The banking sector’s woes reignited systemic fears in March. Volatility has made a comeback and is emerging from a long period of lethargy. At the same time, a powerful rotation within the stylistic and sectoral segments of the market occurred. The sharp drop in long-term yields, due to the increased risks of recession, also echoes a probable change in the pace of rate hikes by central banks. They now know the red line that must not be crossed in their monetary tightening. In this context, the Value segment, the big winner of the last 30 months, clearly underperformed in March due to its high exposure to Financials. Conversely, the “Visibility” style, which includes defensive, low-debt stocks with steady cash-flows, sometimes called “proxy-bonds”, performed very well, both in absolute and relative terms.
After two months of gains for our funds, which benefited from positive surprises on stocks announcing their results, the situation was more complicated in March. The collapse of Silicon Valley Bank, followed by Credit Suisse, reshuffled the deck, with a crash in banking and energy stocks. Our exposure to banks, our cyclical bias and our underweight in defensive mega-caps weighed. The sector rotation was so violent that, unsurprisingly, the funds underperformed and gave back performance. With the actions of the Federal Reserve and the Treasury Department, and the takeover of Credit Suisse by UBS organised by the Swiss authorities, the market stabilised, as did the relative performance of the funds. It should be noted that no discretionary decisions were taken during this period. Our solid experience in managing Digital Stars funds has taught us that discretionary decisions, which do not follow the model, are not profitable. There is no reason to believe that this time would be any different. So we continued to apply our models strictly, as we have always done in previous crises. As risk aversion diminishes, investors should once again focus on company fundamentals and news flow, especially as we approach the first quarter earnings announcement period, which is usually a good time for our strategy.
In this difficult environment, Digital Stars Europe Acc posted a monthly performance of -4.5% against -0.1% for the MSCI Europe NR and -4.1% for the MSCI Europe Small Cap NR. Digital Stars Continental Europe Acc ended March at -3.6% against 0.8% for the MSCI Europe ex UK NR. Digital Stars Eurozone Acc achieved -2.4% against 0.7% for the MSCI EMU NR.
Rebalancing in March was diversified, selecting stocks in the technology, consumer discretionary, healthcare and industrial sectors. Growth stocks are well represented in this selection. We stop to integrate financials as trends have been affected by the banking turmoil and some have been sold. The overweight in banking stocks has been reduced from 8.9% at the end of February to 6.9% in Digital Stars Europe. We are also selling energy and basic materials stocks. Digital Stars Europe is overweight financials, energy, industrials and technology. The fund is underweight healthcare, food and utilities. Italy remains the fund’s largest weight and the largest overweight, at 16.3%, ahead of Germany (15.5%) and the UK (13.3%).
Digital Stars Europe Smaller Companies Acc ended down -4.2% in March, in line with the MSCI Europe Small Cap NR at -4.1%. Positions in oil shipping and an underweight in real estate helped the fund overcome the impact of the banks.
The monthly portfolio reviews focused on strengthening IT and consumer discretionary. Sales were mainly in finance, as well as in energy and more defensive sectors like utilities or healthcare.
The portfolio is now mainly overweight in consumer discretionary and energy, as well as in banks, and significantly underweight in real estate and pharmaceuticals.
Italy (the most overweight country) weighs now 17.8%, ahead of the United Kingdom (the most largely underweight country) at 14.9%, and Denmark at 12.4%.
In a very divergent US market where the MSCI USA NR ended up +3.5% and the MSCI USA Small Cap NR -4.3%, Digital Stars US Equities Acc USD was down -3.7% in March. Significant exposure to regional banks had a strong impact on the fund, as did the under-exposure to technology mega-caps and the underperformance of our retail and oil companies. The good performance of Inter Parfums, e.l.f. Beauty and our healthcare stocks were not sufficient to compensate for this adverse effect.
The latest monthly portfolio review was diversified on the new entrant side. Sales were mainly in energy and consumer staples, as well as consumer discretionary.
The portfolio remains overweight in finance and industry, and underweight in media and pharmaceuticals.
