MARKET REVIEW
Q1 2025 began like a roller coaster, with numerous developments unfolding. These included a reversal of the prolonged US growth and tech trade, and a value recovery led by Europe and emerging markets. Additionally, interest rates displayed divergent trends, with rates declining in the US and rising in the eurozone. Even the typically sluggish European region has provided reasons to invest in its future. These changes have led to rapidly evolving shifts in trends, favouring value-oriented trades. The level of uncertainty was most acute in March due to US-led trade tensions.
Key events during the quarter occurred in Europe and the US. Germany made a historic move by shifting away from its conservative and debt-averse fiscal policy to support increased defence spending and a special fund for infrastructure. In parallel, the EU announced the ReArm Europe plan, which could mobilise close to EUR 800 bn for defence spending. In the US, the Trump administration remained fully committed to its aggressive trade proposals, with potential widespread reciprocal tariffs to be announced in early April.
The equity market was therefore caught in significant cross-currents. In the US, investors worried about the negative implications of higher tariffs for the domestic consumer, growth, inflation, and the reaction function of monetary policy. On the European side, however, the mood was somewhat more constructive as cyclical equities benefited from the positive perspective of fiscal loosening (mostly banks and construction/defence-related sectors).
PERFORMANCE COMMENT
The Fund continued to outperform its reference benchmark in March by 30 bps, bringing the quarter to about 80 bps of outperformance. For March, this was broadly split between stock selection and allocation. Within allocation, our thematic overweight to Consumer Staples and underweight to IT drove most of the outperformance, while thematic headwinds due to limited exposure to Financials and Energy somewhat offset. Given the market sell-off, our top individual contributors were defensive names: Nomad Foods (frozen food, +4%), Sensient (ingredients, +7%) and Danone (healthier products, +7%). On the negative side, stock-specific issues drove our top two detractors: Novo Nordisk (obesity, -23%), which continues to be weak on sentiment rather than fundamentals, whereas Sodexo (outsourced catering, -17%) suffered on the loss of a major client. The third top detractor was Smurfit Westrock (paper and packaging, -16%), where cyclical concerns on tariffs drove the weakness.
For the quarter, the allocation effect supported all of the outperformance, while stock selection detracted. Similar to March, our thematic overweight to Consumer Staples and thematic underweight to IT drove most of the allocation effect. Within stock selection, on the positive side, we again see defensive names: Nomad Foods (frozen food, +18%), Atacadao (Cash and carry grocery, +49%) and Kerry Group (ingredients, +8%). The same three detractors for the month of March were the top three detractors for the quarter.
FUND ACTIVITY
In the quarter, as well as the month of March, most activity was focused on adding cyclicality. The Fund entered the period of market turmoil defensively positioned, and as valuations of defensive names went up and cyclical names went down, our valuation framework pointed us away from defensives and towards cyclicality. We exited names like ResMed (obesity) and Conagra (frozen food), while also reducing Danone (healthier products), Corteva (crop seeds) and Sysco (foodservice distribution). We recycled the proceeds into more cyclical parts of the market, mainly by increasing Zebra Tech (industrial automation), ATS (industrial automation) and Smurfit Westrock (paper and packaging).
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, 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 the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that were 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 three times 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 unrelenting force, which 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.
