The MSCI World equities index was up 0.5% May (in GBP). While muted on the surface, this masks a wide dispersion and high concentration of performance within the index. Excluding the contribution of 10 mega caps (Alphabet, Amazon, Apple, ASML, Broadcom, Meta, Microsoft, Nvidia, Tesla, TSMC) MSCI world would have posted a 1.63% decline. Communication services and IT jointly contributed 2.45%. This polarisation in performance reflects on one hand a spike in Tech, driven by excitement about the possibilities offered by wider adoption of AI, and on the other hand a gradual reassessment of the economic trends in the US and China. Macroeconomic and survey data clouds the picture. Inflation remains sticky in the US and UK, while gradually cooling off in Europe. Manufacturing surveys are weak, consumer confidence is low, yet the employment market is showing no sign of easing in most developed economies, adding to the pressure on central banks to continue hiking. The effects of moderating raw materials prices, resilience in services and strong consumer capital positions will gradually fade through 2023, while tighter credit conditions may begin to translate into weaker jobs data finally setting the stage for a Fed pause.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy underperformed its global benchmark in May, driven by Consumer Discretionary, Healthcare and Financials holdings reversing some of the year to date outperformance. On a stock level, the top three absolute contributors to Fund performance in May were Exact Sciences, Icon and Guardant health. The primary detractors were Ulta Beauty, Tandem Diabetes and Axonics.
Looking at the Longevity & Social Change performance by theme, Later Living delivered the most resilient performance. On a company level, UnitedHealth Group, part of the Health Insurance subtheme, was the top performer while Service Corp, part of the Funeral Services theme, was the main laggard. Service Corp delivered an in line Q1 report but the stock derated on the back of concerns over slowing pre-need sales, though these were largely attributed to bad weather in the West. The company expects to recover a large portion of this in the coming months.
In Education & Wellbeing, Screening was the top performing subtheme, led by Exact Sciences, which posted a strong Q1 update with a beat and raise driven by continuing momentum in Cologuard. Similarly, Guardant Health, reported stronger Q1 revenues and increased FY guidance and provided additional reassuring trial data. The weakest performer in the space was Ulta Beauty. The company delivered an in line set of results and maintained FY EPS guidance on the back of solid revenue momentum but downgraded margin guidance by 20bps noting a higher incidence of store theft – a trend also highlighted by several other consumer stocks including Home Depot and Walmart. The stock now offers very attractive value and we added to our position. May also saw a big derating of Fitness names, prompted by a profit warning from Footlocker, which highlighted slowing US consumer trends and higher discounting. We believe a number of drivers behind Footlocker’s warning were company specific. Reassuringly, Lululemon, recently reported a stellar set of Q1 results, reaffirming our view that companies with strong pricing power and a growth path can continue to deliver higher earnings.
In Longevity Consumer the Companionship theme was the most resilient, underpinned by a solid full year report from Pets At Home, while the rest of the sub-themes had a tougher month. In Financial planning a strong full year report by ICP was more than offset by weakness elsewhere. Julius Baer, widely expected to benefit from the CS turmoil, provided a mixed trading update, with slightly weaker than expected flows prompting a sharp derating. We were encouraged by growth in relationship managers and look for sequential improvement in flows in the coming months.
Healthcare performance suffered from a pullback in Medical Devices, especially among the SMID-cap holdings we are invested. Tandem Diabetes and Axonics both experienced drawdowns despite resilient end markets. Tandem was additionally penalised due to fears from the entry of new competition which had long been contemplated and captured within company guidance. Horizon Therapeutics also detracted from performance following a surprise FTC review of its buyout by Amgen. Lastly, ConvaTec underperformed in May, however a recent meeting with management reaffirmed our belief in top-line acceleration and margin expansion in the medium-term.
Outlook
With the arrival of summer, signs of new stress in the US consumer has added to earlier troubles in the Banking sector, the ongoing challenges of persistent inflation, tight labour markets and higher costs of financing. Despite this backdrop, reporting season was largely positive, with many companies in our portfolio meeting and exceeding expectations. We remain confident in our resilient and defensive portfolio positioning and believe the outlook for the Longevity & Social Change universe remains secure. 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 shifts in demography.
