The MSCI World equities index was flat in July (in GBP) as weakness in Information Technology and Communication Services was offset by strength in Financials, Industrials and Healthcare. The month saw a rotation into the small and midcap space at the cost of large caps, reflecting attractive relative valuations, expectations that the Fed is nearing a new rate cutting cycle, and the anticipation of a Republican sweep in the US elections. This SMID rally partially reversed in early August with the sentiment shifting to a risk off stance. Weak manufacturing ISM and US payroll data published in early August fuelled concerns that the Fed is behind the curve, and that the US economy is slowing. We continue to see a soft-landing scenario as the most probable for the time being. Corporate balance sheets are solid, parts of the consumer remain resilient, and the weakness in employment data is not broad based. There is some lingering uncertainty in the months to come, perpetuated by a fragile geopolitical landscape and bifurcating consumer, which we continue to monitor closely. 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 outperformed its global benchmark in July, with half of the outperformance attributable to a solid month for our portfolio holdings, while the rest was due to our zero allocation to the Information Technology sector. The rotation into midcaps presented a positive tailwind to our performance. On a stock level, the top three absolute contributors to Fund performance in July were Carlyle, Service Corp and Hologic. The primary detractors were Booking, Merck and Transmedics.
Longevity Consumer was the main contributor to performance, driven by the Financial Planning subtheme, where Carlyle and Amundi saw a strong rerating. Amundi reported a reassuring Q2 with solid flow momentum and cost control, resulting in modest earnings upgrades but most of the performance reflected a reversal of the derating in the prior month, which happened on the back of the French political turmoil. Carlyle’s rerating was likely driven by the reassuring commentary from its private markets peers and a supportive valuation. Booking, part of the Travel and Leisure subtheme, pulled back on concerns around slower consumer leisure spend. The company reported its Q2 results in early August and, while performance was solid, the company’s conservative outlook for the rest of the year and commentary on the narrowing booking window disappointed the market. We continue to like Booking’s agile and capital light business model and the cash buyback potential.
Education & Wellbeing saw broad based strength led by the Screening subtheme. Hologic reported a strong Q3 with its shares sustaining positive momentum despite some temporary headwinds seen in the Skeletal business. We used the opportunity to lock in some profits. Exact Sciences rerated after recent weakness. This was followed by a strong Q2 print which will contribute to our August performance. Fitness & Nutrition continued to see headwinds among the apparel names, but this was more than offset by the positive performance for Kerry Group, which reported a reassuring Q2, with positive volume growth and margin expansion in Taste and Nutrition driving an earnings upgrade. The company also indicated it plans to continue to buy back shares.
Later Living positive performance was led by Funeral Services, with other subthemes also gaining. Service Corp rerated strongly, and we opportunistically trimmed our position to lock in some profits. The company has now reported Q2 results, which were mixed, with weakness in Funeral margin and a decline in Pre-need production. United Health and CVS drove gains in the Health Insurance subtheme.
Healthcare contributed positively as strength in Drug Development & Manufacturing more than offset weakness in Medical Devices and Pharmacy subthemes. We tactically increased our positions in GSK and Merck & Co, which traded down on weakness in vaccines despite broadly positive Q2 reports. In
Medical Devices we locked in some profits in Transmedics and Procept Biorobotics, both of which have reported stellar Q2 reports.
Outlook
As we look ahead to the rest of 2024, 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.
