MARKET REVIEW
2024 was once again a special year. Firstly, the fight against inflation has been won, with elevated rates not leading to a recession, but deeply inverted yield curves and other traditional indicators have been poor – worrying signals for investors. Secondly, inflation fell without a material slowdown in growth, allowing for the initiation of a rate normalisation process, in turn supporting activity levels. Thirdly, economic divergences have increased – while the US has been powering ahead against expectations, China has faced ongoing challenges in relaunching its growth trajectory and dealing with its real estate and domestic demand issues; Europe is being cyclically pulled down by Germany and France, while the so-called PIGS are in great relative shape; and, finally, Japan is emerging from a decades-long economic torpor.
As the final quarter of 2024 began, the stock market bounced back from a late-summer dip and continued to reach new record highs. However, in late December, equity markets experienced a brief setback when the Federal Reserve indicated fewer rate cuts for 2025. Despite this, stocks still ended the year on a strong note overall.
On the equity front, it was again a tough year for active managers. Investors, fearful of recession, continued to focus mostly on a narrower set of companies with an a-cyclical dynamic and ongoing earnings growth powered by digitalisation. Artificial intelligence has therefore remained a major market driver. In 2024, only 30% of stocks outperformed the MSCI World, two standard deviations below the last three-decade average.
PERFORMANCE COMMENT
In 2024, the Planetary Transition Fund lagged its reference index, with the performance difference coming from a mix of allocation and selection effects in a market driven by a few mega-caps stocks (53% of S&P500 returns came from the Magnificent 7). The Fund's top performers included NVIDIA, which achieved a return of 183%, significantly boosting the portfolio's performance. Taiwan Semiconductor and Tesla also contributed positively, with returns of about 70% each. The AI trade remained in full swing, which benefited all of our key contributors, even down to some industrial assets such as Schneider Electric (+32%), which play a key role in datacentre rollouts. On the negative side, Enphase (solar inverter market weakness) and Samsung Electronics (memory-focused semiconductors which missed Nvidia’s first generation of AI chips) were among the largest detractors, with returns of -47.0% and -40.5%, respectively.
To zoom in on the last quarter, the Fund experienced a decline while the performance of its reference index was mostly flat, with the environment-focused portion of the portfolio suffering. Despite the overall decline, several securities delivered strong returns. Tesla delivered 62.5%, contributing significantly to the portfolio on hopes that deregulation will aid its Robotaxi efforts. Amazon and Visa also performed well, with returns of 19.5% and 15.9%, respectively. The Fund faced challenges from Enphase (highlighted above) and AES in particular, with returns of -38.5% and -34.8%, respectively, on expectations of a tough environment for clean technology in light of the upcoming US political regime change. However, we believe the market has overreacted to this environment, with the names owned actually beneficiaries of the expected focus on domestic production.
PORTFOLIO POSITIONING
Throughout 2024, we worked to reduce the portfolio's sensitivity to the unwinding trends observed in key clean technology markets targeted by the strategy. Simultaneously, we strategically increased allocations to businesses we identified as essential enablers (a “picks-and-shovels” approach) of the AI trade. From an AI perspective, we focused on key enablers such as Siemens, Schneider Electric and semiconductor players, all of which are instrumental in supporting the rollout of power-intensive computing capacity.
In the mobility segment, we actively increased our exposure to Tesla mid-year and conducted extensive research on the autonomous driving opportunity, which led to an increased position in Baidu. To diversify across system-changes-driven opportunities, we introduced additional consumer exposure, targeting brands aligned with trends like healthy eating. For instance, we added Yakult, benefiting from its probiotics focus, and BellRing Brands, an emerging protein company in the US.
In the latter part of the year, our analysis of financial technologies and attractive valuations in the sector resulted in the addition of names such as PayPal and Global Payments to the portfolio. On the information services side, we added MSCI and Verisk, drawn to their resilient cash flow profiles and robust outlooks for 2025.
Lastly, we intensified our focus on healthcare system transformation, benefiting directly from the obesity treatment boom through investments in Novo Nordisk and Eli Lilly, and indirectly through ResMed, which we identified as an underappreciated beneficiary of these trends.
OUTLOOK FOR THE STRATEGY
In 2024, as the inflation battle seemed over, countries began to move towards more accommodative monetary policies, with rate cuts across key economies, with the exception of Japan. The narrative of a soft landing is starting to take shape, potentially favouring a broadening of the equity market performance into 2025, after having been concentrated in a narrow set of stocks since 2023.
Many of our themes were left behind and encountered cyclical headwinds, such as clean-energy-related themes, which have seen a decline of over 20% for two years in a row. Despite these cyclical headwinds, we believe that the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that are unduly overlooked and could regain investors' attention.
Overall, our portfolio adheres to the principles of strong quality growth while maintaining disciplined valuation. With our dedicated sustainability research team encompassing system changes across sectors, we are confident that the Planetary Transition strategy is well-positioned to capture investment opportunities arising from a society transitioning to net zero, becoming more nature-positive and socially equitable. This provides investors with a diverse range of growth opportunities.
FUND STRATEGY
At Lombard Odier, we firmly believe that the current global economic model is unsustainable, and we recognise the ongoing transition towards a circular, lean, inclusive and clean economic model. This transition is driving fundamental changes in material systems across value chains and industries. These changes will accelerate through market inflection points, where the adoption of sustainable products and services will rapidly increase, shifting from niche to mass market. As a result, new and evolving profit pools will emerge within and across sectors.
Our investment approach for the Planetary Transition strategy is guided by a systems-change framework. We understand that these systems are interconnected with planetary boundaries. This strategy serves as the overarching approach for LOIM's holistiQ investment philosophy, focusing on various sustainable themes within key systems such as industrials, consumers, materials or energy. Additionally, we identify other opportunities for system changes that contribute to a society that values planetary boundaries and aligns with the sustainability transition.
The strategy encompasses key themes, including green sources of power, electrification of demand (in areas such as mobility, buildings and industry), the bio-economy, new food systems, resource efficiency, circularity, zero waste, preventive case, new consumers and enabling technology solutions across multiple systems.