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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.

You take your factors and you apply that analysis to whatever number in the universe. Do you take the top 200 or do you make sure you have representation from each of the 70? How do you do that, because there's a fair amount of discretion here obviously?

There is. We, as the investment committee, decided how much exposure we wanted to each important in sub industry. For instance, apparel retail, clearly a very important part of the retail sales component, which is $5 trillion a year. We decided we're going to have, let's say, eight or nine companies, the leading company, the leading brands from that sub sector versus, let's say, the home improvement sector. We only need Home Depot and Lowe's. There are a few others but we didn't feel compelled to take all of them because if you look at all of the most recognizable, the most relevant brands in that category, clearly Lowe's and Home Depot are the primary brands to focus on.

Are you equally weighted in all of those that you're in?

The 200 are equally weighted. This is not like a traditional market cap weighted index where as those companies get bigger and their price continues to go forward, you end up buying more and more of those. We wanted this to be equal weighted. Let's let Amazon be the same weight as Home Depot, be the same weight as O'Reilly Automotive when we start. Then all year, it's a bit of a horse race, let's let each brand compete in performance until the end of the year when we reconstitute.

This is an index of these consumer companies and you've identified the brands and you are satisfied and confident that stock performance is at least influenced by the fact that it is a consumer brand and that sector has performed very well in the past or outperformed the market in general in the past and the brand recognition. Coca-Cola and other brands that are well recognized, they're going to continue to do well in stock performance in both up and down markets and their relative performance should be fairly good.

Nobody knows the future. But if you are picking the leaders in important categories, when I say important, in my meetings, I remind everybody, "If your goal is to ..." Let's talk about large cap investing in general. Your goal through large cap investing is to have a bit of a proxy investment in the US economy. In order to A, track the economy and hopefully perhaps beat the S&P 500, which is the proxy, one, you need to understand what drives the economy and that's 70% of GDP comes from consumption. I can't tell you what's going to happen in any particular year, but I can say the most predictable thing is consumption. This is not a recent phenomenon.

Over the last 50 years, consumption, as a percentage of GDP, has been somewhere between 60% and 70%. Consumption has always been the most important driver of this economy. Therefore, the thought process is if consumption is what drives the economy then the best brands that consumers tend to focus on and use their products, those are the ones that will probably be pretty decent stocks. At the very least in down markets, they'll be defensive in some cases. Not all the time. In 2008, I think everything was sold indiscriminately.

Certainly, staples tend to do much better than discretionary stocks when the market and economy is difficult. You have consumer discretionary stocks that tend to do really well in raging economies and tend to lag a little bit in recessions but then you have staples that tend to be pretty defensive.

How often do you change your list of 200?

Only once a year. At Accuvest, we run a suite of investment products that are powered by this index. This index is the starting point for every other product that we have. Separately managed accounts, we recently launched an offshore mutual fund for our non US clients. We ultimately will have some co-mingled vehicle, whether it's an ETF or a mutual fund, who knows? The goal is to have a suite of products that allow people to access the consumption theme via a broad universe of the leading brands.

Eric, this is very interesting and as far as I know, unique strategy here. How does an investor or an advisor access this strategy? Do they come directly to you? Do you do separately managed accounts for these? Do you have an ETF for it? How do they access it?

There's a couple of ways right now. Number one, you can come to us through investment advisers. Generally, right now, RIAs that do separately managed accounts, we are available. You can also come to us on a direct basis. We're agnostic about how we reach the end user. Some people like to be direct, do it yourself investors, and some folks like to be advisor driven. We're agnostic to that and we're available through a separate account. Again, that separate account is a sub segment of the 200. Everything we do is powered by the 200 and those separately managed portfolios are what we call the best of the best internally. The 35 companies, 35 brands that we think are the most attractive based on three different factors: the best sustainable dividend yielders, who are what we call the best operating kings, and who has some strong price momentum. Those three factors combined make up the separately managed portfolio.

Let's go back to the strategy itself for just a minute here. This is a long only strategy, always fully invested, like ETFs are, correct?

Actually, we have two models. One is the fully invested long only strategy. It's called Core Alpha Brands. We also have a dynamic strategy. Because we have talked to lots of advisors who say, "I don't want to make market calls. I don't want to decide when to go to cash, if to go to cash. But I understand that sometimes the market does funny things and I want to make sure that I have a manager who has an opinion." The dynamic model allows us to go up to a maximum of 40% cash or bonds, the economy slows and recessions look more likely, that tends to be when major drawdowns happen so we wanted to have a model that allows us to get more conservative. We ask the advisor, if you would like to control the asset allocation, take the core equity strategy, which is long only. You know it's always going to be fully invested. If you want to turn over some of those allocation decisions over to the manager, then perhaps the dynamic model is for you that allows us to have a little more flexibility.

With tactical movement.


Tell us, what market conditions do you see would be most advantageous for this strategy? What market conditions would be least advantageous?

Again, if your goal is to track the economy, we know that consumption drives the economy. From a core allocation to equities, I think a strategy like this make sense all the time. When will it really shine? That would be in higher growth economies that tend to be associated with 3%, 4% GDP growth. When stocks are performing really well, you're going to get the leading brands and technology, but the discretionary stocks should do pretty well. I want folks to know that, from an asset allocation perspective, this strategy, you'll have about 40% exposure to the leading consumer discretionary brands. The consumer discretionary sector is going to be a heavy driver of this index and the products that are created based on that index. Consumer discretionary tends to do really well early to mid-cycle and then staples tend to do very well mid to late cycle.

What do you see as an unfavorable part of the cycle where the strategy would not do as well?

I had a great conversation with a big advisor here in Southern California. He said, "It makes complete sense. It's very logical." He's a little nervous about the economy, he's a little nervous about the markets. He said, "Would it be fair to say that if perhaps there's a 30% odds of recession, would I be nervous about this strategy because it touches the consumer and consumer drives this economy and maybe if we go into recession, perhaps that would struggle a little bit?" I said, "It's an absolutely fair question, but the research ..." Again, I don't know the future. But I can tell you from looking at the past, what tends to happen in big corrections or big recessionary down moves in the markets, discretionary tends to look very market-like, which is okay.

The market in 2008, the S&P struggled particularly in the fall of '08. Consumer discretionary stocks struggled as well. Not so ironically though, the more defensive sectors, telecom, healthcare, consumer staples tend to do pretty when the market is having a hard time. Money tends to flow to those stable, predictable earnings. Your exposure to some of those companies access a bit of a stabilizer when the other part of that index, consumer discretionary, might be struggling a little bit. Overall, if you look at a ten year look back that we created with our index partner, we capture a little over the market when the market's going up and we capture a little less than the market when the market's going down. That's really all you can ask of a strategy.

Can you give us an example here Eric, of one of the positions in your 200? Obviously, we're going to recognize the name. And why they're in there?

I think the biggest reason for this whole strategy is that, if you take one brand, you might not realize how many other sub brands that company owns. For instance, if there were a mass market product, an ETF or a mutual fund that allowed you to invest in the 200 companies, you would be getting access to much more than the 200 brands simply because each one of those, not everyone, but a lot of the brands own a number of very highly recognizable other brands. Those intangible assets are very, very valuable.

A few examples would be Microsoft. Everybody knows the name Microsoft but maybe a lot of people don't know Microsoft owns Xbox, they recently purchased LinkedIn. With your investment in Microsoft as a stock, you're getting access to an ownership in a lot of other really important brands. Disney is another example. Everybody knows Disney and the Disney theme parks, but they also own ESPN, a huge brand, they own Lucas Films, they own Marvel Entertainment. With that investment in these iconic brands, you're getting access to names that you didn't really know you could get access to. Johnson & Johnson is another one. They own brands like Motrin and Neutrogena, Band-Aid, Tylenol, Listerine. Most people don't realize that some of these household names are roll ups into other big companies that they could invest in.

That's a great point. I had not thought about that at all. Here's a question for you here, and it may not be all that easy. Right now, the United States is king of the hill. China is struggling and expected to have a very hard landing sometime fairly soon. Look at Japan, been struggling for 20 years, their economy and not just the stock market, but their economy. Europe we know is struggling. The banks are especially struggling in Italy and Spain and Portugal and elsewhere in Europe. Probably it's an advantage today to be focused only on the United States because our economy is the best performing in the world really. With oil and energy dropping in price, Brazil and Russia and Malaysia and other countries that when oil was rising in price were doing well.

What about the argument that small cap companies who are focused only on US consumption or on US market or really in a better position to outperform these large companies that are worldwide and they're going to struggle with the worldwide issues and economic problems?

I think that speaks to asset allocation. The goal is that you own both. I can tell you that the consumption driving the economy is not a US phenomenon. If you look across the world, consumers make up the largest portion of GDP for most major economies. Even China, estimates are something like 38% of their GDP comes from consumption. I watched the interview today on CNBC that had a guy from Alibaba talking about their business recently. He said the major driving theme that's driving China and Asia is consumption.

I read those same things very recently.

These economies are manufacturing based now switching to consumption based. If that's true, and we know that it is, then you want to have that exposure to those companies that are selling into all of those major economies. Because again, even if the whole world goes into a global recession, we still have to brush our teeth, we still have to drive to work, we still want to buy toilet paper, we still need household items, we still want to be on our cellphones. Knowing that you own those brands through the, I'll use the phrase, safety. You own the global consumption theme through the strong US brands across all those different sectors.

Very interesting. I appreciate that insight, which I really hadn't recognized before. Tell us, you've got a couple of decades of experience here Eric, and some very good companies. You did not start this strategy out of desperation. Why are you with this? Why is it important to you? Why are you doing this and not something else?

Again, we started off with saying, "Sometimes really new ideas start from frustration with existing options." I created this, I started this process because I was frustrated that most strategies, the facts are very clear, whether you got a Morningstar or wherever, the most active strategies fail to be the benchmark on a consistent basis. I struggle with that. I'm a highly competitive person, I'm a highly passionate person. I believe that if my goal was to create something in the large cap category, which is the bulk of somebody's portfolio so it's very important, the overall outcome that they have, I believe that I could create a better, more comprehensive investment index and hopefully products based on that index that allowed for better performance and also to be able to sleep at night. Not for the good times because we don't really worry about our portfolio too much when everything is working.

But we do spend a lot of time analyzing what we own and why we own it during difficult times. The goal was create an investment that was allocated towards large cap because it was very important and give yourself the best chance you could at beating the benchmark simply by looking different in the benchmark. I learned early in my career, if your goal is to be the benchmark, you have to, one, understand it, what drives it, what its weaknesses are and you have to look different in order to beat it. That's what I wanted to create here.

By simply doing a ton of research, I realized that if you just tilted your portfolio to the drivers of the economy, the best consumer brands, you probably give yourself a better chance at outperforming it. I wanted to wake up every morning with passion and conviction to go out and tell my story with advisors who have clients who are saving and investing for retirement, for different goals and to give them an option that had a portfolio of companies that they understood, admired and that they could feel good about in difficult times.

I can tell your passion, I can feel it as I look across the table here from you. I can't help but notice that you are the second portfolio manager we have talked to recently who brought up their mother. Ordinarily, portfolio managers are looking at numbers, they're writing white papers, they're not so humanized. What about this strategy do you see being able to apply to people that are important to you personally?

It's interesting you say that. I'm an only child so I'm always thinking about my mom. From an industry perspective, an old adage, know your client, I think is pretty important. If you look at the average age of the baby boomer and the average age of an advisor and the average age of their clients, they are a pretty influential group and they're about my mom's age, maybe a little bit younger. I think for us, collectively, it's really important as this group of people gets towards retirement and is in retirement, it's pretty important that we all get it right. When I created this index, I wanted to create a product that would perform but I also wanted to get it right for a group of investors.

We hope it works out well for you.

I appreciate that.

Tell us, why in your opinion would someone be foolish to not invest in or at least investigate this strategy?

We all live in the US, we all invest in stocks in some form or fashion and we all have this home bias of US companies. There's certainly evidence to support putting our money in high quality companies that we understand and holding them for the long term. To be honest with you, if your goal is to invest, I can't imagine why you wouldn't want to have an allocation to the best brands, whether it's through products that we have or through other investments that you make. I would just urge everybody to take a look at what you currently own and ask yourself a question of, do I know why I own it? Do I know what's in the investments that I have?

One of the major flaws I think of the mutual fund industry is you don't have great data, you don't have updated data. Our portfolios, there's 100% transparency, you know what you own, when you own it, why you own it. I think that's pretty important. I would just challenge everybody to expect more from your investments and ask more questions to your advisors. My goal has always been to just empower the investor to want to be more involved in the process because that makes a better investor.

Eric, for those who want to know more, give us contact information.

If you're interested in knowing more about the brands index or any of the funds that we use, you can always email or our phone number in Walnut Creek, which is a suburb of San Francisco, that's 925-930-2882.

How about the website address?

That's There's a tab across the top that says, Alpha Brands. You can click on that tab and get lots of great information and some of our fact sheets and investment cases.

Eric, final words for our listeners here.

One, I wanted to say thank you for letting me tell this story. For all the advisers that are listening out there, you now have one investment vehicle that gives you access to the leading brands across nine sectors. It's really easy to go out and get consumer discretionary and consumer staples investments, whether they'd be mutual funds or ETFs. I have not found a comprehensive way to get access to the consumer theme, the consumption theme via the nine sectors. That's why we had to create what we did.

Eric, thank you very much. We really appreciate you joining us here on StrategyCasters today.

Thanks, Charley. I appreciate it.

Again, StrategyCasters. We've been listening to Eric Clark, portfolio manager and a creator of the Alpha Brands Consumer Spending Index of Accuvest. This is Charley Wright wishing everyone an enjoyable week and productive investing.

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