Performance Update Q1 2017 – Fashion and Finance: The Four Seasons

i-Cthru’s consolidated time-weighted return over Q1 2017 is USD 9.83%; EUR 8.55%. This result is unleveraged, net of all trading costs, fees, dividend tax withholding for non-US clients and cost of protection of individual portfolio holdings.

In regards to our investment horizon, three months are not significant and to say something interesting about such a short period of time usually ends up repeating the main newspaper events, which are thought to have had an impact on the stock markets. Even in its simplest form, I know because I used to write them for Vontobel Asset Management U.S.A., it would take days to produce and I thought they were not very informative for clients. It is not surprising that more and more quarterly comments by asset managers are being created by software built by Narrative Sciences, a company that transforms data into narratives without human interference. It might well be for the better.

The piece you are reading is still spelled out on an “old fashioned” Macbook keyboard but who will notice the difference in the future, really? So instead of writing of fairly valued markets, continued but shaken optimism about reduced taxes for U.S. companies, continued earnings growth, Brexit, China and the weather on “Pourquoi Pas Island” in Antarctica, I can write about something completely different to show you I am not a Robot.

Let’s talk about the four seasons and fashion and its relationship to finance. You see Wall Street has four quarters and the Fashion Industry has four seasons per year. Wall Street and the Fashion Industry are continuously under pressure to produce new lines and new products to keep their clientele interested and revenues growing. Fashion has its colors, models and hemlines to work with. Wall Street has its ingenuity to mix the bad with the good and dress up the same in colorful new names, (quant) models and headlines.

Fashion’s new thing is “occasion wear” and a new “pale” color for this spring. Wall street has its new ETFs, Smart-Betas and factor investing that performed well over the last months to entice you to buy. We want them, this is just who we are and it is hard to resist the new and successful, especially when our friends are bragging about them.

However, industries tend to have the same utility over time, fashion is clothing and finance is investing and it is refreshing to think that the basics have not changed for the longest time. Very much like our need for sunlight, oxygen and water; they have staying power.

Which brings me to shoes. Adidas Stan Smith’s tennis shoes are a good example of fashion’s long-term view by dressing the old (vintage) up as the new with the same basic tennis shoe. Adidas has its origins in the 1936 Olympic games where two brothers, Adi and Rudolf, were sponsoring Jesse Owens, an American track athlete who won four medals. The initial success of the two brothers was abruptly interrupted by a steamy love affair between Rudolf and Adi’s wife. The brothers split up as business partners and as a consequence two companies were born. Rudolf started Puma, now a 5 billion euro leisurewear company and Adi built Adidas, now a 37 billion euro leisurewear company. In 1971 Adidas launched a tennis shoe from an existing 1965 model and renamed it Stan Smith after the successful American tennis player, who endorsed the shoe under a royalty contract. The Stan Smith shoe became a huge success. By 1988, 22 million pairs of Adidas Stan Smith had been sold and by 1994, the sales had increased to 24 million pairs; the shoe had become a must-have fashion statement.

In 2011, despite its enormous success, Adidas decided to stop marketing the Stan Smith shoe partly because it was sold through many discount retail outlets. Adidas planned a new release with an upmarket target audience in mind. In 2013 they had Gisele Bündchen pose naked, except for a pair of white socks and Stan Smiths in the fashion magazine Vogue Paris. In 2014, a sneaky year later, Adidas re-launched the Stan Smith in up-market retail stores. By 2016 it is estimated to have sold 15-20 million pairs at much higher prices. Amazing given the fact that the Stan Smith shoe was designed in the 60’s, Stan Smith himself retired in 1985 and you and I probably have one or two pairs in our closets anno 2017.

You see company equity shares are much like tennis shoes. Behind most ETFs, Smart Beta and Factor Investment products are “straightforward” equity shares of companies. Wall Street can create derivatives, ETFs, Smart Betas and dress them up in different names, re-launch them at opportune times but they are essentially the same and the underlying basic value stands the test of time of many three-months cycles.

Instead of buying a pair of Stan Smiths in 2000, I should have bought many equity shares of Adidas AG, which would have given me a return of 1144% and still be very fashionable if I bought a pair today.

At i-Cthru we are confident we can always find companies that fit our investment strategy for the long run. We stick to the basics and don’t have to change our tennis shoes every three months. We keep running smartly on the same basics.