Carmignac Portfolio Long-Short European Equities: Letter from the Fund Manager
Our fund delivered a quarterly performance of +6.1%, in the F EUR share class, net of fees, while the Stoxx 600 was down 24bps.
The portfolio benefited from strong contributions from both our Long and Short ideas. Our attributions by bucket for the quarter were:
| CORE LONGS | +6.77 |
| TRADING LONGS | -1.38 |
| RELATIVE VALUE/ SPECIAL SIT | +0.20 |
| ALPHA SHORTS | +2.99 |
| HEDGING | -0.71 |
On the long side, our core positions in SAP, Spotify, Nova Ltd, Schibsted and SK Hynix performed well with strong Q1 numbers and positive earnings momentum.
On the short side, the largest contributors came from Nike and Lululemon as our short thesis continued to play out. During the quarter, Nike reported a large profit warning, while Lululemon suffered from rapidly deteriorating fundamentals.
The breadth of the market continued to narrow this quarter, with a small number of thematically driven large cap stocks carrying the market, supported by strong numbers, while most of the stocks struggled.
If we take a step back and look at the Q1 earnings season, most companies had a disappointing start to the year which made guidance for many of them look backend loaded and dependent on a second half pick-up in growth, which looked less and less likely as the quarter progressed. Apart from segments exposed to semiconductors, AI or US mega projects, the weak trends were broad based across sectors (autos, chemicals, construction, consumer, luxury, cap goods, etc.). With that backdrop, our net exposure started to come down in June for bottom-up reasons, as we trimmed or exited long positions that were trading closer to fair value, while we found attractive, company specific new short ideas.
Looking at these bottom-up observations from a top-down view, they make sense. While the market had expected many sectors to roll over after the initial inflation and rates shock in 2022, the negative impact on corporate earnings never came, due to all the reasons we know – excess savings, fiscal stimulus, cheap refinancing during the low rate environment, record backlogs due to supply chain issues, shortages that lead to pricing power and overall an inflationary environment that helped nominal growth and corporate margins – while record low unemployment and wage increases kept consumption strong.
We are now starting to see the slow unwind of many of these tailwinds. On the consumer side, excess savings have been spent, while high interest rates and goods inflation put pressure on the consumer, particularly the lower income bracket. On the corporate side, the opening-up of supply chains led to the normalization of backlogs, while new orders declined, as order patterns/lead times normalized again and customers de-stocked. These trends happened while volumes remain fairly depressed due to the muted consumer spending.
While there were many complaints over the last two years on inflation and supply chain constraints, most companies significantly benefitted from that environment. The creation of an artificial supply constraint combined with pricing power occurred while the higher interest rates had little impact on these companies, thanks to strong balance sheets and limited near term refinancing needs. On the flipside, as inflation now starts to fade at a time where the consumer is starting to struggle, most companies will be negatively affected as they are facing pressure on both volume and pricing, resulting in negative topline and margin trends. This new environment will be the new narrative for the second half of the year.
The only positive take on inflation coming down is that it finally opens the door for central banks to cut interest rates. That said, given the limited impact that higher rates had on corporate earnings or consumer behavior, it remains to be seen if that really overcompensates the negative effect of pricing rolling over.
On the negative side, historically when companies start to see margin pressure due to weak topline trends and negative pricing, they respond by cutting costs, i.e. laying off people, what again leads to concerns about job security, rising unemployment, lower consumption and usually a recession. Given we are starting to see the pressure on margins, there is intuitively a good chance that central banks will be able to cut rates quite aggressively, but for reasons which are not necessarily positive for equities.
The set-up for the second half of the year is very interesting and should be a fertile environment for fundamental Long/Short equity investing.
Carmignac Portfolio Long-Short European Equities
A high-conviction long/short approach to European equitiesDiscover the fund pageCarmignac Portfolio Long-Short European Equities F EUR Acc
- Recommended minimum investment horizon
- 3 years
- Risk indicator*
- 3/7
- SFDR - Fund Classification**
- Article 8
*Risk Scale from the KID (Key Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time. **The Sustainable Finance Disclosure Regulation (SFDR) 2019/2088 is a European regulation that requires asset managers to classify their funds as either 'Article 8' funds, which promote environmental and social characteristics, 'Article 9' funds, which make sustainable investments with measurable objectives, or 'Article 6' funds, which do not necessarily have a sustainability objective. For more information please refer to https://eur-lex.europa.eu/eli/reg/2019/2088/oj.
Main risks of the fund
Fees
- Entry costs
- We do not charge an entry fee.
- Exit costs
- We do not charge an exit fee for this product.
- Management fees and other administrative or operating costs
- 1,16% of the value of your investment per year. This estimate is based on actual costs over the past year.
- Performance fees
- 20,00% max. of the outperformance if the performance is positive and the net asset value exceeds the high-water mark. The actual amount will vary depending on how well your investment performs. The aggregated cost estimation above includes the average over the last 5 years, or since the product creation if it is less than 5 years.
- Transaction Cost
- 0,83% of the value of your investment per year. This is an estimate of the costs incurred when we buy and sell the investments underlying the product. The actual amount varies depending on the quantity we buy and sell.
Performance
| Carmignac Portfolio Long-Short European Equities | 2.3 | -7.7 | 10.0 | 16.7 | 5.1 | 0.3 | 7.4 | 13.6 | -5.7 | 0.7 |
| Carmignac Portfolio Long-Short European Equities | + 2.8 % | + 7.7 % | + 5.7 % |
Source: Carmignac at 31 Oct 2024.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).
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