A year on, fashion sees long runways for growth and sustainability

2024 saw non-traditional brands tapping Olympic energy, with luxury and cosmetics leveraging athletes to reshape brand storytelling and design. For the first time, sportswear staples like Nike and Adidas shared the spotlight with luxury conglomerate LVMH whose Berluti and Chaumet brands styled Team France for the opening ceremonies and crafted the prized Olympic medals. Beyond Olympic glory, LVMH is also making inroads into Formula One to expand its base of up-market consumers.

In addition to apparel, cosmetics and self-care products are also essential for personal branding, well-being and self-expression, making it a critical investment cluster for the strategy. As with sportswear, beauty brands are also breaking into new spaces and adorning new faces. Women’s sports surged to USD 1.3 billion in global revenues in 2024, and beauty labels like K18, Sephora, Fenty Beauty, and Glossier are partnering with top athletes including WNBA star, Sue Bird, gymnast Simone Biles and track and field champion Allyson Felix – blending athleticism, digital savvy and social influence to market products to new generations of fans and followers.

While in 2024 the USD 300 billion cosmetics market saw subdued demand, the dermatological segment thrived, driven by consumers seeking science-backed claims and proven outcomes. Results-driven trends are fueling R&D in clinically tested ingredients. For example, L’Oréal recently released a series of anti-pigment solutions under its La Roche-Posay line while Beiersdorf’s decades-long research on wrinkles culminated in the launch of a patented line of anti-aging products.

Injectable treatments are booming too, with neuromodulators and collagen biostimulators gaining traction across demographics. Similar growth flows can be found in premium fragrances, balms and serums as new crops of celebrities and influencers virtually verify their beautifying benefits. L’Occitane’s Sol de Janeiro creams saw a remarkable 200% increase in revenue, and celebrity-backed makeup brands like Selena Gomez’s Rare Beauty achieved USD 350 million in sales in 2023 alone.

While the macroeconomic picture remains somewhat blurred, the beauty industry offers clear opportunities for companies that leverage innovation, social media, and effective products to attract discerning consumers.

Sitting in the lap of luxury has been uncomfortable of late. Over the past 20 years, the personal luxury market has expanded to reach roughly EUR 375 billion in 2024, but geopolitical tensions and China’s macro-economic volatility have tempered sales. China’s crackdown on ostentatious spending, together with brand fatigue, price hikes, and minimal innovation are also to blame. Deflationary pressures and falling property prices are also dragging down perceived wealth and consumer confidence.

However, positive signals are emerging. Higher savings and less debt mean pent-up demand is building. Deposit growth surged 10.5% year-on-year in September and household debt has decreased. When the economy improves, those savings should support stronger future spending. While the timeline for recovery is uncertain, stronger demand-side measures and continued government support could gradually improve conditions, opening the door to a more sustained rebound in discretionary spending.

Since inception, the Fashion Engagement strategy was up 15.3%, compared to 28.8% for the MSCI ACWI². The strategy is purely focused on the fashion value chain and has not benefitted from the explosive growth of the AI boom. Underperformance has also been driven by outsized exposure to the Consumer Discretionary and Staples sectors, both of which have suffered this year from top-down, macroeconomic factors.

Though high-end luxury has remained strong, spending on more accessible luxury segments, which make up a large share of the strategy’s “Premiumization cluster,” have weakened. Similarly, sales and revenues from firms in activewear and mass-market cosmetics, which make up the “Casualization and Value” cluster, have also softened. Unsurprisingly, the “Automation and Digitalization” cluster, which consists primarily of software-based companies or inventory management system companies, stood out as the strongest performer, contributing 1.8% to relative performance, a 46% increase in absolute terms.

We expect a return to confidence in the coming year as top-down catalysts help to normalize consumer spending and lift demand in the US, EU and China. We are still somewhat cautious about the near-term outlook for the industry as a whole. However, as illustrated within the vignettes above, we see attractive stock-picking opportunities across the value chain stemming from well-managed companies with uniquely positioned brands and robust balance sheets.

Glitzy products and glamorous runways mask bigger problems backstage. The fashion engagement strategy takes a unique approach that combines rigorous investment and engagement due diligence behind the scenes to drive long-term industry sustainability and portfolio returns.

The first year has been spent meeting and building trust with investee companies, getting to know internal structures and designing tailored engagement plans that address their unique operational challenges. Fashion’s poor labor reputation prompted the team to concentrate engagement on worker rights and living wages. This year’s priority actions include:

• Creating robust policy-process frameworks that protect worker rights and wages

• Pushing for improved supply chain transparency and oversight

• Encouraging companies to act as responsible buyers

• Seeking buy-in and oversight from Boards and senior management
  

True to its innovative approach, the team has taken due diligence out of traditional conference rooms and onto the factory floor. This past summer, they visited the headquarters of several luxury holdings in France and Italy and probed the production facilities of subsidiaries and suppliers to eyewitness on-the-ground realities missing from glossy reports³.

This summer’s discovery by Italian officials of potentially illicit conduct by fashion suppliers, confirmed their conviction to focus initial engagement phases on social justice. Fashion supply chains are highly fragmented often with multiple layers of sub-contractors. Social audits are often weak which obscures compliance visibility and increases labor-related risks.

An important first step is helping companies create more rigorous human rights risk assessments. These can be used to evaluate and select responsible sourcing partners and trigger corrective action when red flags surface. Moreover, the team sees promising trends toward vertical integration – much like that of Gruppo Florence⁴ – which should boost governance and transparency, particularly in Europe.

Sustainability teams face internal challenges particularly with sourcing teams, whose low-cost focus can conflict with selecting compliant suppliers. Similar tensions arise with creative divisions, where aesthetics often trumps sustainability considerations. The Fashion Engagement team’s combined sustainability and investment expertise aims to help elevate issues so that Boards and senior management can weigh-in and counterbalance intra-unit competition.

There’s been a promising uptick in cross-company collaborations. Companies are conducting joint supplier audits and forming partnerships with groups like the Fair Labor Association and the Living Wage Coalition to improve ethical wages across the board.

The team is also stepping up its own collaborations with the Platform Living Wage Financials, an investor-led coalition that informs and enhances investor negotiations with fashion’s big brands. These will be essential for addressing new legislation, meeting transparency demands, and raising industry-wide sustainability standards.

The strategy’s unique “outside-in/inside-out” perspective as both investor and engagement intermediary is helping amplify progress within companies and across the fashion industry. Looking ahead, the team is keen to weave responsible sourcing, transparency, and fair wages into every stage of the supply chain to position the strategy’s holdings among the avant-garde for style and sustainability.