Monthly fund manager commentary

May was a strong month for most financial assets, as better economic data and lower US-China tariffs led investors to become more optimistic about the global economic outlook. Despite some concerns around the outlook for the US economy, as consumer confidence fell sharply on the initial tariff announcements, subsequent data points suggested that current activity remain robust. This also meant that equities outperformed bonds in all major markets.

Exposure to the potential impact of tariffs drove much of the individual stock performance during the month, with those being hardest hit initially showing strong gains as the US started to talk in a more conciliatory manner around the opportunities for trade deals. The best example of this is Estee Lauder, where we believe the initial fears were (significantly) exagerated as the stock fell almost 30% in early April on the initial imposition of tariffs. However, by the end of May it was back above the levels of late March, helped by an improvement in its underlying performance. In its Q3 results (to end-March) it was able to report share gains in the key markets of China, Japan and the US - the latter for the first time in many years. Within the Asian Beauty industry, there was a strong performance from our Korean holdings, notably Amorepacific. The popularity of Korean cosmetics has continued to grow around the world, such that China now 'only' accounts for around 20% of industry sales, against nearer 50% just 3 years ago. The outlook for Chinese demand is also now more stable, so the remaining 80% of sales are able to drive healthy overall growth. This growth is also geographically diverse, as the US, Europe and Asia are all contributing to an improving picture. Against this background, Amorepacific was up over 20% in May and has returned over 50% for the year-to-date (both USD, total return). Despite these healthy gains, it continues to trade at a 60% valuation discount to L'Oreal.

Although trends in the Spirits industry remain subdued, as demand normalises after a period of excess growth in the early COVID years, our holding in Fever-Tree performed strongly. Following its recent deal to effectively sell its US business to Molson Coors, it had guided for minimal growth this year as it transitions to a new distribution system. However, US demand has continued to grow, trading well above expectations, and the share price has also been supported by the on-going share buy-back. The only industry trading update came from Diageo, as it reported Q3 results and hosted a Capital Markets Day for its Guinness beer business. The Guinness brand has performed strongly in the last 3 years, led by its Zero alcohol version, but the (larger) spirits business continues to struggle as it loses share in the key US market. We do not own Diageo, as we see better prospects for share gains at Becle (through Jose Cuervo tequila) and Campari (through Aperol and its Espolon tequila brand). Indeed, in both May and on a year-to-date basis, our overall spirits exposure has made a positive contribution to returns, in part reflecting the deacde-plus lows for valuations.

Elsewhere, we attended Capital Markets Events hosted by Haleon and Reckitt, and both share prices responded well to the presentations. Although Haleon has delivered healthy sales growth since its IPO, it has struggled to translate this into consistent earnings growth due to gross margin headwinds and some (dilutive) disposals. The presentations showed a plan to increase gross margins by 50-80 bps a year, which in turn should drive 10%+ earnings growth. Although it operates in similar categories, the Reckitt event was used more as a platform to increase confidence that it could return to the healthy 4-6% per annum sales growth it used to deliver. With (rightly) limited ambitions to diversify away from its core business, we believe the strength of its cash flows and some disposals are likely to drive a substantial return of capital to shareholders.

There was a notable fall in BellRing Brands during the month, as it chose not to raise guidance despite another quarter of strong growth, highlighting concerns around potential retailer de-stocking. The shares fell 20%, although to put this in context it had risen four-fold since our initial investment, and we had also halved our position earlier this year. It remains the market leader in Ready-to-Drink protein snacks (through its Premier Protein brand) and the category continues to benefit from significant tailwinds due to (amongst other things) GLP-1 users looking for healthier snacking alternatives to confectionery and chips/crisps.

There was no significiant trading during the month. The top 3 contributors in the month were Amorepacific, Fever-Tree and Estee Lauder. The bottom 3 were BellRing Brands, Nomad Foods and Kose.