The MSCI World equities index was down 2.5% in October (in GBP) with broad weakness across regions and sectors. Utilities was the only sector to record a gain, while Information Technology saw the narrowest decline. Consumer Discretionary, Industrials and Healthcare saw the sharpest corrections. Notably, the US Healthcare sector is on track for its worst relative performance year since 1999. Elsewhere, the geopolitical situation deteriorated as an unprecedented assault on Israel by Hamas prompted swift retaliatory action. Yields remained steady but elevated, USD strength and broad outperformance by large caps and low beta stocks, signals investors remain risk averse. Market reactions to Q3 reporting season have been jittery, leaving little room for disappointment. Twelve-month forward earnings expectations remain near all-time highs with consumer sentiment cooling, industrial activity slowing and financial conditions tight. In this complex environment, we believe investors may continue to pivot to a more defensive stance and see the Longevity Portfolio as well positioned to weather this uncertainty.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy underperformed its global benchmark in October, with Healthcare, Financials and Staples underperformance more than offsetting a strong relative month for our Consumer Discretionary holdings. The Fund’s zero allocation to the IT sector also detracted from performance. On a stock level, the top three absolute contributors to Fund performance in October were Adtalem, Humana and United Health. The primary detractors were Transmedics, Align and Pets At Home.
Looking at the Longevity & Social Change performance by theme, Later Living was the strongest contributor for the second month in a row, once again driven by Health Insurance. United Health reported a Q3 beat and raise with commentary on FY24 outlook and current medical cost trends reassuring investors. Humana and CVS reported Q3 in October though reactions were more muted. We see the Health Insurance sector as relatively insulated from the ongoing GLP-1 and macro concerns and it remains one of our key overweight positions. The Funeral Services subtheme remained the main detractor in October, but reversed sharply at the beginning of November as SCI delivered a solid Q3 with a strong profitability trend and better than feared FY24 guidance.
Education and Wellbeing delivered only a small negative contribution to performance with the Education Subtheme was the top individual contributor to performance. On a stock level Adtalem was the strongest performer. The company reported better than expected Q3 earnings with improving enrolments and profitability and upgraded the full year outlook. The stock’s valuation remains compelling, and we expect secular drivers including a growing shortage of nurses, physicians and vets to remain a durable tailwind. Aesthetics and Vision subtheme was the main detractor, driven by a derating in Align which missed Q3 expectations and provided a cautious Q4 guide on the back of a pullback in Invisalign adult demand.
In Healthcare all subthemes finished the month in the negative territory, with Medical Devices once again the weakest spot. The main detractors in Healthcare were Transmedics and AstraZeneca. Eli Lilly, part of the Pharmacy sub-theme, was the top performer as GLP-1 enthusiasm continued unabated.
In Longevity consumer Financial Planning was the main detractor from performance, driven by a derating in St James’s Place and Carlyle. The former pre-announced Q3 flow and AUM data, which showed slowing trends, and, more significantly, introduced further changes to the fee structure. This will have a material impact on cash earnings from 2025 and carries an implementation cost. While clearly a negative in the near term, we believe this simplifies the business model as well as client experience and should result in a more competitive business proposition in the long run. Travel & Leisure was the other area of weakness. Brunswick sold off on the back of several sector peers noting ongoing sales weakness. The results reported by the company itself, however, showed a high degree of earnings resilience with the company clearly outperforming the industry on the back of a favourable product mix, disciplined inventory management and market share gains. The shares remain attractively valued and price in an overly conservative earnings scenario, which we believe is unlikely to materialise. Pets At Home continued to derate, with no news on the CMA review and despite mostly positive readthrough from Q3 Staples reporting, which indicated the growth in Petcare categories remains resilient.
Outlook
Conditions into the year-end remain uncertain and attention is gradually shifting to the outlook for 2024, which most corporates are not ready to provide much comfort on. A cooling consumer, prolonged monetary policy drag, higher oil prices and renewed geopolitical stress, adds to concerns. On the positive side, employment remains strong and inventory restocking is yet to materialise, which could provide a short-term boost to manufacturing. Against this mixed backdrop, 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 with have such exposure and can deliver sustainable returns over the long term.
