There is a portfolio construction technique known as a “barbell strategy” which bond traders often use. It involves focusing the portfolio on only very short maturity bonds and very long maturity bonds in order to take advantage of mispricing. So as opposed to putting all of your portfolio in a 10-year bond, you might put 50 per cent in a 20-year bond and 50 per cent in a 3-month bond. The 3-month section gives flexibility, as it will behave like cash – which gives the opportunity to take more risk with the other 50 per cent. Ideally, you end up with a portfolio that performs better than just holding a 10-year bond.
There seem to be similar trends going on in everyday life at the moment too – albeit with quality rather than maturity. By this I mean that people seem to be flocking towards a combination of basic and luxury goods, rather than focusing on the middle ground.
The first example is of supermarkets in the UK, a topic which continues to spark discussion in the media. The giants of old – the “big four” of Tesco, Morrisons, Sainsbury’s and Asda – all had a business model based on carving up the middle ground. Historically, I suspect, the appearance of competition on price was more important than actually undercutting rivals across the board – what Asda may have lost on baked beans versus Tesco, it made up for on spaghetti hoops.
Now however, both supply and demand have changed. Aldi and Lidl have been in the UK for more than two decades, over which period they have given consumers meaningful, long-term exposure to low prices. People have started to realise that the difference between the prices of the traditional supermarkets and the new discounters is an indicator of how much profit Tesco et al have been making – without necessarily providing better service or choice. Now, after 20 years, the demand profile has switched, to the barbell mentioned above. So alongside the lower end, the top end is doing well, with Waitrose growing its market share too – the three combined have taken around 4 per cent of market share from the big four over the past three years. This may sound meaningless, but in reality is worth around £5bn of business. Additionally, although the data is less available, it would seem that local delicatessens/butchers/grocers etc are also benefitting. If you are efficient in buying your basics, then you can spend a little bit more on the special treats.
The same thing is happening in non-supermarket retail. Direct sales information and comparisons are more difficult to come by, but just looking at the clothing sector gives some idea of the change. The recent rise of both the internet retailer (Asos, Boohoo.com) and the continued success of the discount provider (Primark, H&M, TK Maxx) has provoked difficult times for middle-ground clothing lines (Marks & Spencer, River Island). However, the higher-end clothing brands (Boss, Barbour) have continued to flourish – in fact some of them have even managed to introduce slightly less expensive lines of clothing, while maintaining their exclusivity, in order to attract the buyer toward them. Again, lower everyday costs leaves more around for a splurge when appropriate.
Somewhat more tangential, but still noticeable to my mind has been the increase in quality at dining establishments. Head to most pubs or bars at the moment, and there are almost guaranteed to be a wide selection of “craft” ciders, or new and locally brewed spirits while the choice of beer on draught is much wider, and changes more often than previously too. The array of drinks on offer seems to have become conspicuously more exclusive in recent years – with price increases to match. Similarly, the food on offer has been subject to an upgrade - burgers, hot dogs, fish and chips are all still on the menu, but now prepared as if for display in an episode of Masterchef, rather than a quick bite to eat on a Saturday afternoon. What has changed on the menu is the adjective count – dishes are now almost always individual, inspirational, organic, hand-picked and home-made.
