MARKET REVIEW
2024 was once again a special year. Firstly, the fight against inflation has been won, with elevated rates not leading to a recession, but deeply inverted yield curves and other traditional indicators have been poor – worrying signals for investors. Secondly, inflation fell without a material slowdown in growth, allowing for the initiation of a rate normalisation process, in turn supporting activity levels. Thirdly, economic divergences have increased – while the US has been powering ahead against expectations, China has faced ongoing challenges in relaunching its growth trajectory and dealing with its real estate and domestic demand issues; Europe is being cyclically pulled down by Germany and France, while the so-called PIGS are in great relative shape; and, finally, Japan is emerging from a decades-long economic torpor.
As the final quarter of 2024 began, the stock market bounced back from a late-summer dip and continued to reach new record highs. However, in late December, equity markets experienced a brief setback when the Federal Reserve indicated fewer rate cuts for 2025. Despite this, stocks still ended the year on a strong note overall.
On the equity front, it was again a tough year for active managers. Investors, fearful of recession, continued to focus mostly on a narrower set of companies with an a-cyclical dynamic and ongoing earnings growth powered by digitalisation. Artificial intelligence has therefore remained a major market driver. In 2024, only 30% of stocks outperformed the MSCI World, two standard deviations below the last three-decade average.
PERFORMANCE COMMENT
In 2024, New Food Systems faced a challenging environment, marked by a dichotomy between large-cap US tech and other sectors. This backdrop proved difficult for a fund concentrated on transforming the food system. Consequently, the Fund's underperformance was primarily driven by sector allocation effects, reflecting our thematic biases. Our overweight position in Consumer Staples and underweight in Technology resulted in a negative allocation impact exceeding 6%. Conversely, stock selection contributed positively, enhancing performance by over 4% for the year. Notably, the inability to hold certain stocks, such as Nvidia, detracted nearly 3% from performance. Among our holdings, Atacadao, a Brazilian retailer, was impacted by Brazil's weak macroeconomic conditions, while Novo Nordisk, a pharmaceutical company, saw its early-year rise tempered by overly ambitious expectations. As the stock's valuation decreased, we increased our position. Top performers included Smurfit WestRock, benefiting from the paper and packaging cycle, and Kellanova, which was acquired earlier in the year.
In the fourth quarter, the Fund continued to lag significantly behind the reference index, with underperformance entirely due to thematic biases. The overweight in Consumer Staples and underweight in Technology cost 2.6%, while stock selection added 1.6%. Major detractors included Tesla, Nvidia, Amazon, Apple and Broadcom. Novo Nordisk and Atacadao remained the largest detractors among our holdings. Among the largest contributors were John Bean Tech, a food equipment company, which maintained strong performance following its quarterly results and the acquisition of Marel in Iceland, and Smurfit WestRock.
FUND ACTIVITY
Throughout 2024, we made significant adjustments to our sector allocations, most notably reducing our consumer exposure by approximately 10%, bringing it down to 38%. This decision was driven by our outlook on a weakening consumer environment, particularly in the US, while also enhancing diversification. The funds from this reduction were primarily redirected towards expanding our healthcare investments by 6%, focusing on obesity-related companies such as Resmed, Thermo Fisher, and Novo Nordisk. The remainder was allocated to the technology sector. Our key individual transactions mirrored these sector shifts, with Novo Nordisk and Resmed experiencing the most significant position changes. We increased our stake in Novo Nordisk from 1% to 3.5%. Within the consumer sector, we exited Greggs following a review of its plant-based strategy, and Kellanova was acquired.
In the fourth quarter, our sector positioning remained relatively stable. Regarding individual stocks, we exited four positions and initiated two new ones. Notable exits included Shift4 and Fresh Del Monte. We divested from Shift4, a provider of food waste technology to restaurants, after its share price doubled from our entry earlier in the year. Similarly, we exited Fresh Del Monte, a fresh fruit distributor, as it reached our price target during the quarter.
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, with the exception of 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 that the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that are 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 3x 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 unstoppable force that 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.