DNCA Invest Sustain Alterosa

Equity Portfolio:

“Higher for longer”: Rising interest rates have been the defining theme of this economic comeback, as inflation and fiscal concerns have fueled investor jitters. On the one hand, rising energy prices (oil up 35%–40% from July lows), combined with the resilience of economic activity—both in terms of growth and employment—led several major central banks to adopt a more restrictive monetary policy to contain this resurgence of inflation (the Fed, ECB, BoJ, and RBA all raised key interest rates by 25 basis points). On the other hand, political and fiscal risks have put additional pressure on government bonds, particularly in Europe and among countries with the most expensive public spending policies. As a result, long-term sovereign yields in several countries reached levels not seen in over fifteen years: the 10-year U.S. Treasury yield stood at 5.28% (+53 basis points over the month), the 10-year French OAT at 4.86% (+68 basis points), and the 10-year German Bund at 3.59% (+27 basis points).

Nevertheless, equity markets showed remarkable resilience (MSCI World: -1.1%, S&P: -0.3%, Stoxx Europe 600: -2.4%). Strong first-half earnings reports and expected earnings growth for 2026 and 2027 (33% and 15% in the U.S., 20% and 9% in Europe, respectively) have so far helped absorb this rate shock.

September also marked a turning point for the AI theme with the launch of Muse, Meta’s new personal agent, which illustrates the gradual shift from conversational assistants toward agents capable of performing tasks and becoming a new interface with consumers. After several weeks of underperformance, companies exposed to this theme thus staged a notable recovery, taking into account valuation levels, the interest rate environment, and the cybersecurity incidents that punctuated the month.

Against this backdrop, the fund posted a monthly return of -0.95%, compared to -0.58% for its benchmark index.

Over the month, the top relative outperformers in the portfolio were: Johnson Controls International (+8 bps, active weight +0.8%), ASML (+6 bps, active weight +0.5%), TSMC (+5 bps, active weight +1.2%), Nvidia (+5 bps, active weight +0.9%), and Thermo Fisher (+5 bps, active weight +0.5%). Conversely, the worst performers were: Xylem (-5 bps, active weight +0.7%), First Solar (-5 bps, active weight +0.4%), Nextera Energy (-4 bps, active weight +0.6%), Rational (-4 bps, active weight +0.5%), and CRH (-4 bps, active weight +0.3%).

Among the key adjustments, we reduced our positions in Compagnie de Saint-Gobain, Allianz, Keyence, CRH, Deere, Johnson Controls International, Broadcom, and GE Vernova, while we increased our exposure to Prysmian following its recent underperformance.

Gross equity exposure stood at 31% as of the end of September.

In the short term, the geopolitical environment and its impact on oil prices will continue to fuel market volatility. However, the latest leading indicators (notably the PMI) point to an acceleration in economic activity on both sides of the Atlantic. Third-quarter earnings reports and earnings growth forecasts should therefore remain positive. In this context, earnings momentum will remain a key driver for equity markets despite rising interest rates and costs. Inflation, however, remains the primary concern and could stay persistently above central banks’ targets, even in the event of geopolitical de-escalation and a decline in energy prices. Such a development, while easing price pressures in the short term, would also support purchasing power, investment, and, more broadly, already robust demand, thereby sustaining a risk of overheating that could force central banks to tighten monetary policy further.

Bond portfolio:

September was marked by another rise in sovereign bond yields, against a backdrop of persistent geopolitical tensions in the Middle East, rising energy prices, and economic activity that proved more resilient than expected. We are witnessing a significant shift in the monetary policies of th , the ECB, and the Fed, all of which raised their policy rates by 25 basis points during the month. The central banks’ joint message has become significantly less accommodative: the main risk is no longer merely that of insufficient growth, but rather that of an energy supply shock lasting long enough to unanchor inflation expectations. This reassessment of the monetary policy path has led to a sharp rise in long-term rates. The 10-year U.S. Treasury yield ended September around 5.3%, while the 10-year Bund surpassed 3.5%—levels not seen since the global financial crisis. The French OAT was further impacted by a widening of its spread (+126 basis points), reflecting investor concerns about the country’s budget and the upcoming presidential elections.

In this context, investment-grade bonds suffered due to their longer duration. Spreads widened by just 3 bp in both Europe and the United States. Returns stood at -1.3% and -2.7% on either side of the Atlantic. Despite its shorter duration, high-yield bonds were also impacted. Spreads widened by 55 bp in Europe and 40 bp in the United States, with returns at -1.7% and -2.4%, respectively. For the credit market as a whole, primary issuances were very abundant during the month. This trend was expected, but the rapid rise in rates may have accelerated corporate issuance. IG issuance totaled €77 billion (compared to a historical average of €59 billion), and non-financial HY issuance totaled €20.7 billion (compared to an average of €8.9 billion). On the demand side, inflows deteriorated over the four weeks of the month (more than €2 billion in outflows from investment-grade bonds and -€1.1 billion from high-yield bonds, particularly in ETFs).

During the month, Alterosa’s bond portfolio was impacted by this sharp move in interest rates. BB- and BBB-rated bonds posted the weakest performance. Hybrid issues and subordinated bank debt, which are more sensitive to interest rates, also underperformed.

The sectors contributing most to performance were energy, financial services, technology, retail, and leisure. Those contributing the least were utilities, healthcare, banking, capital goods, and real estate.

At the issuer level, the top contributors are Derichebourg (services) with its new primary offering, Graanul (energy), a resilient bond ahead of an upcoming refinancing, Biogroup (healthcare), Nexi (financial services), following its upgrade by Moody’s, and Sealed Air (capital goods). The weakest contributors were Unibail-Rodamco-Westfield (real estate), Nextera (utility), EDP (utility), Alstom (transportation), and Neoen (utility) due to their interest-rate sensitivity.

During the month, we reduced the idiosyncratic risks of our high-yield investments: we sold Perrigo (consumer goods), Iron Mountain (real estate), Ardagh Metal Packaging (capital goods), and Stora Enso’s hybrid debt (basic industries), and reduced our position in Metlen Energie (utility). We also participated in new primary offerings with solid fundamentals: Kingspan (capital goods), Nexans (capital goods), Grünenthal (healthcare), Teva (healthcare), Derichebourg (services), and Energia (utility).

We remain confident in the fundamentals of European issuers, which should benefit in particular from a more favorable growth environment. Technical factors, however, appear less supportive than in previous months: the primary market remains dynamic, even though issuance volumes could slow during the third-quarter earnings season, while capital flows have recently shifted toward outflows.

At the same time, rising interest rates have helped restore more attractive yield levels. Given that rates are expected to remain high in the short term, we favor intermediate maturities, around five years.

As of the end of September, the portfolio’s bond exposure stood at around 59%, with a greater weighting toward Investment Grade (38%) at the expense of High Yield (20%). The portfolio thus posted a yield of 4.9%, with duration remaining stable at around 4.