Market Review
December did not provide the usual end-of-year “Santa rally” most equity investors were hoping for, as the rally that started in November with the strong victory of President-elect Trump was interrupted by rising bond yields. The US ten-year bond yield rose by 40 bps to 4.6% on investor concerns that expected tax cuts from the new administration would lead to higher budget deficits and government debt. Healthcare investors had a particularly tough time in December due to the combination of disappointing research results in obesity and pain treatments, the shocking murder of a senior UnitedHealth executive and some controversial nominees from President-elect Trump for key healthcare positions. In South Korea, President Yoon was impeached after his attempt to remove the power of parliament by introducing martial law failed, leading to equity market volatility during the month.
Although our ageing strategy has a low beta of 0.9, meaning it would normally do better in tough markets, the exposure to healthcare led to a worse performance in December’s negative markets. LO Funds– Golden Age was down 5.0% during the month versus -2.6% for the general market index, the MSCI World. Only three sectors were able to show positive returns: Consumer Discretionary (+2.3%), Communication Services (+2.3%) and Information Technology (+0.7%), of which the last two contain all the large technology conglomerates known as the Magnificent 7, which are not part of the ageing investment universe. The worst sectors during the month were Real Estate (-7.1%), Health Care (-6.1%) and Consumer Staples (-4.4%), all of which are represented in our ageing strategy. The performance differences are even more apparent when looking at market cap, as mega-caps, with market capitalisations above USD 500 bn, were the only category with positive returns (+3.7%), while big-caps (USD 50-500 bn), mid-caps (USD 10-50 bn) and small-caps (USD <10 bn) all returned roughly -5% in December.
During the month, our strategy was able to stay ahead of the iShares Ageing Populations ETF, which declined by 6%.
Performance review
Only one of the strategy’s four underlying trends outperformed the market index in December – Baby Boomer Brands (-2.3%) – while healthcare-dominated trends eHealth (-7.1%) and Healthy Ageing (-5.7%) underperformed, mostly due to the combination of disappointing research results from Vertex and Novo Nordisk and the negative Trump effect. The Pension Provider trend (-4.9%) also underperformed the market in December but remained the best trend of the year.
The Fund’s negative relative performance versus the reference index was due to a negative allocation effect of -232 bps in the ageing theme, combined with a small positive stock selection effect of +4 bps. Our over-exposure to smaller pure-play ageing companies and under-exposure to mega-cap technology conglomerates remain the dominant factors behind swings in relative performance versus the general index.
The three stocks that contributed most to the Fund’s performance in December were all consumer companies: Tapestry (+5%), Trip.com (+6%) and Sketchers (+5%). Tapestry’s proposed takeover of its US luxury peer Capri was blocked in November by the FTC, the US anti-monopoly commission. Investors who did not like this deal from the outset had already reacted positively in November and grew even more optimistic after Tapestry’s management disclosed in December that they would use the money reserved for the takeover to buy back 15% of their stock instead. The Asian online travel booking platform Trip.com, which was added to the portfolio in September, continued to benefit from the slow recovery in Chinese travel demand, while the US shoe brand Sketchers continues to gain share from Nike as it better targets the older generations with high-comfort, affordable sneakers.
Two of the three stocks that detracted most from performance during the month were healthcare stocks: UnitedHealth (-17%) and Novo Nordisk (-19%), while Toll Brothers (-24%) reported its quarterly earnings. The US home builder Toll Brothers specialises in building luxury homes and homes for empty nesters in the 50+ age bracket. It reported 10% sales growth and 13% earnings growth for its fiscal fourth quarter (October year-end), achieving another year of strong growth with 14% sales and 21% earnings per share growth. Despite these results beating upfront expectations by 5%, the stock reacted very negatively to conservative guidance for FY25. Management said it expects a 100 bps gross margin decline in the first quarter due to higher customer discounts they gave away in September and October and are due to be delivered in the first quarter. Toll Brothers’ management, known for its conservative guidance, stated that after election uncertainty had passed, it saw sales growth accelerate and price incentives decline. We remain invested as we like the setup for this quality compounder in 2025, with >10% EPS growth and a return on equity (ROE) above 20% at a P/E multiple below 10x.
UnitedHealth Group cancelled its investor day after ten minutes in December due to the tragic death of Brian Thompson, the CEO of the healthcare insurance segment, who was murdered in front of the hotel where the event was held. The potential murderer was arrested in possession of a statement blaming the healthcare industry in general and the healthcare insurance industry in particular and was even applauded for the act in the following weeks on X and other online platforms in the US. The guidance for 2025, which was due to be presented on the investor day, is for high single-digit earnings growth and low double-digit sales growth, in line with prior expectations. UnitedHealth Group expects the healthcare insurance segment, roughly 40% of the group, to remain under pressure in coming years due to the unhealthy and ageing US population combined with higher medical costs and expensive new treatments. The other part of UnitedHealth Group, called Optum, contains all sorts of care and digital healthcare solutions and is expected to continue to grow at the company’s usual 15% target. We expect the US managed care industry to remain under pressure in the coming months, both from a profitability and political standpoint.
December was also not the best month for the share price of Danish pharmaceutical company Novo Nordisk. Despite the takeover of Catalent being approved in the EU and US and its new treatment for haemophilia patients, called Alhemo, being approved by the American healthcare authorities, the stock was hammered after disappointing research results for a potential new obesity treatment. This new drug goes by the name Cagrisema and showed 23% weight loss (or 21% ex placebo) during its large trial, which was below the 25% Novo management had hoped for. Although these results are clearly better than its current treatment, which shows 16% weight loss, they are in line with and no better than the current treatment offered by Lilly. Due to the trial design, whereby patients could switch from high to low weight loss during the trial, the real effect of the high-dose Cagrisema treatment could not be seen in the limited data provided. Novo will publish the full data in February and will also start a new trial to study the real effect of high-dose obesity treatment.
Portfolio Activity
We have added three new 1% positions to the portfolio, all of them US companies: Alliance Bernstein, Expedia and Neurocrine Bioscience. Alliance Bernstein, a diversified asset manager with USD 770 bn in AuM, has delivered net inflows in recent years. The company trades at a very attractive valuation and a discount to peers; however, we expect that this could change if the company proceeds with its plan to change its legal status from a limited partnership (LP) to a C-corp.
Expedia is a large online travel agent with 60% US exposure and trading at a large discount to peers Booking.com and Airbnb. Expedia offers both economic recovery potential as well as a catchup story as the new management team is aiming to (partly) close the gap with peers in terms of both top-line growth and margins by copying the Booking.com strategy of lowering client acquisition costs and by continuing to roll out its outsourcing services as a B-to-B partner.
Neurology Biopharma is a very profitable biotech company selling products to treat the increasing frequency of mental disorders, a very tough area for medical innovation. It has one treatment on the market to treat Tardive Dyskinesia (TD), a movement disorder, and recently had a second treatment approved to treat Congenital Adrenal Hyperplasia (CAH), a genetic disease wherein the hormones produced by the body are out of balance. Today, these patients need to be tested and chronically treated with hormones, while this breakthrough treatment allows the body itself to restore hormone balance. This treatment offers Neurocrine a multibillion-dollar market opportunity. Its research pipeline includes new treatments currently being tested for schizophrenia, depression, Alzheimer’s, Parkinson’s and bipolar disorder, but the market has not rewarded these research projects, which seems fair, given the disappointing research results so far from many companies in this space.
We have financed our new positions by taking some profits in consumer and pension names like Tapestry, Manulife, NN group, Trip.com and CI Financial.
Outlook
After two years of very disappointing investment results, lagging both the general index as well as the underlying earnings growth of the companies we have invested in, it seems a challenge to remain optimistic about the ageing theme. Despite the 10% steady earnings growth our ageing strategy offers, above what is achieved and expected for the general market, the valuation multiples of our ageing stocks fell considerably while the multiple of the general index went up. What could 2025 do to turn this around and bring the ageing theme back into investor favour? Most analysts, strategists and experts expect the momentum of the last two years to continue, with a double-digit equity market performance driven by a handful of US technology conglomerates, so it seems you need some contrarian courage to invest in the ageing theme. This appears odd given that the ageing of our societies is actually speeding up. The number of 65+ year-olds, and especially the number of 80+ year-olds, is steadily increasing in all major economies – North America, Europe, Japan and China – while the number of young people is declining. Combined, these countries will see a yearly increase of 2.6% in 65+ year-olds and 3.7% in 80+ year-olds over the next decade. More and more governments have started to adjust their financing models as the outlook for lower tax income and higher pension and healthcare expenses is becoming a cause for concern. The first pension reforms and changes to the healthcare system have been announced in countries like France, the Netherlands, South Korea, China and the US, and we expect more to follow. Ageing societies will provide a strong growth driver for companies focused on wealthy retired customers and elderly patients, or companies able to benefit from pension reforms. Our portfolio of ageing-focused companies provides secular growth of 5-10% sales and 10% earnings per year for decades to come. While 10% growth is perhaps less than Technology and AI-driven companies are promising, it is available at a substantial discount. Our ageing strategy is currently on valuation multiples more than 25% lower than the general market indices, let alone compared to the large Technology stocks.
On a more short-term horizon, we see two drivers that could unlock the value offered by ageing companies in 2025. For the first time this decade, we will see normal growth rates return to healthcare companies as the pandemic no longer plays a role in the comparable base, although it will probably be some months after the new US administration has been installed before we know what the Trump headwind for healthcare will be. Additionally, structurally higher interest rates, away from the 0-1% of the past decade, are providing pension companies with a solid opportunity to speed up growth, and on much better terms.
In summary, 2025 may provide a very nice contrarian entry point for investors with a long-term investment horizon, as our ageing strategy can potentially offer structural and steady growth at an attractive discount.
Yours sincerely,
The Golden Age Investment Team
Henk Grootveld, Christian Vondenbusch & Alice de Lamaze