PERFORMANCE COMMENT
LO Funds–Swiss Equity’s institutional share class ended December with a return of -1.16%, which represents an outperformance of 12 bps compared to its benchmark, the Swiss Performance Index (SPI TR). For the year 2024 as a whole, the Fund’s institutional share class returned +8.49%, representing an outperformance of 231 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). The headwind equals to some 85-105 bps annually (assuming a dividend yield of 2.5-3.0%), most of which comes in March-May.
Our overweights in Temenos and Galderma, as well as the UCITS-induced underweight in Novartis, were the best contributors to relative performance in the month. At the same time, the overweights in Sunrise Communications and Partners Group, alongside not owning Logitech, detracted. In the SPI, Consumer Discretionary, Real Estate and IT were the only sectors to end December up for the month, while Communication Services and Consumer Staples 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 added a position in Swissquote.
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 Equity investment team