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, the Future Electrification Fund experienced slightly positive portfolio performance, significantly lagging behind the reference index due to the narrowness of equity markets and challenges within the renewables supply chain. Despite strong contributions from top performers like NVIDIA, with a return of 179.7%, Taiwan Semiconductor at 72.0%, and Tesla Inc at 73.3%, the Fund was heavily impacted by allocations to clean technology-focused businesses, with key clean technology indexes down 30% for the year. Notable underperformers included Sigma Lithium, where EV target rollouts by many key OEMs suppressed market expectations, and Enphase Energy, which suffered from ongoing weakness in the residential solar market, with returns of -57.6% and -56.7%, respectively.
Focusing on the last quarter, the portfolio gave back gains from earlier in the year, ending down 6.6%. This was fueled by weakness in industrials, particularly Sika and Ashtead, which delivered weaker-than-expected earnings outlooks but remain high-quality compounders within the Fund.
FUND ACTIVITY
Throughout 2024, we sought to reduce the sensitivity of the portfolio to the unwind experienced in key clean technology markets followed by the strategy, while strategically increasing weights in businesses we felt would provide the picks and shovels of the AI trade. Within clean technology, we decided to underwrite and focus on the highest-quality assets while reducing lower-return businesses. For example, we have exited the lithium supply chain, where we held two names, to focus on where we see value, which includes domestic solar inverters (Enphase). As demonstrated by the strategy’s resilience versus clean technology last year, this focus on reducing exposure to clean technology proved vital. From an AI perspective, we focused on key enablers, such as Siemens and Schneider Electric, as well as semiconductor companies, all of which play key roles in the rollout of very power-intensive compute capacity. We selectively introduced names on weakness, such as BE Semiconductor, NVENT and Delta Electronics, all of which play key roles in the supply chain. We were also active within the mobility segment, having increased our exposure to Tesla mid-year, as well as doing work on the autonomous opportunity, which saw us increase exposure to Baidu, while also introducing Uber to the portfolio.
OUTLOOK FOR THE STRATEGY
In 2024, as the inflation battle seemed over, monetary policies turned towards a more accommodative stance, with rate cuts across key economies, apart from Japan. The narrative of an economic soft landing is starting to take shape, potentially favouring a broadening of the equity market performance into 2025 after a historical concentration in performance to a narrow set of companies since 2023. Many of our electrification-related themes were left behind and encountered cyclical headwinds due, in part to inflationary pressure and elevated rates. Despite these cyclical headwinds, we believe that the structural trends we focus on are firmly established. Looking ahead, we identify several attractive opportunities that were unduly overlooked and could regain investors' attention. We still see the deployment of various policies as favourable as the most recent European Community announcement on the establishment of the Strategic Technologies for Europe Platform, aimed at promoting and increasing investment in critical technologies across Europe.
Despite the challenging performance of our key investment themes in 2023-24, we maintain a positive outlook on their long-term prospects. As interest rates are being lowered globally, apart from the specific case of Japan, narrative over an economic soft landing is starting to take shape potentially favouring a broadening of the equity market performance into 2025. Our portfolio is focusing on compnaies with superior revenues and/or earnings growth and with higher economic returns compared to the index, all while maintaining an attractive valuation. We believe that our diversified exposure to the global power system transition provides robust growth opportunities while mitigating downside volatility.
FUND STRATEGY
Electrification is poised to become one of the most transformative system changes in the history of capitalism, presenting one of the largest investment opportunities to date. The convergence of falling costs, significant efficiency improvements, and widespread accessibility is paving the way for numerous electrification tipping points. An estimated USD 24.5 trillion in capital expenditure is projected to be deployed over the course of this decade. We anticipate a substantial shift in revenue streams across various aspects of energy demand, supply, and enabling solutions.
Our investment strategy revolves around capitalising on opportunities arising from regulations, innovations, services and products that align with the transition to a more environmentally friendly, circular, leaner, inclusive and cleaner world. The key themes of our investment strategy encompass demand-side electrification, including mobility, building and industrial sectors. We also focus on green power supply, encompassing renewables, battery technology and related infrastructure such as cables. Additionally, we target electrification enablers, including critical components such as infrastructure, semiconductors and materials that support the electrification ecosystem.