December 19, 2019 in Articles & Newsletters | by Chris Pate

THIRD QUARTER 2019

True North Financial Advisors Third Quarter Newsletter

Ribbon-cutting for Louis Vuitton's Texas workshop, October 2019In this day and age, the world does not lack for sensational headlines. Even in The Wall Street Journal or Financial Times, headlines in 2019 read like something out of the National Enquirer. Stories of salaciousness, intrigue and flat-out zaniness are a daily occurrence. Interesting recent examples include the WeWork IPO-to-near- bankruptcy-in-two-months saga, the Boeing 737 Max grounding, the PG&E power struggles in California, and the Credit Suisse spying drama. Even with competition such as this, one particular story jumped out recently. What is the connection between President Donald Trump, the French fashion house of Louis Vuitton, and unincorporated Johnson County, Texas? Hint: look at the picture.

That a storied brand like Louis Vuitton would select a 200-acre patch of ranch land outside Fort Worth upon which to build its latest manufacturing facility (referred to internally and in the press as its “workshop”) seems far-fetched. That President Trump ended up in the middle of the ribbon-cutting event, commanding most of the attention, actually brings the story back to reality. Such is the time in which we are living.

Luis Vuitton store in Honolulu, Hawaii, 2016

A wholly-owned subsidiary of LVMH, Louis Vuitton is the best-known brand within a luxury powerhouse that owns household liquor names like Hennessey, Krug and Moet, fashion brands such as Dior, Fendi and Loro Piana, and other retailers like Hublot, Tag Heuer, and Sephora. Most people in the market for a Louis Vuitton purse – generally starting around $1,200 and rising significantly from there – do not realize that the brand has been manufacturing products in the United States for over 30 years. Roughly half of all Vuitton handbags sold in the United States are made in one of two California workshops. So while most non-LVMH luxury brands (Hermes and Chanel for example) continue to tout the Italian or French origin of their bags, LVMH has always been a progressive advocate for moving its manufacturing closer to the customer. Louis Vuitton CEO Michael Burke, when asked whether the brand would be devalued by having factories in places like the outskirts of Fort Worth, responded, “For every one person who complains, there are 99 in favor. You listen to the 99 percent.” He added, “It’s about creating jobs. There is a commonality of interests that is absolutely in keeping with what our overriding social duties are.” When asked about his choice of footwear at the ribbon-cutting, Burke proudly noted that his boots were bespoke and had been made for him several years ago in El Paso.

Luis Vuitton streetwear at Milan Fashion WeekLouis Vuitton’s factory will eventually employ 1,000 Texans. More high-profile corporate relocations (with their white collar jobs) have generated the headlines recently, but this particular expansion tells the story better than most. Two effects covered in prior quarterly letters have combined to generate a powerful magnetic pull of jobs toward the South Central United States generally, and to the Dallas-Fort Worth area specifically: the insourcing/expansion of manufacturing due to low energy/power costs (Q4 2012 letter) and the emerging dominance of Dallas-Fort Worth International Airport as a global business hub (Q4 2016 letter). LVMH touted both as reasons for this particular project. Combined with competitive labor costs, there is no notable disadvantage for companies when considering a move to the middle of the country. While the new facility is officially referred to as an expansion and not a move, nobody will be surprised if LVMH continues to build out the Texas presence over the next few years while shuttering jobs and/or entire workshops in California.

2018 U.S. Average Electricity retail Prices Chart

Electricity considerations alone can justify manufacturing shifts from high-cost regions to low-cost regions. In today’s globally competitive environment this concept is applicable to both intercountry movement and interstate movement within the United States. In the United States, power prices in coastal states like California, Massachusetts, and New York are roughly double those in lower cost states like Texas. Even in a Louis Vuitton factory, the constant automation of tasks previously done by hand means that power is becoming a more important component of overall manufacturing costs. Aside from costs, power grid reliability is surprisingly a topic of consideration as well. California’s power crisis involving PG&E lays out a dire picture of what can happen when challenging physical terrain, ever-expanding electricity needs, conflicting political and societal interests, and a complete lack of competent leadership come together. Rolling blackouts are not supposed to be a regular occurrence in 2020 anywhere in the developed world, much less in our most populous state, but companies in many parts of California are currently dealing with the impacts.

“Made in USA” textile labelAmong the reasons for their Texas workshop decision, LMVH executives also listed the benefits of Fort Worth’s central location within the United States, as well as the fact that there are multiple daily nonstop flights from DFW Airport to Paris. While access to seaports has been economically advantageous to major cities around the globe for thousands of years, the Dallas/Fort Worth region has used its flat and open geography to expand cheaply and efficiently in a way that other landlocked cities cannot. With a globally competitive airport in the very center of the region, companies in the area know that their executives and employees can be anywhere in the United States within about 3 hours, and can reach most major global cities with a single flight. Add the sheer luck of Texas’ central location in North America coupled with a multi-decade American migration toward the South, and one begins to wonder why every company is not following LVMH to relocate.

DFW International Airport

What does this mean for True North, our clients, and how we invest our capital? The dynamics causing states like Texas to prosper economically are no secret to the investing world. It does not take many meetings with sophisticated family offices or institutional investors based in other parts of the world (London, Hong Kong, Zurich, etc.) for them to start talking about their real estate holdings in Dallas or Austin. This is both a compliment and a cautionary sign. Macro tailwinds can turn a good investment into a great one, but price remains the most important component of any asset purchase, and good deals are increasingly difficult to find. This is especially true in the real estate asset class, where the Dallas market is approaching tier 1 cities such as Los Angeles and New York in both pricing and desirability to global investors. As with other asset classes, the most interesting real estate deals we have invested in over the past few years have been smaller-sized investments sourced creatively by our network of relationships. From a 25-acre former industrial storage facility just across the Margaret Hunt Hill Bridge from downtown Dallas (now multi-family development), to last-mile distribution facilities that are increasingly demanded by companies delivering products to consumers, to office and retail assets too small for institutional investors to deal with, attractive deals have been sourced but more work and more creativity is necessary in 2019 compared with what the market looked like five or seven years ago.

Ten candidates debated in Atlanta Nov. 20, 2019.

This theme – gems being few and far between – has been true across both the public and private investments landscape of late, but a recent increase in public market volatility over the past quarter might portend a new dynamic emerging. While the S&P 500 is still having a nice year on the surface, a wide chasm exists between the winners and the losers within the index. Late in a bull cycle it is typical for volatility to increase as the effects of an exuberant environment begin to show cracks. Nowhere is this more evident than in the late-stage venture capital asset class, where recent IPO’s such as Uber, Lyft, and Slack have suffered large losses post- issuance, and other recent high flyers such as WeWork have failed to IPO at all. The two- way nature of the market since July actually is a healthy sign that investors are recognizing risk in some previously-overbought asset classes and rewarding value again in others. Volatility can be unnerving in the present, but with the benefit of hindsight it always produces opportunity. With a polarizing election coming up in 2020, investors should be strapped in and ready for more.

About The Author

Chris Pate is Managing Director of the Fort Worth office and joins True North as a result of the Western partnership that became effective January 1, 2019. His duties include managing the firm’s Fort Worth presence and sourcing/evaluating investment opportunities for clients of the firm.

Chris previously spent eight years managing the investment activities for Western. His responsibilities included oversight of both public markets and private investments within Western’s investment advisory operations, including equities, fixed income, alternatives, and hard assets.

Before joining Western, Chris spent 11 years at Q Investments, a $2.5 billion (as of 2011) Fort Worth multi-strategy hedge fund founded in 1994. He graduated Cum Laude from Texas Wesleyan University in May 2000 with a Bachelor of Business Administration in Finance and Economics.

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