The MSCI World equities index was up 5% in February (in GBP) with broad based strength led by cyclicals), while more defensive sectors such as Staples and Healthcare lagged. Nvidia’s record results refuelled AI optimism and the equities rally was sustained despite Central Banks reiterating their stance of being in no rush to cut rates as inflation remains above target levels both in the US and Europe. With earnings season largely behind us, it is difficult to make a uniform assessment of corporate outlooks as consumer demand remains bifurcated. Services sector, which has been an engine of growth in 2023 is normalising at a high level, while demand for goods is more idiosyncratic with ongoing sluggishness in rate sensitive sectors contrasting with resilience in beauty, eyewear and an uptick in the luxury space.
Corporates provided cautiously optimistic outlooks for the year ahead, but many guided for growth to be second half weighted. In this complex environment, 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 delivered a positive return but underperformed its global benchmark in February. The main reason for divergence stems from our overweight allocation to Healthcare and its relative underperformance. On a stock level, the top three absolute contributors to Fund performance in February were Icon, Carlyle and Strategic Education. The primary detractors were Reckitt Benckiser, Medicover and Conmed.
Healthcare was the main contributor to performance with strong gains in the Drug Development & Manufacturing and Pharmacy subthemes. On a stock level, Icon and Eli Lilly drove the largest contribution to return while Conmed was the main detractor. Icon reported a solid Q4, which highlighted a strong setup for 2024 with solid book to bill, cash flow generation, positive margin momentum and strong activity among the Pharma customers. Conmed underperformance reflects ongoing market concerns over competitive dynamics for its AirSeal franchise.
Longevity Consumer saw strong gains in Financial Planning and Travel & Leisure subthemes which more than offset slight weakness in Life & Non-Life Insurance and Companionship. Carlyle was the main contributor to performance, supported by a reassuring Q4 update and a planned change to the compensation structure which will rebalance a higher share of the steady Fee Related Earnings streams to shareholders. An expanded share buyback plan was also taken positively. Brunswick shares gained despite a Q4 miss and a lower than expected guide for FY24, reflecting relief that the bottom of the earnings cycle is near as well as an acknowledgement that the company fared better than peers through the destocking period. Legal and General was the main detractor from performance as the market continues to struggle with IFRS 17 related earnings noise. We expect the company to report strong underlying trends in the PRT market when it publishes results in March, highlighting that underlying cash generation is not affected by accounting changes.
Education & Wellbeing performance was bifurcated with Aesthetics & Vision and Education posting solid gains, while Screening and Hygiene & Personal Care lagged. On a stock level Strategic Education and Ulta Beauty were the strongest performers while Reckitt Benckiser was the main detractor. The company’s disappointing Q4 results raised questions over the near-term growth trajectory. We expect some of the headwinds to abate through 2024 and see significant value in the shares at current levels. In Later Living a solid month for Funeral Services was more than offset by underperformance in the Health Insurance subtheme. Medicover was the main detractor from performance, despite delivering a beat on earnings. We remain supportive of the company’s strategy and believe the market is underestimating its India market presence where it now operates over 5,500 beds [versus Fortis Healthcare (4,300 operational beds) and Apollo Hospitals (~10,000 operational beds)] and future profit contribution.
Outlook
As we look ahead to 2024, we remain focused on the reality that populations around the world are ageing and the social implications around this demographic transformation continues to create significant opportunities for companies that provide products and services that 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.
