LO Funds
New Food Systems

MARKET REVIEW

February proved to be a very eventful month. On the political front, the Trump administration announced the introduction of tariffs on Canada, Mexico and China. Eventually, both Canada and Mexico received one-month reprieves by agreeing to additional border-security measures, while tariffs on China proceeded as planned. Additionally, discussions over a potential truce in Ukraine, combined with an increase in EU defence spending and the German election, shifted attention to potentially better macroeconomic conditions for the EU economy. Meanwhile, in the US, weakness in the ISM services index and rising inflation raised concerns about the resilience of US economic growth.

Finally, the earnings season concluded on a strong note, showing solid EPS growth but also an interesting narrowing of growth differentials between mega-cap companies and the rest of the equity market.

February was therefore an unusual month by several measures. We observed many dynamics reversing quite significantly, with movements exceeding one standard deviation. For instance, the top 10 largest companies in the world underperformed the rest of the equity market in a monthly move not seen since 2022. Similarly, European equities markedly outperformed US equities, and value and low-volatility factors also showed significant outperformance.

PERFORMANCE COMMENT

In February, the New Food Systems Fund performed broadly in line with its reference benchmark. Thematic biases within the strategy were the largest detractors, as our universe underperformed the index. The allocation effect also detracted, while stock selection contributed positively to performance.

Vusion Group, a company specialising in food waste technology, was the largest contributor for the month, benefiting from a strong earnings report. Atacadao, a Brazilian fresh food grocery retailer, also performed well. Despite recent pressures arising from the challenging Brazilian macroeconomic environment, the shares were acquired by another retailer, which recognised their value. Nomad Foods, a leading frozen food company, recorded a positive performance as the market eventually took notice of the company's strong fundamentals, healthy product portfolio, and attractive valuation, overcoming the negative sentiment in the sector.

On the downside, Glanbia, a protein shake producer, was the most significant detractor. The company faced difficulties due to higher-than-expected whey protein prices. However, the stock continues to trade at an attractive valuation and benefits from strong volume growth in the protein supplement market. We took the opportunity to add to our position. Bakkafrost, a leading salmon producer, was a detractor in the portfolio due to short-term problems related to fish mortality, though this does not affect the long-term investment thesis. Zebra Technologies, despite delivering a strong quarter, also detracted from performance as it provided very conservative guidance in response to geopolitical headwinds.

FUND ACTIVITY

In February, there were no major changes in the Fund's activity. The most significant adjustment was a reallocation of exposure from Consumer Staples to Healthcare. This shift was primarily driven by exiting our position in Atacadao, as mentioned earlier, and continuing to build our position in Danaher, which we initiated in January.

Regionally, this reallocation resulted in a slight increase in North American exposure, while it reduced our European exposure. Additionally, our China exposure increased slightly due to the strong performance of China Mengniu, a dairy producer. Cash holdings also rose modestly during the month.

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, except for 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, due in part to inflationary pressure, such as food-related themes. Despite these cyclical headwinds, we believe the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that were unduly overlooked and could regain investors' attention,

Last year saw a tremendous surge of interest in our themes. For instance, food took centre stage at COP28: the number of agribusiness lobbyists more than doubled; there were three times as many delegates from the meat and dairy sectors; 160 delegates signed a declaration to include food and agriculture in their climate plans; and the FAO unveiled its roadmap for aligning the food system with climate goals – a significant step akin to what the IEA outlined for the energy transition several years ago. Our portfolio of companies is well-positioned to benefit from systemic changes across the entire value chain. From the enactment of new regulations to the development of obesity medications that alleviate pressure on the system, our holdings are strategically positioned to capitalise on this unrelenting force which continues to gain momentum.

FUND STRATEGY

Currently, food systems are contributing to the violation of various planetary boundaries, including biodiversity loss, deforestation, agrochemical pollution, excessive water usage and waste generation. In order for food systems to be sustainable in the medium to long term, significant transformations are necessary. These paradigm shifts will disrupt profit pools, altering opportunities in existing markets and creating new ones, while also posing risks and unlocking potential upside for financial market investors.

Our strategy is specifically designed to capture the potential opportunities associated with the transformation of food systems. We aim to invest across the entire food value chain, from sustainable food production (such as ingredients, fertilisers and aquaculture) to food consumption (including manufacturing and canteens) as well as enabling technologies (such as life sciences, packaging and logistics). Our goal is to align with the shift towards a food system model that can nourish the planet while operating within, or contributing to, the restoration of planetary boundaries.