LO Funds (CH)
Swiss Leaders

PERFORMANCE COMMENT

LO Funds (CH)–Swiss Leaders’ institutional share class finished February with a return of +1.66%, which represents an underperformance of 78 bps compared to its benchmark, the Swiss Performance Index (SPI TR).

Our underweight in Sandoz, alongside not owning Tecan Group or Swissquote, were the best contributors to relative performance in the month. At the same time, overweights in SIG Group, Temenos and Belimo detracted from relative performance. In the SPI, Consumer Staples and Consumer Discretionary led the index higher, while IT and Communication Services underperformed.

MARKET REVIEW

The Swiss market, as measured by the Swiss Performance Index (SPI), gained 2.44% in February. The Swiss small & mid-cap index (SPIEX) lost 0.74%. This compares with a 0.72% loss for the MSCI World Index (NDDUWI), driven by the MSCI USA index (NDDUUS), which lost 1.61% vs MSCI Europe’s (MXEU) 3.48% gain.

US exceptionalism was called into question once again in February. Policy uncertainty started to hit US growth and a slew of disappointing economic data prints dented confidence. A hotter-than-expected January CPI report raised fears of stagflation and recession, while the Fed’s preferred inflation measure of core PCE met expectations, slightly easing concerns later in the month. Softer non-farm payrolls and initial jobless claims signalled a cooling labour market. The Conference Board’s consumer confidence index fell to an eight-month low. The ISM services index missed expectations, while the manufacturing index showed resilience, offering mixed signals of economic activity. These factors, the threat of tariffs and uncertainty about Ukraine led to a spike in volatility as measured by the VIX index, which rose from 16.4 to 19.6. Meanwhile, Europe, including Switzerland, fared better.

Defensives outperformed cyclicals, large caps fared better than small caps and value beat growth.

PORTFOLIO ACTIVITY

In Switzerland, style factors performed differently to the US, with cyclicals outperforming defensives, large caps outperforming small caps and growth leading value. The same was true for Europe.

STOCK OF THE MONTH

Lindt & Sprüngli’s share price appreciated 8.48% in February vs the SPI’s 2.44% return. One reason was falling cocoa bean prices. The price of the May 2025 future, for example, fell nearly 17% during the month. This means material costs could fall, allowing for higher spending on sales & marketing. We like Lindt for its attractive growth prospects. 2025 guidance calls for 7-9% organic sales growth plus 20-40 bps of EBIT margin expansion. We expect the company to meet or beat this guidance thanks to limited price elasticity in demand for premium chocolate and strong market share gains. The current valuation is in line with the 10-year average.

QUARTERLY OUTLOOK

US exceptionalism has waned in early 2025. The US Information Technology sector, which led the market higher in 2024, has underperformed as investors question what returns massive artificial intelligence investments will generate and whether the US’s AI leadership is threatened by competition from China’s DeepSeek. Additionally, President Trump has initially focused on tariffs rather than pro-growth initiatives like tax cuts and deregulation, which has led to policy uncertainty. The so-called Trump trade has therefore unwound.

Meanwhile, Europe and Switzerland have outperformed. There is hope that a new German government may release the debt brake and that Ukraine and Russia could negotiate a ceasefire. The CDU/CSU and SPD proposed a larger-than-expected fiscal package, including a EUR 500 bn special fund for infrastructure spending and open-ended fiscal room for defence. The overall package is likely to reach more than EUR 1 trn and would boost growth. Relative valuations have also played a role. At the end of February, the MSCI USA traded on a 12-month forward P/E of 21.7x, a 22% premium to the 10-year average, while Switzerland traded on 17.5x, only a 3% premium. With the ECB and SNB both set to continue cutting interest rates, there is support for further multiple re-rating.

Sincerely,

LO Funds (CH)–Swiss Leaders investment team