The millennial generation, with less money at their disposal than earlier generations and spending habits that have baffled retailers and marketers alike, has been a bit of an enigma for investors, unless that investor’s name is Bill Smead. While other investors may finally be looking to see the value of their portfolios expand as the now single largest living generation in America enters its prime spending years, Smead has already been profiting off millennial spending habits for years, according to Barron’s.
Making Money off Millennials
His Smead Value fund, which boasts a four-star rating from Morningstar, has outperformed the S&P 500 index and its peers in the large-blend category in six of the last eight years as well as year to date (YTD). Over the past five years the fund, which follows a fairly simple strategy, has returned an annual average of 15.7%.
While Smead focuses on companies with strong financial positions, are shareholder friendly, and perform well throughout the business cycle, his number one criteria is that the company satisfies an essential need. Considering that millennials are more burdened with student debt than earlier generations and have had less promising employment prospects upon graduating, focusing on essential needs is the most millennial-centered strategy around. (To read more, see: Millennials: They’re Doing Worse Than Boomers Did.)
Smead Value Fund’s Exposure
According to Smead, the number one economic need over the next 10 years, as millennials enter the 35 – 44 age bracket, will be for single-family homes. His fund’s largest holding is home builder NVR Inc. (NVR), which has no debt and earned positive free cash flow (FCF) all the way through the financial crisis and recession that followed.
Despite millennials being more ‘connected’ than earlier generations, Smead’s fund, aside from eBay Inc. (EBAY) and PayPal Inc. (PYPL) being two of the top 10 holdings, has little exposure to technology. Considering the S&P 500’s current exposure to tech companies is at similar highs compared to just before the dotcom bust, Smead is keeping a prudent distance from the technology sector.
The fund is also not very exposed to healthcare, although its second largest holding is Amgen. The drug company has exhibited strong growth and offers medication that works extremely well in lowering cholesterol levels when used with a statin. While expensive, the drug, called Repatha, will become more popular with that other big aging generation—the baby boomers. (For more, see: Why Millennials May Not Be Able to Retire.)
With American Express (AXP), Bank of America (BAC) and JP Morgan Chase (JPM) among the top 10 holdings, the fund has significant exposure to the financial sector. Around 40% of the more affluent millennials say that American Express is their primary credit card. (To read more, see: Millennials: Finances, Investing, & Retirement.)
As bigger banks have an advantage in being able to spread the cost of technology improvements over larger customer bases, holding shares of Bank of America and JP Morgan Chase allows Smead’s fund to benefit from the fact that millennials are more technologically savvy than earlier generations and do most of their banking online. At least that’s what Smead is banking on.