Seeking attractive moats outside the U.S.


Shep Perkins, CFA, Chief Investment Officer, Equities, presents research and insights from Putnam’s equity team on market trends and opportunities.

This month’s author: Vivek Gandhi, CFA, Portfolio Manager, Putnam International Equity Fund


When investing in any region or sector, a key attribute to consider is a company’s moat — the competitive advantage or “secret sauce” that can help the business outperform its peers. While disruptive technology is one form of moat, there are many others. For example, strong brands and intellectual properties may provide a potent competitive edge for businesses. And we’re currently finding many of them in Europe and Japan, where monetary policy remains accommodative and stocks are trading at a discount to their U.S. peers.

A strong brand: A potential inflation buffer

In the current environment of rising inflation, the strength of a company’s brand may be a notable advantage. For luxury goods and spirits in particular, consumers are not likely to switch away from a beloved brand. This may allow the businesses to raise prices to cover their increased costs with limited impact on volume growth.

The world’s biggest luxury brands are owned by European businesses, many of which are publicly traded. These companies have benefited from rising affluence globally, especially in China. Chinese consumers are now the largest group of customers, by nationality, for all the major luxury brands. U.S. and western European demand has also been growing fast, along with the number of consumers in these markets. A significant wealth effect has been created from rising property values and equity markets. At the same time, as the pandemic halted travel and leisure activities, affluent consumers, most of whom maintained their income levels, spent more on luxury goods.

In the current environment of rising inflation, the strength of a company’s brand may be a notable advantage.

Among luxury goods groups, LVMH is the largest and most powerful, known for brands like Louis Vuitton, Christian Dior, Dom Pérignon, and Tiffany. LVMH is also the largest company overall in Europe, with a market capitalization of $415 billion (Source: Bloomberg Finance L.P., as of 2/1/22). Other European groups with profitable luxury brands include Hermès, Richemont Group, which owns Cartier, and Kering, which owns Gucci. Their classic brands have immense desirability, which has historically enabled these companies to generate superior returns and growth over long periods.

The benefit of a strong brand is also evident in Europe’s premium spirits industry. U.K.-based Diageo, for example, owns leading brands such as Johnnie Walker, Tanqueray, Ketel One, Casamigos, and Guinness. Diageo is more than four times the size of any U.S.-based player in the spirits industry, with a portfolio of over 200 brands and presence in over 180 countries. Diageo’s popularity is also growing rapidly in many emerging markets. And we expect even faster post-pandemic growth as increasingly affluent consumers trade up to more premium brands.

The music industry moat: Intellectual property

Valuable and irreplaceable intellectual property also brings a competitive advantage. In the music industry, for example, the dominant companies own rights to the work of many great artists, past and present. From an investing standpoint here as well, we find non-U.S. markets offer great potential opportunities.

Universal Music Group (UMG), recently spun out of French media conglomerate Vivendi, is the largest music company in the world with a market share of over 30%. The second-largest is Sony Music, part of Sony Group in Japan, with a market share of over 20% (Source: Music and Copyright). UMG has rights to four of the top five artists on Spotify in 2021. This includes Olivia Rodrigo, who had the top song — streamed over 1.1 billion times on Spotify — in 2021 (Source: Spotify).

Many industry experts believe the number of streaming subscribers will more than double by 2030.

Streaming: A better business model

The quality of the music industry business model has significantly improved because of streaming. Consider other media content models, such as TV and film, where content is often consumed only once. With music streaming, content is consumed over and over, which repeatedly monetizes it.

Based on 2020 data from UMG, close to 50% of its revenues came from “catalog,” which UMG defines as music over three years old. The costs to produce this music were incurred years, sometimes decades, ago. As music streaming platforms provide access to all this new and old music, owners of the content — music companies like UMG and Sony — reap the benefits.

A long runway for future growth potential

We have a bullish outlook for the music industry, which suffered a 15-year decline in revenues after a peak in 1999. The decline was caused by a collapse in physical music sales along with a rise in piracy. Music revenues troughed in 2014 and have begun to grow, driven primarily by music streaming.

There are approximately 524 million streaming subscribers globally, according to MIDiA Research as of 6/30/21. According to 2020 data from UMG, the U.S. and Nordic markets are relatively mature, with close to 40% penetration. Streaming penetration in other developed markets is 24%. In China, it is approximately 5%, and it’s even lower in other emerging markets. Increasing penetration from this low base represents a long runway of future growth potential for music companies. Even in developed markets, growth potential is attractive because emerging younger generations are likely to consume music exclusively through streaming platforms. Many industry experts believe the number of streaming subscribers will more than double by 2030 (Source: Putnam Research).

The music industry is in the very early stages of developing new ways to monetize its content.

Emerging opportunities beyond music

The music industry is in the very early stages of developing new ways to monetize its content. This includes social media, fitness, physical and mental health, gaming, NFTs, and the “metaverse.” UMG has recently signed deals with Facebook, Snapchat, and TikTok in social media. While the concept of the metaverse and other new technologies may seem like the distant future, consider the fact that Lil Nas X’s recent concert on Roblox attracted 33 million viewers. Abba, following the release of its first new album in 40 years in 2021, is embarking on a live tour that uses avatars of the quartet singing to a live audience in the stadium. Ticket availability is already very limited and priced between $60 and $400 per ticket.

Many investors recognize technological innovation as a competitive moat, and we agree. However, intellectual property and brands also create very powerful moats, in our view. And we believe they are often more durable than technological innovations, due to their lower disruption risk. Non-U.S. markets may provide the potential to capitalize on these moats by investing in global leaders like LVMH, Diageo, Universal Music, and Sony.


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The views and opinions expressed are those of the author, are subject to change with market conditions, and are not meant as investment advice.

Putnam International Equity Fund holdings as of 12/31/21: LVMH (2.25%); Diageo (2.88%); Universal Music Group (1.75%); Sony Group (3.24%). Hermès, Richemont Group, and Kering were not held.

Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund's other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.