MARKET REVIEW
April was a highly volatile month of trade developments that whipsawed the equity market, with volatility levels (VIX) last seen during the Covid crisis or GFC. The month opened with the “Liberation Day” tariff announcement by President Trump. Although expected, the scale, breadth and methodology associated with this announcement took investors by surprise. Equities, in particular US equities, came under pressure as recession fears increased, while US rates rose on the back of the perceived risk of tariff-led inflation pressure, and the USD weakened against most major currencies. Some of these initial knee-jerk reactions receded as the US administration announced a 90-day suspension for some tariffs to allow for a negotiation period with a dozen countries, while escalating trade tension with China further. In a stark reversal of past trends, US equities were the weakest and closed the month down, while equities from other key regions ended in positive territory.
The volatility surrounding significant events such as Liberation Day creates opportunities for us as bottom-up stock pickers – as the picture remains unclear, our decisions are made on a stock-by-stock basis rather than sector by sector.
PERFORMANCE COMMENT
In a volatile market, the Fund outperformed its benchmark in April. Most of this was driven by the allocation effect, while stock selection detracted. Our top contributors mainly benefited due to their defensive business models. The top contributor was Sensient Technologies (+26%) which benefited from further positive sentiment around its natural ingredients portfolio in the face of RFK's attack on the US food system. Glanbia (+18%) benefited as a result of better-than-expected earnings. The stock was trading at bargain basement levels (>10% free cash flow yield) and only needed to show "less bad" results than expected for a significant move higher.
The more cyclical names contributed negatively to performance. Smurfit Westrock (-7%), although not directly impacted by tariffs, would be hurt if the second-order effects of tariffs are realised (a recession) and fell accordingly. Similar to Glanbia, the stock now trades at very cheap levels of valuation in absolute terms (>10% free cash flow yield) but also relative to lower-quality peers. This is despite a consolidating, more rational industry in the US and a well-established management team now running operations.
FUND ACTIVITY
The most significant changes to our portfolio in April were the addition of Chipotle (a healthy food restaurant chain in the US) and an increase in our position in Novo Nordisk. Chipotle has been on our radar for many years and we know it as a solid operator in a competitive space. As valuation compressed in the aftermath of Liberation Day, we decided to take a position in this much-loved name. The addition was timely, as President Trump announced a 90-day tariff pause the following day and we saw a considerable contribution from the position much earlier than expected.
In the diabesity space, Novo Nordisk has fallen on tough times, with the valuation spread to its nearest rival (Eli Lilly) now at a considerable discount. The market has, in our view, correctly identified Eli Lilly as the leader in the space but has incorrectly written off the possibility of a strong number two. Novo Nordisk is more than well-placed to fill this position. During the month, Eli Lilly released data on its oral obesity drug, which led to a strong sell-off in Novo. This is the last major event in the space for some time. With all the bad news out of the way and Novo's shares trading at 13x P/E (despite EPS expected to compound 15-20% to 2030), we added to our position, which is now the second largest in the portfolio.
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.
