Carmignac Sécurité: Letter from the Fund Managers

Over the fourth quarter of 2024, Carmignac Sécurité gained +0.89% compared with +0.62% for its reference indicator, bringing its performance for the year to +5.28% compared with +3.16% for its reference indicator.

2024 was thus a very productive year for the Fund, which posted a performance in the top decile of its Morningstar category² while enjoying historically low volatility, which stood at 1.1% over one year at the end of December. The carry, buoyed by historically high interest rates, were of course a major contributor to performance. However, all of the Fund's main strategies contributed to performance. Active duration management, the tightening of credit spreads in our preferred sectors (financials, energy, CLOs), strategies benefiting from persistent inflation and the steepening of yield curves all contributed positively to the Fund's performance. We look forward to 2025 with confidence in an asset class that continues to offer a wealth of opportunities. Just look at the portfolio's yield to maturity, which remains very attractive despite the European Central Bank’s (ECB) first rate cuts. At around 4%, we expect it will again be one of the main drivers of performance for 2025.

In the United States, the Federal Reserve (Fed) took a proactive approach in response to the deterioration in the labour market, starting its cycle of interest rate cuts with a 50 basis point reduction in September. This decision was aimed at ensuring a soft landing for the economy in response to signs of a slowdown. The easing of monetary policy had been well anticipated by the markets (10-year yields performed particularly well in the third quarter), and fears of premature easing pushed long-term yields back up. The US 10-year rate ended the year at 4.57%, compared with 3.77% at the end of September and 3.86% at the end of 2023. The yield curve (2-10 years) continued to steepen after a lacklustre first half. This rise in rates over the year reflects the fact that, while the Federal Open Market Committee (FOMC) has made a good start to cutting rates, the real economy has been surprisingly strong. The election of Donald Trump adds to this optimism, as his programme appears to be focused on supporting the US economy (through tax cuts, deregulation and the imposition of import tariffs).

In Europe, the ECB has maintained an accommodative monetary policy, cutting interest rates by 100 basis points over the course of the year. Quantitative tightening (QT) continued to reduce excess liquidity, putting pressure on bond yields. At the same time, governments struggled to reduce their budget deficits and net issuance reached record levels.

The German 10-year yield ended the year at 2.36%, compared with 2.12% at the end of September and 2.07% at the end of 2023. Within the eurozone, sovereign spreads experienced contrasting fortunes, with the Italian spread narrowing by almost 50 bps over the year, while the dissolution of the French government and the difficulty of establishing a stable executive cost the French 10-year a 30 bps spread over its German counterpart, which ended the year at 80 bps.

Central bank rate cuts, strong equity markets (particularly in the US) and stimulus measures in China created a supportive environment for risky assets. Subscriptions to credit funds enabled the corporate bond market to perform well throughout the year, with the average spread on the European investment-grade credit market rising from 140 basis points over Germany at the beginning of the year to around 100 basis points at the end of 2024. It should be noted that these historically very low levels are being achieved at a time when economic growth in Europe is flirting with zero. So flows have largely dominated the fundamentals this year.

In the last quarter, the modified duration was reduced to around 1.40 at the end of November (compared with almost 2 at the end of September), before being raised slightly to 1.53 at the end of December through purchases of US short-term rates. Over the course of the year, the contribution of the modified duration of corporate bonds remained stable at around 1.35/1.40, while that of government bonds fluctuated in line with market valuations (peaking at the end of June). At year end, the Fund re-exposed itself to US 2-year bonds at a time when the markets were expecting only two more rate cuts by the Fed in 2025, which we consider to be the minimum.

The first few months of 2025 are likely to be dominated by Trump's first decisions and US economic data. The first factor is difficult to assess as the range of possibilities with the new US president is so wide. But his obsession with growth should support risky assets, at least initially, and reinforces our view that we should maintain a high exposure to private equities. Economic data will be closely scrutinised, particularly inflation data and the risk that its persistence could lead to further interest rate cuts. However, since inflation was certainly one of the reasons why Biden was defeated, there is no doubt that Trump will also be able to manoeuvre (thanks in particular to a more abundant energy supply) to prevent it from getting too out of hand. If the market continues to de-price rate cuts, the Fund's sensitivity will most likely increase, especially at the short end of the curve.