Key Points

• The Marlborough Global SmallCap strategy focuses on companies that are niche leaders within their industry with the potential to deliver unrecognised growth.

• Niche leader: Brunello Cucinelli, is a niche leader producing high-quality Italian handmade cashmere garments.

• Global expansion: A growing global branded store presence in the key major cities around the world, supported via vibrant online sales.

• New products: Timeless designs with new ranges launched seasonally, and new verticals in homewares to leverage the brand.

• Investment capital: Significant investment in human capital and boutique expansion.

• Strong ESG: Social philosophy ingrained in the culture of the company.

• Great management: A long successful history with Brunello still leading the charge since founding the company in 1978.

In the vast and often volatile world of global small-cap investing, identifying companies that can outperform the market is a challenging yet rewarding endeavour. Our Global SmallCap strategy stands out for its disciplined and research-driven approach to identifying niche leaders - companies that dominate specific, often overlooked market segments.

We are talking about hidden gems that get overlooked because of their size, ‘youth’ or just because bigger peers dominate the mindset of institutional sell-side analysts. In the case of Brunello Cucinelli, a niche leader we review below, sell-side analysts who have discovered Hermes, LVMH and Kering for example, may have overlooked the potential in this small compelling fashion house. We think that looking forward, the market is still to recognise the growth potential of Brunello Cucinelli.

A clear vision and strong ESG

Brunello Cucinelli is an Italian luxury fashion brand renowned for its sophisticated cashmere apparel and timeless elegance. Founded in 1978 for the lira equivalent of US$550 by its namesake, the brand has carved a unique niche within the global luxury market by blending local artisanal craftsmanship, understated design, and a deeply humanistic company philosophy.

Headquartered in the medieval village of Solomeo, Italy, the brand exemplifies “humanistic capitalism,” where profit is harmonised with ethics, beauty, and community well-being. Having grown up in a rural farm in Castel Rigone, Cucinelli’s family lived by the wheat they farmed for their landlord. Sometimes the harvest was poor, and it was a fallow year. Others, it was good. Either way, according to Cucinelli, “We gave the first bale of wheat to the community, at the behest of my grandfather. That’s when I first learned the great theme in life: the balance between profit and giving back.” Philosophy and giving back is fundamental to how the Cucinelli family runs the business.

Smaller niche leaders are often underestimated in the early years of their development as larger brands dominate their markets. This offers an element of shade for such companies as they steadily but surely establish a competitive advantage in their industry, making them less susceptible to the whims of broader market trends. In the case of Brunello Cucinelli, being a niche challenger in the fashion industry has allowed them time to develop their own unique voice and vision.

There is very little real luxury left. While most brands like Prada and Gucci have been broadened through conglomerates reaching lower budget customers, only a few like Brunello Cucinelli and Hermes have scaled globally whilst remaining focused on being true luxury. It is becoming harder and harder for the rich to stand out with truly exceptional items.

A niche leader with brand strength

Cucinelli’s competitive advantage lies in its commitment to quality, heritage, and subtle luxury, all inspired by Cucinelli’s philosophy of beauty and what comes from the earth. Unlike mainstream fashion houses that chase trends, Cucinelli appeals to a refined clientele who value longevity, comfort and discretion in their wardrobe. Its pieces are crafted with meticulous attention to detail, primarily using fine Italian cashmere and natural fibres. This commitment to outstanding craftsmanship ensures exclusivity and product authenticity, reinforcing its premium pricing strategy.

The brand’s strong culture is central to its success. Brunello Cucinelli himself has cultivated a corporate environment grounded in dignity, respect, and purpose. Employees are treated as “collaborators,” receiving above-average wages, working in aesthetically beautiful spaces, and benefiting from a strong work-life balance. This emphasis on human value and community translates in the quality of the product and the authenticity of the brand experience. It could also benefit them in future changes in globalisation and trade tariffs relative to the other global luxury players.

Furthermore, Cucinelli’s devotion to preserving Italian heritage through the restoration of Solomeo, and their support of arts and culture adds intangible value to the brand. Customers resonate with Marlborough Global SmallCap this narrative of beauty, integrity, and sustainability - making them not just buyers, but brand advocates reinforcing their competitive advantage.

Our investment process aims to exploit the inefficiencies within the asset class by investing in quality companies with unrecognised growth potential at attractive valuations. The funds team of experienced portfolio managers and analysts meticulously sift through a vast array of data, financial statements, and industry reports to identify hidden gems. One of the key criteria for identifying niche leaders is market leadership. We look for companies that have a dominant market share in their specific segment, often backed by a strong brand, proprietary technology, or a unique business model. Bruno Cucinelli has carved a unique approach within the global luxury market through artisanal craftsmanship, with understated design and a deeply humanistic company philosophy.

Financial health and investment capital

Another critical factor is the company’s financial health. Our team conducts thorough bottom-up financial analysis to ensure that the companies they invest in have solid balance sheets, sustainable ESG credentials, and a track record of prudent financial management. This focus on financial stability is crucial, especially in the small-cap space, where companies can be more vulnerable to economic downturns.

Brunello Cucinelli is financially strong, with a cash generative business, high levels of asset and land banking in their unique business model, a growing gross margin of around 45%, and a balance sheet that can easily support their emerging branded distribution base with new branded retail outlets in the heartland cities of their high-net worth global clientele.

Innovation, new products and global expansion

Innovation is often a cornerstone for niche leaders, and in some way is a competitive advantage as smaller operators can often change direction nimbly, compared to larger peers. Brunello Cucinelli’s business has been able to innovatively pivot on its advantage in luxury wool for adults, sourced and produced locally, for European and global clients. Having added homewares and children’s wear to their existing adult ranges, they have created two additional adjacent verticals that can leverage the brand and operational excellence of the business. Brunello Cucinelli has also established a European and select global branded store network that has been steadily growing over the past decade, now numbering some 125 stores in most major cities of the world, with a 10-year compound growth rate of over 7%, steadily building with their client base. Given the quality of the brand and momentum of the business, we think there is significant unrecognised growth potential for investors as the company grows and expands.

Great management: People matter to value creation, especially in niche markets

We place a strong emphasis on management quality. We believe that the success of a small-cap company is closely tied to the vision and capabilities of its leadership. We look for management teams with a proven track record of executing their business strategies and a clear vision for the future. Brunello Cucinelli and his family are intimately connected to their business, entirely aligned and are a part of the experience of the brand, very much in the same vein as Ralph Lauren. Having ‘skin in the game’ like Ralph Lauren and the Arnault family at LVMH is incredibly important to alignment with shareholders and generating true return on investment. By focusing on niche leaders, the Global SmallCap strategy aims to deliver consistent returns while minimising risk. This approach not only aligns with our investment philosophy but also resonates with investors who are looking for a well-diversified portfolio of small-cap companies. As the global economy continues to evolve, the ability to identify and invest in these niche leaders will be crucial for achieving long-term success in the small-cap space.

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The views expressed are those of the fund manager and are intended for professional investors only. They are based on information available at the time of writing and may be subject to change.

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For professional clients only. The value of equities (shares in companies) may fall as well as rise. As a result, investors can lose some or all of their investment. Investment in smaller companies can involve greater risk than is generally associated with investment in larger, more established companies.

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.