Quarterly Strategy Q1 2024 – R-co Valor & R-co Valor Balanced

The markets closed the quarter significantly positive for international equities. The MSCI World All Country gained +10.7%¹ over the period, driven mainly by hopes for a meaningful pivot in central bank policies. Both Europe and the United States performed well, gaining, respectively, +12.4% and +12.9%¹. However, some economic disparity between the two regions is starting to emerge, with weakness in the old continent. Growth forecasts for 2024 are +2.1% for the US²and +0.9% for the euro zone². Similarly, while inflation seems to be converging towards 2% for the latter, it remains above 3% in the United States¹. This could ultimately lead to divergence in monetary policies between the two regions. In China, the Communist Party is still having a hard time convincing its people and foreign investors that it is able to support robust structural growth. And yet, something of a shift does seem to be materialising, with growth figures above forecasts, at an annualised +5.3% in the first three months¹. Industry drove activity, with the PMI³ Caixin manufacturing index coming in at 51.1 in March, a high since February 2023. Against this backdrop the Hang Seng dipped by -0.8% on the quarter¹.

R-co Valor

Within R-co Valor, we have kept our equity exposure relatively unchanged since the start of the year, at about 68%¹. Even so, we did make some transactions, at all times with the goal of lowering the weighting of the portfolio’s most cyclical portion and raising the weighting of its more defensive companies. For example, we completely sold off our exposure to the Swiss industrial group ABB, the insurance company Manulife, and the diversified mining group Teck Resources. Meanwhile we raised our goldmining exposure, via Newmont.

The recent spike in gold, hitting a record of more than 2300 dollars per ounce, stands in stark contrast with the goldmining sector’s disappointing showing. Goldmining companies’ extraction costs have been driven up in particular by inputs such as diesel, and machinery, but also by higher labour costs. These escalating costs have cut into producers’ profit margins. This trend appears to be moving back to normal in part, and we believe that our goldmining stocks should be able to make up lost ground as long as their underlying asset stays at high levels. Regarding diversified mining groups, we added two new copper projects to the portfolio, with NGEx Minerals and Filo Corp. We also added to the portfolio’s more defensive portion via healthcare stocks. Historically, healthcare stocks tend to underperform during election campaigns, when investors anticipate a reform, and then recover once the actual policy has been implemented. Even so, no major healthcare proposal has so far been mentioned in campaign platforms. Moreover, President Joe Biden has already successfully put through, in 2022, a law allowing the government to negotiate prices of certain drugs under Medicare. We are accordingly taking advantage of the sector’s discount to add to our exposure in a setting that is structurally buoyant, with an ageing population (by 2050 one person out of six worldwide will be 65 or older), and particularly innovative. In technology, we took some profits by selling down companies that had posted strong gains recently, such as Facebook and Uber, and switching to Match Group. We believe that dating apps still offer strong growth potential, in terms of both use and monetisation. And lastly, early in the year we added to our Chinese exposure in order to keep it from being diluted within the portfolio. 

The fund gained +7.5% in the first three months of the year⁴ (C units). Healthcare was the worst contributor during the quarter for the the above-mentioned reasons. Technology, the fund’s top sector, was also its best contributor, led by Meta, which gained +37%. Most of the gains occurred on 2 February, the day after it reported 39 billion dollars in net profit for 2023 and announced that it would pay out its first-ever dividend. Uber, the fund’s second-best contributor, reported net profit of 1.9 billion dollars for last year, demonstrating its ability to continue generating robust and profitable growth.

At 68%, our equity exposure is historically low; over the past 10 years it had averaged 83%⁴. The concentration of inflows into certain regions and sectors, geopolitical and electoral tensions, the reduction of liquidity caused by central banks’ shrinking of their balance sheets, and ballooning government debt are among the factors making us relatively conservative. We remain disciplined in our management strategies and are taking advantage of the current lull to take some profits and build up our supply of “dry powder”. By the way, the fund’s “Money-market and similar” allocation should not be seen as a fallback option. French Treasury Bonds maturing in less than one year are yielding on average 3.75% after spending a decade in negative territory, and our fund’s flexibility allows us to reposition ourselves on this asset class, pending an opportunity to return to equities.

R-co Valor Balanced

As of the end of March, R-co Valor Balanced was 36% exposed to equities and 54% to bonds, with the rest being invested in money-market and similar investments⁴. The fund gained +4.5% on the quarter⁴. Its equity allocation was the main contributor to performance, driven mainly by tech stocks. The bond allocation also made a positive marginal contribution, although rising interest rates have impacted investment grade bonds⁵ so far this year.

Equity Pocket

R-co Valor Balanced equity allocation replicates that of R-co Valor.
Both funds have the same exposures and are subject to the same modifications.

Fixed Income Pocket 

Ten-year US and German yields rose, respectively, by 27 basis points (bps) to 4.2% and by 23 bps  to 2.3%¹. Central banks, the Fed in particular, reiterated their desire not to rush into easing financing conditions, in light of the latest inflation numbers. Among corporate bonds, investment grade gained +0.4% on the quarter, and high yield⁶, +1.7%¹. The primary market was busy in the first quarter, as issuers took advantage of receding bond yields in late 2023 to refinance,  while investors showed a marked appetite, confirming that there is lots of cash on the sidelines, ready to be deployed. In investment grade, investors also showed lots of appetite, compressing issue premiums, which were also pushed by a lack of opportunities on the secondary market.

In the fund’s bond allocation, we took profits in high beta, hybrid and AT1 paper. On the buying side, we took part in primary market issues, mainly in investment grade. In general, we continue to overweight companies with low debt levels and the ability to maintain high cash flows.. We remain cautious about lower-rated corporate sectors. Furthermore, we maintain our hedge through CDS on the Main, accounting for approximately 20% of our bond portfolio⁴.

The bond allocation’s sensitivity stood at 3.7 as of the end of March; its yield was 4.5%¹.