Mark Denham, fund manager of the FP Carmignac ICVC European Leaders Fund, explains the fund’s allocation to Consumer Staples and where his focus is.
As a quality manager, consistency of revenue is one of the most sought-after characteristics of a winning compounding stock. And nothing is more consistent than high quality consumer stocks. FP Carmignac European Leaders Fund has around 17% exposure to consumer stocks split relatively evenly between staples and luxury. We have written previously about luxury names like Hermes, which continues to demonstrate its incredibly resilient business model.
While staples are generally considered bullet proof defensive stocks, it is important to understand that not all staples are the same. As a bottom-up stock picker, we are looking to identify the highest quality companies across this complex that demonstrate the twin traits of long-term profitability and commitment to reinvesting for the future.
Within this space, there are areas where we will not invest given our focus on ESG and then we home in on the areas we like and separate those that we don’t like – primarily on valuation and fundamental grounds. An easy area to rule out is tobacco. At Carmignac we have a strict exclusion policy to tobacco within our funds since our creation in 1989.
A harder area is food products. Traditional staples should be “staples” in a high-quality compounding strategy, right? Not necessarily, when you scratch beneath the surface and link together the trends in healthcare right now. We prefer personal products and currently see the opportunity for strong, organic earnings accretion together with good entry points.
The change of appetite for food
Food habits may be set to change across the globe as humanity becomes more aware of their health, given the focus in the media and the widespread use of gyms and health tracking devices. However ultra-processed food still accounts for 60% of the average American’s daily calorie intake. This rate is 30 to 50% lower in Europe, but it is still increasing1. And ultra-processed foods2 tend to be associated with an increase in obesity, type 2 diabetes, cardiovascular disease, and risk of cancer.
The World Health Organisation (WHO) identified that ultra processed foods, together with tobacco, fossil fuels and alcohol are responsible for 2.7 million deaths per year in Europe3.
Could we see potential headwinds for the food sector? There are low expectations for growth in the long-term – estimates are for sales in the agri-food sector to grow at an average of +2.5% per annum – the advent of new-generation appetite-suppressant medical treatments (also known as GLP-1) have led to concerns over the evolution of consumer behaviour as they lean towards healthier options. Some studies indicate up to 30% reduced spending at grocery stores for GLP-1 users4 and a staggering 70% decrease in fast food, confectionery, or soda.
Some well-known food producers have already made greater efforts to address the fat, salt and sugar content of their products and will continue to engage with investors on this topic. Danone and Unilever notably tend to rank better at addressing malnutrition in all its forms. But even though this is positive, the reality is that the bulk of revenues for the big food producers come from a handful of product lines.
For example, a company like Nestle, 80% of total sales are generated from around 10% of product lines and there is a long product tail that doesn’t significantly impact the bottom line. Therefore, while efforts are being made, much more needs to be done to adapt product lines and develop new ones.
Also, while demand is unlikely to change in the short term, the evolving and tougher regulatory environment and cultural shift towards health-consciousness is likely to be a negative factor for companies in the sector over the long-term, and this will affect the discount rate and we don’t think this is reflected in valuations.
The historic winners in the food and drink sector now face multiple headwinds and we prefer to stay away from food and distribution stocks in favour of consumer staples companies with exposure to household and personal care products.
Beauty and health are the opportunity for wealth
We believe that personal care offers a more compelling investment case. We see strong organic growth rates which will drive operating margin improvements and lead to valuation re-ratings. In Europe specifically, we have global leaders in the pure play personal care sector that have been around since the late 19th century and have continually adapted to customer needs by developing new products.
Our analysis, supported by a sell-side consensus5 on the MSCI World Staples sub industries, sees personal products having a 5.4% organic sales growth estimate for 2025 – significantly higher than food & products, beverages, or household products. We can also see this trend in operating margin where YoY growth is estimated at 1.8% for household and Personal products versus -0.3% for Food, beverages & tobacco. This results in an attractive EPS growth estimate of 10.3% for household & personal products versus 2.8% for food, beverage & tobacco, a significant gap against history.
There are some companies in personal products that we really like and rightly carry the label of a quality staple that is reinvesting for future growth. These companies should have products with strong brand positioning and consumer awareness; products that are used frequently and loyally, maybe even described as weekly or daily subscription models; and a portfolio of products that are diversified and distributed to the mass market. We favour those companies who are embracing the demand trends – dermatology focused, premium lines and innovating across the spectrum of products and lines to adapt to client needs. Indeed, innovation is essential in these companies to differentiate versus peers, to create more brand loyalty and enable “premiumisation.” As consumers get wealthier, they trade up to more premium products and demand becomes more price inelastic… which is a similar play to luxury goods. Thus, as we look for opportunities, we believe that within this segment of consumer staples, their traits are very much in line with companies we like to invest in, strong competitive advantage and market position, an evolving industry and breadth for future evolution driven by research and development (R&D) and corporate strategy.
How we play it
Within our FP Carmignac ICVC European Leaders Fund, we see personal care as a core theme and focus on defensive growth through two names in particular:
Beiersdorf
With strong brands like Nivea, Eucerin and La Prairie, we see Beiersdorf as a company with continued growth that can deliver steady margin expansion. Management has successfully turned around their historical Nivea brand, their largest chunk of revenues, which had lost its appeal over the years, and which has been reinvigorated since 2021. Growth in their Dermatology segment with clinically proven ingredients is an area of longterm structural growth in line with current consumer trends and where most of the innovation is coming from. Each year they conduct 800 studies through external quality-controlled institutes, for their product development teams to bridge the gap between their skin researchers and the consumer.
L’Oréal
The global leader in beauty has a large product mix to effectively serve the many different segments of beauty. The luxury segment has been disappointing over the past couple of years, but L’Oreal has significant growth potential going forward, coupled with higher margins, driven by the portfolio with brands such as CeraVe, a successful dermatology specialist. Innovation is at the forefront of their strategy, unveiling their personalized skin analysis tech device at the CES tech showcase in Las Vegas and demonstrating how they aim to innovate in skin care solutions, and leverage their R&D strength. Furthermore, their low net debt to EBITDA points towards potential acquisitions and more spending in artificial intelligence (AI).
While performance in both names has been muted due to the China pullback, we maintain these two companies as core long-term holdings in the portfolio. We see little variation in the growth outlook versus other staple sectors and there has been a noticeable normalization of the global beauty market growth over the past year. Besides L’Oreal, for instance, with a 2025 PE of 25x, is trading at the low end of its past 5-year valuation band.
In conclusion, food may give investors indigestion given the headwinds in consumer trends and regulation whereas personal products continue to offer attractive and resilient earnings in the future. We look to staples to stabilize and defend our equity returns, and coupled with our investment in luxury, are comfortable that our 20% position in the consumer sector will underpin investment returns through the market cycle.