Carmignac Portfolio Patrimoine Europe: Letter from the Fund Managers
Over the third quarter, Carmignac Portfolio Patrimoine Europe achieved a positive return of +2.38%, although it slightly underperformed its reference indicator, which posted a gain of +2.75%. This resulted in a year-to-date performance of +8.01% for the fund, compared to +6.08% for the reference indicator1.
European Markets review
The third quarter of 2024 concluded with positive returns despite several episodes of market volatility. In early August, stocks took a hit due to weaker U.S. economic data, an interest rate hike from the Bank of Japan, and thin summer liquidity. However, the much-anticipated commencement of the Federal Reserve’s (Fed) rate-cutting cycle in September, along with a less aggressive stance from Japanese policymakers and new stimulus measures in China, alleviated investor concerns and fuelled a strong stock market rally towards the end of the quarter. This stock price upturn was led by economically sensitive cyclical stocks, anticipating future recovery. In Europe, the European Central Bank (ECB) implemented its second rate cut, but central bankers face a dilemma: resilient euro-area inflation contrasts with a worsening economic outlook.
In more detail, as the market leadership was taken up by cyclical sectors, previously strong areas of the market, notably Healthcare and Technology lagged. Mirroring the trends in the equity markets, the credit markets have reaped the rewards of high carry and low spreads. Amid a backdrop of relatively optimistic risky assets, the sovereign markets were significantly more pessimistic about the economic trajectory, resulting in a sharp decline in rates over the quarter.
How did we fare in this context?
The fund continued to maintain its momentum, delivering a positive performance over the period with less volatility compared to the market.
The end of July and the beginning of August was a period that truly tested the resilience of our fund amidst a whirlwind of market volatility. During this period, equity markets, including the Stoxx 600, experienced a sharp decline, plummeting by 6% in just three days while Japanese equities lost nearly 20%. However, our fund demonstrated notable resilience, limiting its decline to a mere 1.3%. This performance was the result of strategic positioning. One of the key contributors was our volatility calls. On August 5, 2024, the VIX, often referred to as the "fear gauge," saw its largest intraday spike ever recorded. We had been holding these options for a while, anticipating that the low implied volatility in equities presented an attractive opportunity in the event of market turbulence. Additionally, our puts on equity indices played a crucial role in reducing our exposure to the falling equity markets. These tactical hedges further mitigated the impact of the market downturn on our fund.
But the story doesn't end there. As the markets began to rebound, our fund was well-positioned to capitalize on the recovery. Our effective stock picking allowed us to seize opportunities and drive performance. Moreover, our exposure to commodities, particularly gold, served as a robust performance driver during this period. Gold, often seen as a safe-haven asset, provided stability and growth amidst the market's fluctuations and tensions in the Middle East. Finally, our cautious positioning on interest rates, characterized by a low modified duration, limited our ability to fully capitalize on the decline in interest rates in Europe. However, our bond selection in the high yield and structured credit sectors contributed to the Fund's performance.
Outlook
The European economy continues to be sluggish, and we anticipate weak but steady growth through year-end. The austerity measures enforced by Brussels in response to budgetary excesses, especially in Italy and France, are likely to hinder economic growth. Additionally, the ongoing situation in the Middle East could impact commodity prices, thereby influencing inflation rates across Europe. However, it is evident that in the coming months, market attention—even in Europe—will be primarily focused on the situation in the United States. We believe that while US growth is decelerating, it is not falling off a cliff. Rapid disinflation is enabling the Fed to maintain the economy’s soft landing through consecutive rate cuts.
In this scenario, we remain constructive on equities with exposure around 30%. Indeed, in a scenario of gradual economic slowdown and global monetary easing, risky assets should continue to perform well as long as we don’t have a recession. However, similarly to the third quarter, we anticipate increased market volatility. The main risks to equities include overly optimistic corporate earnings expectations and uncertainties related to the US elections, which justify maintaining partial hedges. Regarding interest rates, we maintain a low overall modified duration as markets already reflect a negative outlook on growth.
To strengthen our overall portfolio construction, we have implemented several diversification strategies. As mentioned, we have hedged part of our equity market exposure via puts options on major equity indexes as well as call options on volatility. We have also allocated around 5% of our portfolio to commodities through ETCs on gold, silver, and copper. Our long-term view is that inflation will be higher on average over the next decade compared to the 2010s. To address this, we have invested in inflation products, particularly inflation swaps. These instruments help protect the portfolio against unexpected inflation spikes and potential geopolitical tensions.
Carmignac Portfolio Patrimoine Europe A 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
- 4,00% of the amount you pay in when entering this investment. This is the most you will be charged. Carmignac Gestion doesn't charge any entry fee. The person selling you the product will inform you of the actual charge.
- Exit costs
- We do not charge an exit fee for this product.
- Management fees and other administrative or operating costs
- 1,80% of the value of your investment per year. This estimate is based on actual costs over the past year.
- Performance fees
- 20,00% when the share class overperforms the Reference indicator during the performance period. It will be payable also in case the share class has overperformed the reference indicator but had a negative performance. Underperformance is clawed back for 5 years. 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
- 0,67% 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 Patrimoine Europe | -4.8 | 18.7 | 13.9 | 9.5 | -12.7 | 2.1 |
| Reference Indicator | -4.8 | 16.4 | 2.4 | 10.2 | -11.0 | 9.5 |
| Carmignac Portfolio Patrimoine Europe | - 0.4 % | + 4.5 % | + 4.6 % |
| Reference Indicator | + 2.3 % | + 3.5 % | + 3.9 % |
Source: Carmignac at 30 Sep 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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