The MSCI World equities index was up 3% in March (in GBP) led by Energy, Materials and Utilities and broad performance across major regions. March reporting by a number of consumer discretionary names introduced some doubt about the resilience of the US consumer confirming our earlier assessment that demand is likely to remain bifurcated. Growth in sectors which proved most resilient so far, such as beauty, seems to be waning. Still, employment data remains stronger than expected with inflation readings surprising on the upside in recent months, all of which points to a greater likelihood of “higher for longer” rates cycle. 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 marginally underperformed its global benchmark in March. Strong stock selection in Healthcare and Financials as well as our zero allocation to Information Technology were the main contributors to performance. This was offset by underperformance in our Consumer Discretionary and Staples holdings. On a stock level, the top three absolute contributors to Fund performance in March were Convatec, Exact Sciences and Tandem Diabetes. The primary detractors were Basic Fit, Reckitt Benckiser and lululemon.
Healthcare was again the main contributor to performance with strong gains in Medical Devices and Pharmacy subthemes. On a stock level, Convatec, Tandem Diabetes and AstraZeneca drove the largest contribution to return while Transmedics was the main detractor. Convatec’s FY23 results beat expectations on top and bottom line with continued improvement in FCF performance. The company boosted top line guidance, backed by improving product pipeline and indicated cash generation will remain solid. Transmedics gave up some of the prior months’ gains and we took the opportunity to increase our allocation as we see the long term growth story intact, backed by expanded logistics offering which is delivering ahead of expectations and helping improve efficiency and penetration. The shares posted a solid recovery in April so far.
Longevity Consumer saw strong performance led by Financial Planning and Travel & Leisure, while Companionship lagged. On a stock level Brunswick, part of the Travel & Leisure subtheme, and Allianz, part of Life & Non-life Insurance subtheme, were the main contributors to performance. Although Allianz’s Q4 23 results in February initially underwhelmed on outlook and share buyback, shares recovered in March leading gains in the broader Insurance sector. Pets at Home, part of the Companionship subtheme, was the main detractor from performance as CMA reported it will launch a formal Vet Market investigation. We held follow up discussions with the company and industry experts and remain reassured that Pet’s business model, which houses its vet business in JVs and mostly under a group brand umbrella, is likely to mean it will be minimally affected by potential action from the regulator.
Education & Wellbeing was the weakest subtheme with solid trends in Screening and Aesthetics & Vision, while Fitness & Nutrition and Hygiene & Personal Care lagged. On a stock level Basic Fit and lululemon were the main detractors from performance. Basic Fit delivered a solid Q4 report but new club expansion guidance disappointed the market. Our follow-up meetings with the company and analysis confirmed that cash generation should remain a priority for what remains an attractively valued growth stock. Lululemon reported another strong quarter, but decelerating trends in the US and cautious near term guidance prompted a derating in the richly valued share. We still view lululemon as a well-run business, with a strong innovation track record and attractive expansion potential in China, which should support ongoing share gains in the fitness space. Exact Sciences, part of the Screening subtheme, was the main contributor to performance in March. The company reported positive data on CRC study results which showed promising performance of its next generation Cologuard-Plus test.
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.
