We refreshed our Industrial Concentration framework in our June 2021 Thematic report. At the time our US inflation leading indicators were rising sharply while growth leading indicators were at very high levels. The read-across to markets was to retain equity exposure, but tilt towards quality.
Investing in concentrated industries offers 1) protection in an inflationary environment (more pricing power to protect profit margins) and 2) exposure to “quality” factors (concentrated industries can act more rationally, allowing for better return on equity).
Our screen of companies has performed very well since our June 2021 refresh, initially lagging the market but offering critical protection through today’s bear market.
Tobacco, packaged foods & meats and defense companies were over-represented in our screen.
A key insight from our testing is that rebalancing across industrially-concentrated companies adds value vs a simple buy and hold. Industrially-concentrated companies and industries can often become very expensive and experience savage drawdowns.
We view investing in concentrated industries as offering a favorable mix of pricing power and quality that should serve investors well over the next decade, as the macro and policy environment shifts away from globalization and towards fiscal and monetary policy co-ordination.
As Homer Simpson said: “Here’s to alcohol: the cause of, and solution to, all of life’s problems.”
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