Janus Henderson: Fast Casual and Artisanal Alpha
The restaurant business has historically been divided into two categories – quick-service, eg, McDonald’s, Taco Bell, Dunkin’ Donuts and full-service eg Applebee’s, Chili’s, Cheesecake Factory, etc.
It is hard to beat McDonald’s on price or convenience. But many new entrants to quick-service have won by offering better-quality food for slightly more money. Five Guys, Shake Shack, and The Habit all sell burgers and fries, but are not like McDonald’s. These and other chains including Panera and Chipotle pioneered 'Fast Casual', now the fastest-growing restaurant segment.
The key feature of Fast Casual is offering a familiar, but improved product to justify its higher price tag. Otherwise you might as well go eat a Big Mac. Similarly, 'Fast Casual Alpha' seeks to deliver an index-like product that modestly outperforms the benchmark with low tracking error. The active manager tweaks the recipe in individually small ways to squeeze out alpha while remaining index-based. Investors are happy to pay a bit more in fees if a fund actually provides tastier returns.
Meanwhile, full-service restaurants are broadly struggling – particularly mid-range chains like Applebee’s, Chili’s etc, which have had flat to down sales despite benign economic conditions. Notably, lunchtime restaurant traffic has fallen to a four-decade low (Source: NPD Group Inc, figures for 2016). The middle tier is squeezed as it typically offers up mediocre food but at a higher price point than Fast Casual options. The sole bright spot has been strong growth in fine dining – the bifurcated economy is certainly widening this divergence. High end diners want an amazing, artisanal experience that they cannot possibly replicate at home.
For alternative managers, the challenge and opportunity is to deliver differentiated alpha that cannot be replicated via exchange traded funds (ETFs) or mutual funds. Repeatable returns, low beta and correlations to other asset classes, and high Sharpe ratios can justify fees if the strategies are meaningfully different. These are potentially not suitable as everyday meals, but might be considered as modest additions to a broadly diversified portfolio.
'Artisanal Alpha' is about delivering a non-index-like product that is unique and uncorrelated. Like the restaurant world, the future of active management involves either competing against passive indexers, or being very different from everyone else. These are both hard to do successfully, but it would seem that staying in the middle is the worst of both worlds for restaurants and asset managers.