The MSCI World equities index rose 1% in March (in GBP) with European benchmarks giving up some outperformance seen earlier in the year, while US resilience was driven by the Tech sector. On the macroeconomic front, CPI indices remain stubborn with stickiness in core inflation in Europe and the US. Central banks meanwhile signalled determination to continue the pace of monetary tightening. Financials dominated news flow following the failure of Silicon Valley Bank in the US and the Swiss government assisted takeover of Credit Suisse by UBS, leading to a sharp selloff in financial stocks including banks, brokers and insurers. While the response from regulators seems to have stabilised the financial system for now, concerns have shifted to the medium-term implications of a possible credit crunch resulting from increased regulatory oversight. Commercial Real Estate exposures of banks and insurers also continue to draw scrutiny. While we believe a repeat of a GFC scenario is remote, recessionary risks have undeniably gone up.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy declined 1.4% in March (in GBP), underperforming its global benchmark primarily due to a strong rally in Information Technology and Communication Services stocks (e.g. Microsoft, NVIDIA, Meta, Apple). The Fund has zero exposure to these sectors given the limited connection between the growth drivers of these companies and the longevity industry. Our Healthcare, Financials and Consumer Discretionary holdings, which generated positive alpha in the two prior months retreated, more than offsetting the strength in our Staples holdings. On a stock level, the top three absolute contributors to Fund performance in March were Lululemon, Cooper and Tandem Diabetes. The primary detractors were Amedisys, Brunswick and Intermediate Capital Group.
Looking at the Longevity & Social Change performance by theme, Education and Wellbeing was the top performer with strength across Fitness & Nutrition, Hygiene & Personal Care and Aesthetics & Vision subthemes. Positive performance was driven by Lululemon and Basic Fit both of whom reported positive fiscal updates. Lululemon reported a strong final FY23 quarter with a revenue driven earnings beat, moderating inventories and a strong outlook for the next fiscal year.
Longevity Consumer was the main laggard, held back by Financial Planning and Life Insurance. The Financials sector was the weakest performer in MSCI in March as troubles in the US regional banking sector and at Credit Suisse drove outflows from the space. We reduced our position in UBS following its takeover of Credit Suisse. While the acquisition terms appear favourable for UBS shareholders, our decision reflects upcoming execution risks and a temporary suspension of the share buyback, which was a key tenet of our positive thesis. The strongest performers in Financials was Julius Baer which is likely to be one of the main beneficiaries from consolidation in the wealth management space. ICG reversed strong gains from the prior two months, but we see it as relatively sheltered from the financial market turmoil with potential to benefit from tightening credit conditions in the medium term. Pets at Home also reversed its strong February gains however our recent meeting with management reaffirmed our positive stance on the pet companion industry.
The Healthcare theme performed broadly in line with the MSCI benchmark in March (+1% in GBP). However, our SMID-cap holdings endured a bumpy ride despite no discernible newsflow, with notable drawdowns (-10% to -25%) in Amedysis, Axonics, Guardant Health and Medicover. In Later-Living, we expect the Health Insurers to see some relief following CMS announcements at the end of March which should be seen as favourable by the market.
Outlook
As we move through 2023, troubles in the Banking sector add to the ongoing challenges of persistent inflation, tight labour markets and higher costs of financing. Despite this, we believe the outlook for the Longevity & Social Change universe remains robust. Across the globe, populations continue to age, and this creates opportunities for companies that provide products and services which cater to changing consumption patterns driven by shifts in demography. With the cost of capital climbing and inflation still running high we believe companies with strong management and a track record of execution should prove to be good long-term investments. We remain focused on identifying high quality companies with proven operating models and strong innovation characteristics that have exposure to the durable and resilient growth offered by the Longevity and Social Change theme.
