PERFORMANCE COMMENT
LO Funds–Swiss Small & Mid Caps’ institutional share class finished February with a return of -2.40%, which represents an underperformance of 166 bps relative to its benchmark, the SPI Extra TR. As a reminder, the Fund reports performance net of withholding tax on dividends vs. gross of withholding tax for the benchmark (35% withholding tax).
Our overweights in Lindt & Sprüngli and Baloise, as well as exiting Siegfried, were the top contributors in February. The overweights in Sunrise Communications, SIG Group and Tecan Group detracted from it. In the SPI Extra, defensive sectors such as Consumer Staples, Utilities and Real Estate traded higher, alongside Consumer Discretionary, while Materials and Healthcare traded down.
MARKET REVIEW
The Swiss market, as measured by the Swiss Performance Index (SPI), gained 2.44% in February. The Swiss small & mid-cap index (SPIEX) lost 0.74%. This compares with a 0.72% loss for the MSCI World Index (NDDUWI), driven by the MSCI USA index (NDDUUS), which lost 1.61% vs MSCI Europe’s (MXEU) 3.48% gain.
US exceptionalism was called into question once again in February. Policy uncertainty started to hit US growth and a slew of disappointing economic data prints dented confidence. A hotter-than-expected January CPI report raised fears of stagflation and recession, while the Fed’s preferred inflation measure of core PCE met expectations, slightly easing concerns later in the month. Softer non-farm payrolls and initial jobless claims signalled a cooling labour market. The Conference Board’s consumer confidence index fell to an eight-month low. The ISM services index missed expectations, while the manufacturing index showed resilience, offering mixed signals of economic activity. These factors, the threat of tariffs and uncertainty about Ukraine led to a spike in volatility as measured by the VIX index, which rose from 16.4 to 19.6. Meanwhile, Europe, including Switzerland, fared better.
Defensives outperformed cyclicals, large caps fared better than small caps and value beat growth.
PORTFOLIO ACTIVITY
In February, we exited positions in Inficon, Siegfried and Ypsomed, while adding holdings in Bachem, Barry Callebaut, Daetwyler and SFS Group to the portfolio.
STOCK OF THE MONTH
Lindt & Sprüngli’s share price appreciated 8.48% in February vs the SPI’s 2.44% return. One reason was falling cocoa bean prices. The price of the May 2025 future, for example, fell nearly 17% during the month. This means material costs could fall, allowing for higher spending on sales & marketing. We like Lindt for its attractive growth prospects. 2025 guidance calls for 7-9% organic sales growth plus 20-40 bps of EBIT margin expansion. We expect the company to meet or beat this guidance thanks to limited price elasticity in demand for premium chocolate and strong market share gains. The current valuation is in line with the 10-year average.
QUARTERLY OUTLOOK
US exceptionalism has waned in early 2025. The US Information Technology sector, which led the market higher in 2024, has underperformed as investors question what returns massive artificial intelligence investments will generate and whether the US’s AI leadership is threatened by competition from China’s DeepSeek. Additionally, President Trump has initially focused on tariffs rather than pro-growth initiatives like tax cuts and deregulation, which has led to policy uncertainty. The so-called Trump trade has therefore unwound.
Meanwhile, Europe and Switzerland have outperformed. There is hope that a new German government may release the debt brake and that Ukraine and Russia could negotiate a ceasefire. The CDU/CSU and SPD proposed a larger-than-expected fiscal package, including a EUR 500 bn special fund for infrastructure spending and open-ended fiscal room for defence. The overall package is likely to reach more than EUR 1 trn and would boost growth. Relative valuations have also played a role. At the end of February, the MSCI USA traded on a 12-month forward P/E of 21.7x, a 22% premium to the 10-year average, while Switzerland traded on 17.5x, only a 3% premium. With the ECB and SNB both set to continue cutting interest rates, there is support for further multiple re-rating.
Sincerely
LO Funds–Swiss Small & Mid Caps investment team
