The Consumer Spending Index, with Eric Clark of Alpha Brands

Episode Summary

Eric Clark is the portfolio manager of Accuvest Alpha Brands Consumer Spending Index. This strategy is focused on three things. One, the consumer spending. Two, brand recognition. Three, stock performance. He discusses these in detail to show how this empowers the investor and makes a better investor.

Listen to the Episode Here

Hello and welcome to StrategyCasters where we bring you conversations with investment managers you are not hearing elsewhere. Today, we'd like to welcome Eric Clark here. Eric is the portfolio manager of Alpha Brands Consumer Spending Index. Eric, welcome to the StrategyCasters.

Hi, good morning.

We got a couple of questions for you here. Accuvest Alpha Brands Consumer Spending Index is your brainchild. After decades of investment management and marketing, you created this strategy, which is focused, as I see and as we've talked, on three things. One, the consumer spending. Two, brand recognition. Three, stock performance. Tell us how this strategy was born and why you created it.

I think a lot of good ideas come from frustration with existing options. One of the things that I noticed as an investor and as a marketer of strategies is that I couldn't find one single investment that had the leading brands all contained inside of it. I said, "For whatever reason, this doesn't exist." I think it's very important. I've done a ton of research and I thought, "If it doesn't exist and it's a good idea then it should be a going concern." So I created it.

This is basically an index. It's long only investments into companies that are well known brands because you believe that they outperform the market in both good and bad times?

Every bad time is different, but overall, my belief is if consumption drives the economy and brand loyalty drives consumer behavior, then it's probably logical that the best brands, the most iconic brands, the most recognizable brands are going to be the ones that you probably want to invest in from a stock market perspective.

Are these all consumer stocks, consumer companies? Do you have any companies that are B2B, transportation companies, things like that?

We do. We track 70 sub industries. It's a pretty broad diverse group across nine different sectors. Primarily, the 200 index is consumer focused companies.

That's 200 companies in the index?

Correct. 200 companies, equally weighted, reconstituted or updated every mid to late December and mostly consumer facing. Some of those, they don't touch the consumer directly, we're part of the consumption supply chain, if you will. For instance, like a Boeing, clearly the largest airline manufacturer, manufactures airplanes, which touch travel, which touch consumers, that's a second derivative of the consumption theme.

You select these 200 companies. If you recognize the name, does that mean that it's a well-recognized brand? Have you done surveys among consumers and asked them what names they recognize?

Done a ton of industry research. There are some brand consultants out there. Interbrand is a very well-known brand, Brand Z, which is part of a huge conglomerate, advertising and PR conglomerate in London. All of them have put out, for years, their top 100 global brand surveys. Their goal is working with these brands and try to help them enhance the brands. They're not taking an investment angle. Plus all the research that we do on individual companies from traditional Wall Street research to identify who are the leading brands. For our purposes when we created the 200, we just wanted leaders in the most consumer facing industries. Those are the brands that we tended to focus on. By leaders, we use a very simple ranking system that talks about size and market cap, growth and then sales growth. Because we want today's leaders and brands but also maybe tomorrow's brands as well.

Tell us now, you've got these 200 companies that you've identified who are major well-known brands. Sears is a well-known brand. Your long only, I presume you're not investing in Sears?

Sears did not make the cut.

What causes a company to make the cut?

Being at the top of the ranking systems with those three factors: market cap, sales and sales growth within the consumer facing sectors. In order for you to get into the index, you have to A, be one of the 70 sub industries, and then you have to be one of the leaders in those sub sectors based on the ranking system. Sears wouldn't qualify. It did ten years ago. Sears clearly was a highly recognizable brand, but it also had the sales and the sales growth and the market cap to be included. It just doesn't anymore.

You'd take the market cap or the largest companies that have strong sales and have sales growth. That eliminates those that are not going anywhere.

Yeah. We don't need full exposure. For instance, the apparel retail sector. Let's say, there's 22 constituents to choose from, I don't need 22. If I only have 200 slots, an analogy would be if I have a hotel that has 200 rooms and my goal is to fill those 200 rooms up with the best clients at the end of the year, I don't need to choose all of the companies so to speak in each one of those sub industries. I choose how much exposure, we, myself and Accuvest, the investment committee, we choose how much exposure we want based on how important that consumer sub sector is to the overall consumption theme.

How were you able to back test this to determine if your factors that you're looking at are indeed valid potential predictors for future performance?

What we did is, we hired a third party index calculation company. Indxx, they're based in New York, they have been the creator of many different indexes and many investment products, CTFs have been created using their indexes. I think you need to go to an outside, third party, unbiased source. Take your information, take your data, take your analysis to them and then they go about doing the calculation for you. That's what they do. They're professionals.

Were you able to determine that the factors you're looking at are indeed valid predictors of future performance of stocks?

The answer to that question lies in the sectors. If you take a look at, literally since 1989, when the S&P sectors were created, the consumer discretionary, consumer staples sectors have outperformed the market, the S&P 500, since 1989. You have a bit of a tailwind just by owning a lot of the consumer stocks in general. We think we can then even enhance that strictly by owning the leaders rather than just owning a complete basket of those stocks.

Why did you just stay with the consumer sector?

I think if you're tracking the consumption theme, consumption is more than just discretionary items in staples, it's technology, it's healthcare. My view was, from the time that you are an infant and your parents are buying Gerber baby food and Pampers for you all the way through adolescents and early adulthood and then older adulthood, we as people consume.

What we wanted to do is track the leading brands across a lifecycle of spending. Certainly, there's some demographic implications in there as we go forward. My mother's 73, she consumes different brands in different quantities than for instance a millennial does at 30 years old. It didn't seem to make sense to track only one portion of that. We wanted to track a more comprehensive list of brands that people consumer across from the time they're born to the time that they pass.