MARKET REVIEW
February proved to be a very eventful month. On the political front, the Trump administration announced the introduction of tariffs on Canada, Mexico and China. Eventually, both Canada and Mexico received one-month reprieves by agreeing to additional border-security measures, while tariffs on China proceeded as planned. Additionally, discussions over a potential truce in Ukraine, combined with an increase in EU defence spending and the German election, shifted attention to potentially better macroeconomic conditions for the EU economy. Meanwhile, in the US, weakness in the ISM services index and rising inflation raised concerns about the resilience of US economic growth.
Finally, the earnings season concluded on a strong note, showing solid EPS growth but also an interesting narrowing of growth differentials between mega-cap companies and the rest of the equity market.
February was therefore an unusual month by several measures. We observed many dynamics reversing quite significantly, with movements exceeding one standard deviation. For instance, the top 10 largest companies in the world underperformed the rest of the equity market in a monthly move not seen since 2022. Similarly, European equities markedly outperformed US equities, and value and low-volatility factors also showed significant outperformance.
PERFORMANCE COMMENT
After performing broadly in line in January, the Fund underperformed the reference index by about 1.5% in February. About half of this was related to our thematic biases (i.e., our universe underperformed by 70 bps). Generally speaking, our structural under allocation to Financials and Real estate (given limited thematic relevance) was a headwind. Our stock selection was also weak within Industrials and Information Technology.
Our top contributor was Republic Services in Industrials (waste management, +9%), which outperformed on a strong earnings print. Similarly, Daifuku in Industrials (industrial automation, +24%) performed strongly on earnings. Heidelberg in Materials (cement producer with an increased on environmental friendly solutions +6.5%) continued to benefit from improved perspective for the sector on the back a potential truce in Ukraine.
Agilent in Healthcare (life sciences, -16% ) was the largest detractor on results that contained no major surprises. Tetra Tech in Industrials (environmental-focused Engineering & Construction company, -21%) continued to underperform based on the Trump administration’s perceived negative impact on environmental services and particularly USAID, to which Tetra Tech has 10% revenue exposure. Thankfully, we reduced this position significantly in January, which cushioned the underperformance. The position now represents a little less than 1% of exposure for the Fund. Finally, despite delivering strong results, TREX in Consumer Discretionary (a US producer of composite decks) fell by 15% as investors remained concerned about the US housing market.
FUND ACTIVITY
The largest position change in February was a reallocation of capital away from Industrials towards Consumer Staples. This was in the form of taking profit on stocks that had outperformed in Industrials, such as Republic Services (see above), while also cutting some risk in underperforming positions; predominantly taking more exposure out of Tetra Tech (see above) and reducing Clean Harbours (hazardous waste management).
Within Consumer Staples, we entered a new position in Glanbia, a protein powder business. Protein powder supports a dietary shift from animal-based to plant-based protein, and its main ingredient, whey, is a byproduct of cheese production, hence supporting circular food supply chains. We continued to add to Sysco (foodservice distribution), which is now a top 10 position. Both are trading at historically low valuations with clear catalysts in the near term to create value for shareholders.
Another new position in February was Edenred, a French payments company providing meal voucher services. Meal vouchers are a tax-efficient way for employees to purchase food, making food more economically accessible and enabling a captive audience to promote healthy dietary shifts.
From a regional perspective, trading resulted in a slight reduction of US exposure in favour of Europe.
OUTLOOK
In 2024, as the inflation battle seemed over, countries began to move towards more accommodative monetary policies, with rate cuts across key economies, except for Japan. The narrative of a soft landing is starting to take shape, favouring a broadening of the equity market performance into 2025, after having been concentrated in a narrow set of stocks since 2023 and with the flight away from Smid Caps (i.e. the strategy's battle ground). We continue to observe attractive market anomalies. Looking ahead into 2025, we anticipate that a broader equity market performance would particularly benefit stocks that lagged in 2023-24, with a specific focus on small and mid-cap companies.
In this environment, we aim to complement our portfolio's barbell approach, which balances high-quality value and growth, with idiosyncratic opportunities driven by company-specific catalysts. We have observed a growing interest and understanding among investors in circular-economy solutions, which is supportive of growth and asset valuation. Currently, our areas of focus include performance and bio-based materials, advanced manufacturing and exposure to enhanced infrastructure that promotes a sustainable future, spanning from waste and recycling to water management and environmental integrity. Both the regulatory environment and economic factors are unveiling new business models within various dimensions of our Fund's universe.
FUND STRATEGY
The Circular Economy strategy aims to capitalise on investment opportunities arising from the shift of our economic model from linear to circular. This transition is centred around two main priorities: harnessing the power of nature and safeguarding natural capital.
The strategy's primary investment themes are closely tied to opportunities identified within four key revolutions associated with this transition: the circular bio-economy, resource efficiency, outcome-oriented economy and zero waste. Across these four revolutions, the thematic investment universe encompasses over 250 companies, carefully mapped across regions and sectors. As a result, it presents a well-diversified investment universe that offers ample depth and breadth for our stock selection process.