brand is becoming obsolete so we can remove it from the brands index and avoid the brand in portfolios.
Top 20 Risers
Each year there’s a sub-segment of BrandZ’s Top 100 report that highlights the brands showing exceptional year over year gains in brand value. Not surprisingly, the top risers group has experienced strong absolute and relative returns making tracking them very important for investment portfolios. The performance chart above highlights how much value was added over the Top 100 brands portfolio along with the indexes. Just for fun I created a model portfolio in Ycharts.com for the publicly traded top 20 risers to see how this 17 company portfolio performed looking back one and three years on an equal weighted basis, rebalancing the portfolio at year end. All of us would have benefitted greatly from owning these companies over the last three years at least. The results are posted below the Risers list.
Here’s how much value would have been added to your portfolio if you had the benefit of knowing which brands were resonating with consumers and businesses the most. How’s that for an alpha portfolio!
Here are some key takeaway points for investors to consider:
- There is significant evidence to support the conclusion that every investor should have dedicated exposure to a top brands strategy. Tracking global consumption is a winning strategy.
- Real alpha can be generated over time and these great brands are often less volatile during difficult times. Clients enjoy that one-two punch.
- The top two or three brands in key consumption categories have historically performed extremely well versus peers.
- The brands that increase their brand value the most year over year (Risers) can add significant horsepower to a portfolio.
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.