The MSCI World equities index was down 0.9% in September (in GBP) with Developed markets and rate sensitive sectors leading the declines as long-term yields widened to a level not seen since 2007. IT, Real Estate, and Consumer Discretionary were the weakest performing sectors while Energy, Financials and Health Care gained. The higher for longer narrative re-emerged as oil prices climbed to the highest level so far this year and US GDP and labour market statistics continued to point to a resilient US economy. While a US government shutdown was avoided, concerns remain over a possible policy mistake and the impact from a resumption of US student loans repayments. The US consumer is showing signs of cooling as solid cash positions are gradually fading whereas credit demand and delinquencies are picking up.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy performed broadly in line with its global benchmark in September, helped by its zero allocation to the IT sector and a strong relative performance of its Staples holdings. On a stock level, the top three absolute contributors to Fund performance in September were Humana, GSK and United Health. The primary detractors were Exact Sciences, Cooper and Service Corp.
Looking at the Longevity & Social Change performance by theme, Later Living was the strongest contributor, driven by Health Insurance and Home Health & Nursing. Humana reiterated its EPS targets ahead of a broker conference and data from CMS pointed to slightly better than expected growth in MA plan enrolment than previously anticipated. Service Corp shares derated on no specific newsflow, likely reflecting concerns over the pace of pre-need sales at the time when the US consumer is likely to be selective with spending allocation.
Healthcare performance was polarised with a strong gain in Pharmacy subtheme more than offset by weakness in Medical Devices. In Pharmacy, GSK was the strongest contributor to performance supported by positive initial launch trends for its RSV vaccine Arexvy. Medical Devices saw broad-based weakness among the higher growth names such Tandem Diabetes, Transmedics and Conmed with derating likely driven by widening yields.
In Longevity consumer Travel and Leisure was once again the area of strength with both Brunswick and Booking contributing positively. Brunswick hosted an analyst day where long term targets were pushed out, reflecting near term discretionary consumer challenges and industry overstocking. The shares held up, however, reflecting the company’s strong product positioning and already discounted valuation. Companionship was the main detractor from performance as Pets at Home sold off on the back of news that the UK CMA is reviewing the UK vet sector. We believe that Pets at Home, which operates its Vets business in a JV structure and under a common brand umbrella is likely to be relatively shielded from any regulatory fallout, though we acknowledge that the perceived overhang is likely to weigh on valuation for a period of time. Our Financial Planning holdings saw an average derating of 2% in September, slightly above the market, and therefore not out of line with what one would expect for this group given its beta and leverage to market performance.
Education and Wellbeing was the biggest detractor from performance in September. Exact Sciences, part of the Screening subtheme, and Cooper, part of the Aesthetics & Vision subtheme, were the main laggards. Haleon and Reckitt Benckiser, both part of the Hygiene & Personal Care subtheme were the main positive contributors. Education names Adtalem and Strategic Education both delivered positive performance too. In Fitness & Nutrition, lululemon delivered a strong quarter, further supported by a reassuring Q1 report from Nike at the end of the month, which indicated industry inventories are now at healthier levels.
Outlook
While the forecasts for the timing of the US recession continue to be pushed out, conditions into the year end remain uncertain. Consumer resilience, prolonged monetary policy drag, higher oil prices and delayed but not fully averted US government shutdown all pose concerns. On the positive side, employment remains strong and there are continued signs of normalising inventories, 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 which continues to create significant opportunities for companies that provide products and services that meet the changing consumption patterns driven by demographic shifts. Our longevity strategy is focused on identifying high-quality businesses with have such exposure and can deliver sustainable returns over the long term.
