MARKET REVIEW
February proved to be a very eventful month. On the political front, the Trump administration announced the introduction of tariffs on Canada, Mexico and China. Eventually, both Canada and Mexico received one-month reprieves by agreeing to additional border-security measures, while tariffs on China proceeded as planned. Additionally, discussions over a potential truce in Ukraine, combined with an increase in EU defence spending and the German election, shifted attention to potentially better macroeconomic conditions for the EU economy. Meanwhile, in the US, weakness in the ISM services index and rising inflation raised concerns about the resilience of US economic growth.
Finally, the earnings season concluded on a strong note, showing solid EPS growth but also an interesting narrowing of growth differentials between mega-cap companies and the rest of the equity market.
February was therefore an unusual month by several measures. We observed many dynamics reversing quite significantly, with movements exceeding one standard deviation. For instance, the top 10 largest companies in the world underperformed the rest of the equity market in a monthly move not seen since 2022. Similarly, European equities markedly outperformed US equities, and value and low-volatility factors also showed significant outperformance.
PERFORMANCE COMMENT
In February, amid a generally weak equity market, the Planetary Transition Fund underperformed its reference index. This relative performance was influenced by a combination of allocation and selection effects. From an allocation perspective, the Fund was particularly impacted by its lack of exposure to the Financial sector, especially traditional banks. Selection effects also posed a challenge to the strategy’s relative performance, as our strong stock picking within Consumer Discretionary was more than offset by weaker selections, primarily within the Information Technology and Industrials sectors.
At the stock level, we observed a strong rally in BYD (a leading Chinese producer of batteries and EVs), which surged by 36% following robust results and overtook Tesla in terms of market share. Republic Services, a large US waste-management company with a defensive growth profile, rose by 10% due to strong quarterly results and a solid outlook. Our precious metals exposure (key metals for the sustainable transition) also performed well, with Wheaton up 10% over the month.
On the downside, PayPal (a leading digital payment player) disappointed markets with its 2025 outlook, causing its share price to retreat by 20% from its late 2024 run. Despite delivering strong results, TREX (a US producer of composite decks) fell by 15% as investors remained concerned about the US housing market. Finally, Cadence (a US provider of electronic design software), while still structurally well-positioned to leverage next-generation AI hardware for semiconductor production, disappointed in growth terms, declining by 15%.
PORTFOLIO POSITIONING
In February, we took profits in Republic Services and MercadoLibre to fund new high-conviction positions. We first added Aptiv, a key provider of the essential components of electric vehicles, including cable management and active safety products. While the market has become increasingly concerned with the rollout of electric vehicles, Aptiv focuses on the broader smartification of vehicles and is well-positioned.
Additionally, we re-entered Steel Dynamics, a leading producer of steel from scrap using Electric Arc Furnace technology. The company has also developed a low-carbon aluminium plant. We are very positive about the upcoming cash generation from its broad asset base, which is well-exposed to the demand for local and highly efficient raw materials in the US, used in everything from new infrastructure to wind turbines.
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, 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, such as clean-energy-related themes, which have seen a decline of over 20% for two years in a row. 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.
Overall, our portfolio adheres to the principles of strong quality growth while maintaining disciplined valuation. With our dedicated sustainability research team encompassing system changes across sectors, we are confident that the Planetary Transition strategy is well-positioned to capture investment opportunities arising from a society transitioning to net zero, becoming more nature-positive and socially equitable. This provides investors with a diverse range of growth opportunities.
FUND STRATEGY
At Lombard Odier, we firmly believe that the current global economic model is unsustainable, and we recognise the ongoing transition towards a circular, lean, inclusive and clean economic model. This transition is driving fundamental changes in material systems across value chains and industries. These changes will accelerate through market inflection points, where the adoption of sustainable products and services will rapidly increase, shifting from niche to mass market. As a result, new and evolving profit pools will emerge within and across sectors.
Our investment approach for the Planetary Transition strategy is guided by a systems-change framework. We understand that these systems are interconnected with planetary boundaries. This strategy serves as the overarching approach for LOIM's holistiQ investment philosophy, focusing on various sustainable themes within key systems such as industrials, consumers, materials or energy. Additionally, we identify other opportunities for system changes that contribute to a society that values planetary boundaries and aligns with the sustainability transition.
The strategy encompasses key themes, including green sources of power, electrification of demand (in areas such as mobility, buildings and industry), the bioeconomy, new food systems, resource efficiency, circularity, zero waste, preventive case, new consumers and enabling technology solutions across multiple systems.
