PERFORMANCE COMMENT
LO Funds–Swiss Small & Mid Caps’ institutional share class ended December with a return of -0.78%, which represents a slight outperformance of 6 bps relative to its benchmark, the SPI Extra TR. For 2024 as a whole, the Fund’s institutional share class returned +5.81%, representing an outperformance of 198 bps. As a reminder, the Fund reports performance net of withholding tax on dividends vs. gross of withholding tax for the benchmark (35% withholding tax).
Our overweights in Temenos and Galderma, as well as not owning Barry Callebaut, were the top contributors to performance in December. The overweight in Sunrise Communications, as well as not owning Avolta and Flughafen Zurich, detracted from it. In the SPI Extra, Consumer Discretionary, Real Estate and Financials were the only sectors to end December up on the month, while Communication Services and Health Care fared worst.
MARKET REVIEW
The Swiss market, as measured by the Swiss Performance Index (SPI), lost 1.28% in December. This compares with a 2.61% loss for the MSCI World Index (NDDUWI). The Swiss small & mid cap index (SPIEX) lost 0.83% by comparison.
For the full year 2024, the Swiss Performance Index gained 6.18%, the Swiss Performance Extra Index +3.83%, the MSCI Europe Index +5.75%, the MSCI USA Index +24.58% and the MSCI World Index +18.67%. The difference in performance can be explained by better-than-expected economic growth in the US as well as the strong performance of US mega-cap technology stocks.
The FOMC press conference on 18 December was the highlight of the month. While the FOMC cut the federal funds rate by 25 bps, its outlook statement proved more hawkish than expected. The dot plot changed from four to two cuts in 2025. As a result, the two-year US Treasury rate increased from 4.15% to 4.24% and the 10-year rate from 4.17% to 4.57%, which led to a 2.50% fall in the S&P 500 index. The US Dollar index gained 2.26%.
On the economic front, there were no significant surprises. The global Citi Economic Surprise Index (CESIGL) fell slightly from -1.5 in November to -5.8 in December. The global manufacturing PMI moderated from 50.0 to 49.6, but both the Eurozone and US were relatively stable, with the former moving from 45.2 to 45.1 and the latter from 49.7 to 49.4. The annual inflation rate in the US (CPI) in November was 2.7% and the US personal consumption expenditure (PCE) index, the Fed’s preferred inflation gauge, came in slightly below expectations at a 2.4% annualised rate. Volatility in the equity market, as measured by the VIX index, spiked from 13.5 to 17.4.
By style, cyclicals outperformed defensives globally, in the US, Europe and Switzerland. Growth outperformed value globally, in the US and Switzerland, but not in Europe. Quality lagged the broader market in all regions. Small caps underperformed large caps everywhere.
PORTFOLIO ACTIVITY
During the month, we liquidated the holding in Huber + Suhner.
STOCK OF THE MONTH
Galderma returned 11.5% in December for a YTD return since the IPO in March of 57.3%. We attribute the strong monthly return to passive buying on index re-weightings in response to a higher free float and positive regulatory decisions. The US FDA approved Nemluvio (nemolizumab) in its second, larger indication for atopic dermatitis and the CHMP recommended the drug for approval in the European Union. Additionally, UBS upgraded the stock to buy on the back of a positive US aesthetics survey. When Galderma IPO’d, it was valued at a circa 35% discount to L’Oréal. Since then, management has executed well, delivering on targets. We continue to like the company’s sales growth prospects and EBITDA margin expansion opportunity.
QUARTERLY OUTLOOK
We expect the positive economic backdrop to continue into 2025, with ongoing disinflation and lower interest rates. In equities, the outlook for earnings growth looks robust, but some valuations are high. The MSCI USA trades on a 12-month forward P/E of 21.7x, which represents a 22% premium to the 10-year median. Meanwhile, MSCI Switzerland trades on 15.9x, a 7% discount to its 10-year historical level. The difference is partly explained by diverging regional outlooks. In the US, deregulation, lower taxes and rising infrastructure spending may extend the economic and equity market exceptionalism, while trade tariffs could weigh on growth elsewhere. Most Swiss companies we invest in are not domestic but multi-national and will, as such, also benefit from their US presence.
Sincerely
LO Funds–Swiss Small & Mid Caps investment team