Carmignac Portfolio Grandchildren: Letter from the Fund Managers

To begin the year, Carmignac Portfolio Grandchildren posted a performance of +15.46%, outperforming its reference indicator (+11.33%).

The beginning of the year was marked by both resilient economic data in the United States and stickier inflation, which led central banks and the markets to expect fewer interest rate cuts in 2024 than at the start of the year. Equity markets welcomed this better-than-expected macroeconomic backdrop, leading the S&P 500 to post its best start to a year since 2019. While equity investors remained focused on the artificial intelligence (AI) theme throughout the first part of the quarter, the bullish momentum then spread to the rest of the equity market, with a broadening of the contributors to performance and the participation of cyclical sectors.

This sectoral mix was initially supportive for our fund but created a small headwind in March. Nonetheless, the fund had a strong quarter, thanks to our investments in the Technology and Healthcare sectors.

Within the Technology sector, stocks related to AI performed well. Nvidia, in particular, rose by an impressive 88%. This was driven by the growth in data center spending towards GPUs which was reflected in strong Q4 results report beating and raising expectations. We still like Nvidia, but have trimmed our position after a strong year-to-date performance. Other AI-related stocks like ASML and AMD have also been following this trend, but to a lesser extent. Additionally, high-quality technology companies such as Oracle and SAP posted solid results that rewarded investors.

In the Healthcare sector, Novo Nordisk was the top contributor, rising 27%. This was due to strong sales and profits driven by the demand for their GLP-1 drugs Ozempic and Wegovy. We expect profits to grow by around 30% this year and maintain Novo Nordisk as our largest holding. Eli Lilly also benefited from strong demand for their obesity product Zepbound. However, due to recent outperformance and relatively high valuation, we have significantly reduced our holding into the name. Lonza's performance (+46%) is also noteworthy. The company responded positively to strong financial results and mid-term guidance. The company also acquired a large Roche manufacturing facility enabling them to satisfy strong growth prospects in biologics manufacturing and upgraded mid-term growth to 12-15%.

While it was a strong quarter overall, our consumer names, particularly Puma, lagged behind. Puma's stock fell by 25% and was the biggest stock headwind for us. The company provided a cautious outlook for 2024, citing cautious consumer activity and a challenging economic backdrop. We are concerned about Puma's reliance on the wholesale distribution channel, especially considering the increasing competition from Adidas in that space. Therefore, we sold our entire holding.

Our macro overlay framework is pointing to a defensive posture towards equity markets. We believe that the downside risk is greater than the upside potential, as the market has already priced in positive earnings expectations. If these expectations are not met, we may see market declines. Additionally, the recent increase in yields is not supportive, although we expect rates to decrease again in the medium term as economic growth slows and inflation subsides.

Therefore, we believe that high-quality companies with strong sales and profit visibility may outperform the market in this environment. Specifically, we continue to favour the technology and healthcare sectors, as well as defensive stocks in the consumption sector. As mentioned above, we sold Puma and added one stock: Hermès. The luxury goods sector has faced challenges recently, with companies like LVMH expected to experience a normalization of sales growth after a strong period from 2019 to 2023. This negative trend has been highlighted by profit warnings from Burberry and Gucci. Fortunately, we had no exposure to this trend until recently. In January, we saw a decline in Hermès, which we perceived as an opportunity to invest in a company renowned for its desirable and exclusive products, thus possessing significant pricing influence. The company's full-year results confirmed this profile, with double-digit growth and guidance for further price increases. We forecast a 13% sales growth in 2024. Adding Hermes was an exception, as we made few major changes to the portfolio in 2023 or this year so far, after adding several high-quality names during the volatility caused by rising rates in 2022.