The MSCI World Index was down 5.5% in December (in GBP) reversing some of the gains seen in the prior two months and taking year to date performance to -8.4%. December saw a tightening in financial conditions, with further rate hikes announced by a number of developed market central banks which came despite moderating inflation prints. Headline US CPI inflation slowed to 0.1% m-o-m in November (+7.1% y-o-y), as commodity price pressures and global supply chain bottlenecks continued to ease. However, the labour market remains tight, with historically low unemployment in both US and Europe and the December FOMC meeting signalled continued tightening in the new year with a similar rhetoric emerging from the ECB.
Looking into 2023, improvements in supply chains may provide support to corporate earnings in the near term, while China reopening should gather momentum once the current wave of Covid infections subside. Nevertheless, the possibility of central bank overtightening, geopolitical uncertainty and eroding savings still present risks to growth with many market observers predicting the US will slip into a recession during 2H 2023. Notwithstanding this backdrop, we remain optimistic that the Longevity Consumer is well positioned to demonstrate relative resilience in this uncertain time, underpinned by stronger savings balances among the longevity population and relatively inelastic demand for healthcare in particular.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy outperformed the MSCI World index during December (-1.4% in GBP), helped by the performance of its Healthcare, Consumer Discretionary and Financial holdings. The top three absolute contributors to Fund performance in December were Horizon Therapeutics, Pets at Home and Haleon. The primary detractors were Guardant Health, Lululemon and Adtalem.
The Healthcare sector was the second best performer in the MSCI index in December and our high allocation to the sector with a solid month across the fund’s Healthcare holdings boosted overall performance. Our Financials holdings also outperformed in December, continuing the re-rating seen in the prior month, particularly among the interest rate sensitive names such as UBS, Julius Baer and Nordnet. The strongest performer was Prudential which is one of the key beneficiaries of a reopening in China. Consumer Discretionary holdings delivered another strong month with relative outperformance driven by Pets at Home, Ulta Beauty and Nike. We expect quality consumer brands to remain resilient in the near future, supported by leaner inventory levels, easing supply chain headwinds, innovation and ongoing reopening in China. Lastly, our Consumer Staples holdings outperformed the benchmark in December helped by the performance of Haleon, which re-rated after a favourable US court ruling in relation to Zantac MDL litigation.
2022 Performance – Outperforming MSCI World, MSCI Growth and MSCI SRI
2022 has been a challenging year for performance but by focusing on high quality growth stocks and maintaining a broadly diversified portfolio across sectors and holdings, the Fund outperformed the MSCI Growth Index by 14.2% (-7.2% vs -21.4% in GBP), the MSCI SRI Index by 5.9% (-7.2% vs 13.1% in GBP) as well as its reference benchmark by 1.3% (MSCI World -8.4% in GBP). This outperformance materialised despite the Fund excluding Energy and Commodities from its investable universe – partly on ESG consideration grounds and partly due to a lack of a clear link to the Longevity theme. In 2022, the Energy sector outperformed materially, delivering a 55% return hindering the relative performance of the Fund by 2.1%.
While the pandemic has weighed heavily on many businesses over the past few years, the outlook for the Longevity and 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. However, a diversified approach to portfolio construction is also required in a stagflationary environment. Business models will be stressed, brand strength challenged, the innovation capabilities and relevance of companies’ offerings will be tested. With the cost of capital climbing and real incomes shrinking due to inflation 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.