Carmignac Portfolio Grande Europe: Letter from the Fund Manager

During the third quarter of 2023, the return of Carmignac Portfolio Grande Europe (A EUR Acc share class) was a fall of 4.44%, providing a return below the reference indicator which fell 2.11%.

Following the strong performance of European equities in the first half of the year, markets fell back in the third quarter. While the second quarter earnings reporting season had been relatively uneventful, and consistent with full year expectations of little profits growth overall, worldwide pressure on stock prices came once again from ever-rising bond yields. Despite falling inflation and weak growth in the region, German 10-year bund yields rose from 2.4% to 2.8% in the period, continuing an ascent from zero at the start of 2022. A function of the (European Central Bank) ECB monetary policy which, while it hiked rates to 4% – the highest level since the euro was created – has signalled that the 18-month period of increases has now ended.

This backdrop proved difficult for the higher rated quality stocks and sectors that we favour, particularly Industrials and Technology, but supportive for low-rated / low-quality sectors where we have no exposure such as Commodities, Banks, and Oil. Being a temporary headwind for our Fund, we believe this dynamic is not sustainable for much longer. In fact, economic growth is weak, and inflation is falling. As a result, we are closer to the end of the hiking cycle. Furthermore, consensus expectations for a soft landing in 2024 might even been too optimistic when considering latest comments from economically sensitive sectors such as building materials and semiconductors. If this prudence is to be justified, then the more visible sales and profits growth traits of our quality names should increasingly be rewarded.

Nonetheless, in the quarter, some stock specific events disappointed and weighed on returns. Orsted, the wind farm developer, took additional write downs on unprofitable projects in the US due to cost overruns and rising interest costs, among other things. This was extremely surprising and disappointing news for us especially since management, only few weeks earlier at their capital markets day, presented a totally different scenario, with the worst of the problems being behind them. We sold out of our remaining holding on the announcement when the stock fell significantly. Lonza, the contract manufacturer of drugs for the pharmaceutical sector, also provided a negative return for the Fund. While the business has had ongoing operational problems related to delayed start of new projects and some weakness caused by lack of funding for their smaller biotechnology clients, these issues have been well flagged by management and accounted for by investors. However, the surprise announcement in September that the CEO of the company was leaving shocked the market. While we were disappointed with Orsted management, in Lonza’s case we believe investors have over reacted, and thus decided to reinforce our position in the name during the period.

But not all is bad news. A mention of honour goes to Novo Nordisk, the drug company at the forefront of the new class of drugs GLP-1 agonists, engaged in a fight to treat diabetes and obesity. As well as continued strong demand for their products, a clinical trial in the period demonstrated a higher-than-expected improvement in cardiovascular outcomes (i.e., fewer strokes and heart attacks) for patients on their weight loss drug. As a result, we maintained a very large position in the name believing analyst forecasts are just scratching the surface of how large the opportunity could be, especially given the widening of insurer and reimbursement coverage expected on the back of the trials’ latest results.

Argenx, the Belgian listed biotech, also saw its stock rise significantly after its lead compound efgartigimod demonstrated strong clinical trial results in its second indication, called CIDP, which is a chronic, progressive neurological disorder. As well as widening the therapeutic area the molecule is approved for, the trial confirms the efficacy of the product beyond its first indication, Myasthenia Gravis, thus likely improving the probability of further success in the multitude of related illnesses it is in clinical trials for.

Having added numerous names to the Fund in 2022, when we picked up many high-quality names sold off in the volatility caused by rising rates, activity has subsided so far this year. Being bottom-up investors focused on high quality / sustainable businesses, we have a long-term view and expect to benefit from the peak and subsequent fall in interest rates and bond yields, the likely outcome of the current economic environment. The superior profit growth and visibility of sales and profits of our names, in fact, is likely to be reflected in better performance, especially against an uncertain economic background.

However, we are not reliant on that. We have an investment horizon of 5 years, and we stick to our process of focusing on profitable companies with high returns on capital, reinvesting for growth and having positive outcomes. We believe these companies will continue to deliver the best long-term returns for investors across different market environments.