The MSCI World equities index was down 1% in December (in GBP), reversing some of the gains seen in November as the market reacted to the Fed’s December meeting and to the possible policy shifts post the US election. Information Technology, Consumer Discretionary, and Communication Services were the only sectors to deliver a positive performance. Energy, Materials and Real Estate were the weakest sectors. The Fed reduced its benchmark interest rate by 25bps, in line with market expectations, but signalled a more cautious approach to future rate cuts in 2025 and revised its inflation outlook upward. This sent jitters through equity markets as well as Treasuries as yields rose. Our expectation for a resilient path for the US economy remains unchanged, but we are mindful of the relatively rich equity valuations currently and the uncertainty which comes with a Republican sweep, including the potential for a trade war, higher inflation and increased geopolitical tensions. We believe the Longevity portfolio offers a balanced defensive stance and remains well placed to benefit from long-term demographic trends.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy underperformed its global benchmark in December, with most of the underperformance attributable to our overweight allocation to Healthcare and zero allocation to Information Technology. On a stock level, the top three absolute positive contributors to Fund performance in December were Lululemon, Ulta Beauty and Medicover. The primary detractors were Transmedics, Brunswick and Service Corp International.
Education and Wellbeing was the strongest contributor to performance led by Fitness & Wellbeing and the Aesthetics & Vision subthemes. Lululemon reported stronger than expected Q3 results, with stable trends in the US and continued strength in International reassuring investors that the growth algorithm is intact. Ulta Beauty also gained on the back of its Q3 report with growth and margins both posting a positive surprise. The company recently announced CEO succession plans and provided a positive update on holiday trading. While it is too early to say whether stronger trading results reflect an improving competitive environment it is nevertheless reassuring and should stabilise valuation levels following a turbulent 2024. The weakest performers were Exact Sciences, Cooper, and Hologic. Cooper reported a Q4 EPS beat but a slight miss on revenues and FY25 top line growth guidance drove a derating in the shares. We believe Q4 and November deceleration seen by the company was likely temporary and expect Cooper to return to share gains in contact lenses going forward.
Longevity Consumer was held back by weakness in Brunswick and Booking, both part of the Travel & Leisure subtheme. While retail momentum and dealer sentiment improved post the election, a delayed rate cutting cycle is seen as a negative for Brunswick, as persistent high rates are likely to weigh on affordability of the boating products. We view weakness in Booking shares as a temporary reversal. The company presented at an investor conference in London and laid out several cost rationalisation initiatives. We expect travel and leisure to remain one of the most resilient consumer categories the coming year. In Financial Planning, Carlyle and Ameriprise were the main detractors from performance, while Amundi made a positive contribution. Life & Non-Life Insurance subtheme made a positive contribution with Legal & General the main driver of this. The company held a deep dive on its Institutional Retirement business and signalled a potential for higher capital returns, which was welcomed by the market.
Healthcare was the main detractor from fund performance in December driven primarily by a sell-off in our Medical Devices holdings. Transmedics hosted its first capital markets day, showcasing the innovation pipeline and aiming to alleviate investor concerns over competing technologies, but a cut to FY24 guidance on recent transplant volume weakness and the planned CFO transition weighted on the shares. The other detractors included Procept Biorobotics, Conmed and Convatec, while Icon Plc was the main positive contributor.
Outlook
As we look ahead into 2025, we remain focused on the reality that populations around the world are ageing. The social implications around this demographic transformation continue to create significant opportunities for companies that provide products and services which meet the changing consumption patterns driven by this phenomenon. Our Longevity and Social Change strategy is focused on identifying high-quality businesses which have such exposure and can deliver sustainable returns over the long term.
