The MSCI World equities index was down 1% in August (in GBP) as most regions and sectors finished in the red. Utilities, Materials and Financials were the weakest performing sectors with only Energy and Healthcare recording gains. Consumer Discretionary came under pressure on the back of mixed sector reporting, concerns around the resumption of US student loans repayments as well as the sluggish pace of recovery in China. Strong consumer capital positions are gradually fading whereas credit demand and delinquencies are picking up. Similarly, while overall unemployment remains low, jobs market data is becoming more mixed with higher participation levels, slower wage growth and downward revisions to prior months non-farm payroll data signalling the economy may finally be cooling.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy performed broadly in line with its global benchmark in August, despite continued outperformance of the IT and Energy sectors to which the Fund has no exposure. This was supported by our overweight in Healthcare and strong relative performance of Financials and Staples holdings. On a stock level, the top three absolute contributors to Fund performance in August were Horizon Therapeutics, UBS and Convatec. The primary detractors were Transmedics, Exact Sciences and Tandem Diabetes.
Looking at the Longevity & Social Change performance by theme, Healthcare was the strongest contributor, driven by Pharmacy and Drug Development & Manufacturing. On a company level, Horizon Therapeutics and Eli Lilly, were top performers while Transmedics and Tandem Diabetes were the main detractors. Transmedics traded off on the back of concerns that its entry into the organ logistics segment may dilute returns but our analysis indicates this strategy should prove earnings accretive as the business scales up – we added on weakness. Tandem Diabetes, along with a number of diabetes exposed device companies, derated on concerns that wider the adoption of GLP-1 weight loss drugs will impact the utilization of advanced diabetes technologies like Continuous Glucose Monitors and insulin pumps. Type-2 diabetes is a progressive disease and we expect the majority of patients on insulin pumps today are unlikely to come off of them given their disease has progressed to a point where they require daily insulin shots for the remainder of their life. As such we believe the impact of GLP-1 drugs on device names is overstated.
Later Living was the second most resilient theme in August with a positive performance delivered by Care Services (HCA Healthcare) and Home-health & Nursing (Amedisys). Health Insurance was the main detractor with a resilient performance by Humana more than offset by weakness in CVS Health and UnitedHealth. The sell off in CVS was prompted by the unbundling of the Blue Shield of California PBM contract in favour of a new arrangement with multiple providers aiming to save on costs. CVS management has indicated the contribution of this contract is immaterial to its longer-term outlook and we believe Blue Shield’s shift is unlikely to be replicated by other health plans.
Travel & Leisure was the most resilient subtheme in Longevity consumer reflecting a continued re-rating in Booking after a strong set of Q2 results. In Companionship, following a reassuring set of results, we increased our position in Pets at Home as we expect the Pet industry to remain an area of resilience within the UK consumer space. Financial Planning performance was highly dispersed. UBS was the strongest performer and finished August on a strong note. Q2 results assured investors that the CS integration is progressing according to plan, capital position remains solid and CS asset outflows are moderating. Carlyle group was the weakest performer as it lagged after Q2 results which beat expectations but underwhelmed on outlook. We see Carlyle as a deep value name in the alternatives space and believe that once Private Equity market fundamentals improve it should re-rate.
In Education and Wellbeing both Hygiene & Personal Care and Education delivered positive returns. Unicharm was the largest contributor to performance, supported by a solid set of Q2 results, which showed the company is able to navigate volatility in input costs and changing product mix trends. Strategic Education and Adtalem, both part of the Education theme, also contributed positively. In Fitness & Nutrition, Lululemon stood out as an exception to the rule in the apparel/retail space, reporting a stellar set of Q2 results which once again highlighted superior execution and a sizeable runway for growth outside America.
Outlook
A recession remains a real possibility, despite the widespread assumption of a soft landing. We continue to maintain a more defensive portfolio orientation given the ongoing weakness in the lower-income US consumer, the uncertainty surrounding China’s recovery, and the divergent performance of European economies. In this uncertain backdrop, we remain focused on the reality that populations around the world are aging. This creates significant opportunities for companies that provide products and services that meet the changing consumption patterns driven by demographic shifts. Our longevity strategy is focused on identifying high-quality businesses with such exposure, which we believe will deliver sustainable returns over the long term.
