Market review
After a solid start to the year, market sentiment deteriorated rapidly in February, especially in the US, with the Nasdaq moving into negative territory. This was mainly due to geopolitical uncertainty and the resulting conservative guidance from many companies. The rotation into the rest of the world, especially China and Europe, continued. The majority of our portfolio holdings published earnings results in February. The fourth-quarter earnings season has been solid, with both revenues and earnings beating estimates across all invested sectors. In February, bond yields fell slightly, with the US 10-year now at 4.25%. The Bloomberg Commodity Index was up 5.5% intra-month, only to close up 0.5%. The pressure came from gold and Crude oil, both of which were down, but the swings came from soft commodities like corn and wheat, which were down 10% intra-month as sales fell short of expectations (down 50% in the last week of the month versus the prior week). It is uncertain whether this remains the case, given macro developments during the last weekend of February. The VIX ended at around 20, up from 16 in the previous month.
Performance review
All in all, the strategy delivered a small negative absolute return and small positive relative return in February, further adding to the strong relative start to the year. Sector allocation contributed neutrally to relative performance during the month. While being overweight Healthcare (+1.1%) and not owning Communication Services (-5.2%) helped from a relative point of view, being overweight Consumer Discretionary (-6.7%) detracted equally. From a regional point of view, being overweight Western Europe (+3.3%%) and underweight North America (-1.6%) contributed positively. Finally, the strategy benefited from the absence of Magnificent 7 companies, which are not owned for purity reasons. Stock selection was most positive in Consumer Discretionary, while stock selection in Financials and Healthcare contributed negatively to relative performance. In terms of trends, Healthy Ageing (+2.2%) and Pension Providers (+0.2%) outperformed, while Baby Boomer Brands (-3.1%) and eHealth (-3.8%) lagged the overall market during the month.
The three stocks that contributed most to the Fund’s performance in February were Tapestry (+17%), continuing its positive earnings momentum; Expedia (+15.8%), also on good results; and Eli Lilly (+13.7%). The three laggards last month were Skechers (-19.0%), on weak Chinese sales in the fourth quarter; Trip.com (-20.2%), due to margin pressure because of faster international expansion; and Toll Brothers (-17.8%) on a weakening housing market. At the end of the month, the portfolio’s positioning comprised Baby Boomer Brands 24%, eHealth 14%, Healthy Ageing 34%, and Pension Providers 28%.
Portfolio Activity
In February, we sold Evolent Health as guidance disappointed after last year’s cost overruns, and added to existing positions in LVMH, Expedia and AIA, all to a default 2% weight. We reduced the position in Skechers to 2% after weak results. We also took profit in Trigano, Thermo Fisher, Abbott Laboratories, Azimut and Manulife and reduced our positions in Hologic, Virtus and Toll Brothers.
Outlook
After two years of highly disappointing investment results, lagging both the general index and the underlying earnings growth of the companies we invested in, it may feel challenging to remain optimistic about the ageing theme. Despite the 10% steady earnings growth our ageing strategy offers above what is achieved and expected for the general market, the valuation multiples of our ageing stocks fell considerably while the multiples of the general index rose. What could happen in 2025 to turn this around and bring the ageing theme back into investor favour? Most analysts, strategists and experts expect the momentum of the last two years to continue, with a double-digit equity market performance driven by a handful of US technology conglomerates. Therefore, it seems you need some contrarian courage to invest in the ageing theme. This is odd, given that the ageing of our societies is actually speeding up. The number of 65+ year-olds, and especially the number of 80+ year-olds, is steadily increasing in all major economies – North America, Europe, Japan and China – while the number of young people is declining. Combined, these countries should see a yearly increase of 2.6% in 65+ year-olds and 3.7% in 80+ year-olds over the next decade. More and more governments have started to adjust their financing models as the outlook for lower tax income and higher pension and healthcare expenses is becoming a cause for concern. The first pension reforms and changes to the healthcare system have been announced in countries like France, the Netherlands, South Korea, China and the US, and we expect more to follow. Ageing societies should provide a strong growth driver for companies focused on wealthy retired customers and elderly patients, or companies able to benefit from pension reforms. Our portfolio of ageing-focused companies should provide secular growth of 5-10% in sales and 10% in earnings per year for decades to come. While 10% growth is perhaps less than Technology and AI-driven companies are promising, it is available at a substantial discount. Our ageing strategy is currently on valuation multiples more than 25% lower than the general market indices, let alone compared to the major technology stocks.
On a more short-term horizon, we see two drivers that could unlock the value offered by ageing companies in 2025. For the first time this decade, we should see normal growth rates return to healthcare companies, as the pandemic no longer plays a role in the comparable base. However, it will probably be some months after the new US administration is installed before we know what the Trump headwind for Healthcare will be. Additionally, structurally higher interest rates, away from the 0-1% of the past decade, are providing pension companies with a solid opportunity to speed up growth, and on much better terms.
In summary, 2025 provides a very nice contrarian entry point for investors with a long-term investment horizon, as our ageing strategy offers structural and steady growth at an attractive discount.
Yours sincerely,
The Golden Age Investment Team
Jeroen van Oerle & Christian Vondenbusch
