PERFORMANCE COMMENT
In February 2025, the LO Funds-World Brands EUR P was down -2.13% while the MSCI World EUR was -0.76%. The underperformance came mainly from sector allocation. The overweight in consumer discretionary and communication services was negative. The fund did benefit from our underweight in the USA and our overweight of Europe and China. Selection in China was very good while our selection in Europe was less beneficial despite the overweight. Our stock selection in the USA was not very good. The bottom 3 detractors on a securities level were Tesla, Block and Alphabet and the highest contribution came from Xiaomi, Eli Lilly and Horizon Robotics.
The fund’s allocation to North America is lower at at 59.86% and the allocation to Europe was stable at 22.47%. The fund’s allocation to Japan was at 3.44%, while the allocation to Emerging Markets was higher with Greater China at 13.31% and India at 0.92% as of 28th of February 2025.
MARKET REVIEW
Global equity markets have been volatile since the new US administration took helm and started to implement tariffs and foreign policy. The US equity market started to re-price for a lower Price/Earnings Ratio multiple given the higher amount of uncertainty. The Nasdaq Composite Index fell -3.97% and the S&P 500 Index -1.42%. The Russell 3000 was down -2.03%.
The Euro Stoxx 50 Index continue to show a strong performance (up +3.11% in USD driven by better the Germany’s fiscal policy and defense plan spending given the geopolitical situation. The DAX Index was up 3.54%.
In the month of February 2025, China continued to benefit from AI advances and new product releases. The Hang Seng Tech Index had a stellar performance as it powered on with a gain of 17.88% in USD while the less tech-driven onshore index was up only 1.47%. US internet and tech companies de-rated. The MSCI World Communication Services Index was down -5.12% in USD while the MSCI World Information Technology Index was down -1.91% in USD. The MSCI World Consumer Discretionary Index was up +4.61% and the MSCI World Consumer Staples Index was down +1.80% in USD. The MSCI World Financials Index was also down -6.48% in USD. The MSCI World Consumer discretionary was down -6.73% - driven mainly by the big weights Amazon and Tesla - while the MSCI Financials index was up 1.91%.
THEMATIC OVERVIEW
Alibaba delivered a strong Dec quarter results with total group revenue of RMB 280bn, +7.6% yoy. The strong sales was driven by good GMV growth as well as an increased take rate, which indicates a stabilization of BABA’s market share in the Chinese ecommerce space and good value of its tech stack offerings to merchants. Meanwhile, the cloud segment also grew 13%, driven by the recent urge in AI related demand. In the results meeting, the management reiterated its competitive moat integrating cloud and AI models, backed by open source ecosystems and a rich application scenario. As the largest hyperscaler and the biggest ecommerce platform in China, we believe BABA is one of the best positioned names to benefit from the accelerating AI developments in China, and are confident that BABA’s substantially stepped up capex plans will solidify the company’s position and enable it to better capture rising AI demand.
Bilibili similarly reported a decent set of results – total group revenue grew +22% yoy in the quarter, which were driven by a 79% growth in mobile games sales as well as a 24% yoy growth in advertising revenues. Its flagship mobile game title San Mou has maintained strong traction, at the same time, performance advertising continued its decent growth trajectory, resulting in BILI achieving its first positive gaap profit quarter. Looking ahead, we see BILI, being one of the leading video content platform in China with a sticky user base, is in a good position to benefit from AI, as the technology can potentially lower barrier for video generation as well as lead to better advertising placements. Therefore, we expect BILI to continue gaining market share and delivering margin expansion in the next few years.
Hermès: Vs rest of the luxury names, Hermès not only delivered a stellar end to the year, but also outperformed most of its peers with 17.6% constant currency growth in Q4. This strong results were driven by both impressive sales in Leather Goods, as well as decent performance in other categories. The management are confident in 2025 on the back of the resilient demand from a loyal, wealth clienteles despite the uncertain macro backdrop. With a 6% to 7% price increase planned for FY25 on top of the 6% to 7% volume growth guided by the company, we see 2025 as another year of strong growth for Hermès, and continue to view the brand as one of the best in the luxury space given its superior pricing power and attractive demand dynamics.
On Holdings: Among global sportswear companies, On Holdings is one of only a few that delivered strong sales in the quarter. Sales were up 36% yoy, with direct-to-consumer chancel growing 43%, which also helped to push group’s gross margin to an all-time high level at 62%. Moreover, the company also saw strong demand in the early months of this year, and hence is guiding ~27% cc growth for FY25E to abt CHF2.94bn; and an expected adj EBITDA margin of 17% to 17.5%. Given the strong product line up starting with the Cloud 6 and several LightSpray technology related product drops later this year, we believe On Holdings is posed to achieve another year of decent growth.
FUND ACTIVITY
The fund has 3 overweight stances from a GICS sector perspective globally (1) brands in Consumer Discretionary, (2) brands in Information Technology; and (3) brands in Communication Services. From a regional perspective, in North America, we are overweight in communication services with names like Meta Platforms, Take-Two Interactive and Netflix as well as within tech brands AI software brands like Salesforce. We have been increasing our allocation to China tech brands like Xiaomi, Tencent and Alibaba. The global allocation to Digital brands in the strategy totals 51% of the fund, mainly in the sectors of Information Technology and Communication Services.
The fund keeps the overweight in brands in the Consumer Discretionary sector but more diversified from a regional perspective now across North America, Europe and Asia. We focus on quality growth within Consumer Discretionary and have a large part invested in global internet brands like Amazon.com, sports brands like Amer Sports, auto brands like Xpeng, travel brands like Royal Caribbean Cruises and European luxury brands like Richemont. We established 2 new positions in Europe: Kering and Volvo.
QUARTERLY OUTLOOK
The LOF – World Brands fund owns a high conviction diversified portfolio of businesses around the world that are structural winners. We classify all our investments in 3 categories: Digital Brands, Upcoming Brands and Global Brands. Currently the fund holds 51% in Digital Brands, 8% in Upcoming brands and 41% in Global Brands. Looking forwards over the next 2 years, the fund’s holdings have very strong financial metrics which significantly exceed the MSCI World benchmark. Meanwhile, the portfolio is trading at a 23.3x forward 2-year Price to Earnings multiple vs MSCI World 17.3x (the fund forward PE is 27.5 vs. MSCI World 19.5x) which continues to represent a very attractive level since we started to manage the fund in 2009. The forward P/E of the fund reached a peak of 35x in February 2021. On a PEG ratio (P/E ratio to earnings growth) the fund is very attractively valued compared to the broader market’s PEG ratio (MSCI World). We continue to evaluate the potential impact of the Trump 2.0 policies, possible end of the war and the China tech Deepseek innovation on a brand-by-brand basis, making adjustments to the portfolio and maintaining an overall risk-on stance.
