LO Funds
Future Electrification

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

In February, the Future Electrification Fund faced a challenging month, underperforming its benchmark. The lack of exposure to traditional Financials contributed to the negative allocation effect, while stock selection was a further detractor.

From a stock perspective, the design software segment experienced weakness, with Cadence and PTC both facing declines due to high expectations around AI rollouts that did not live up to market expectations. Quanta Services also saw a decline on concerns about a potential reduction in government infrastructure spending following a solid rally in 2024.

On a positive note, BYD rallied strongly after reporting robust results and surpassing Tesla in market share. Siemens' growth profile was highlighted in its results, with its significant discount to peers increasingly apparent. Additionally, our precious metals holdings performed well, with Wheaton delivering strong returns over the month.

FUND ACTIVITY

In February, we allocated some cash to fund new high-conviction positions. We first added Aptiv, a key provider of essential components for electric vehicles, including cable management and active safety products. While the market has concerns about the rollout of electric vehicles, Aptiv is well-positioned in the broader smartification of vehicles.

Additionally, we re-entered Steel Dynamics, a leading electric arc furnace manufacturer that has also developed a low-carbon aluminium plant. We are positive about the upcoming cash generation from its broad asset base, which is well-exposed to the need for local and highly efficient raw materials used in everything from new infrastructure to wind turbines.

OUTLOOK FOR THE STRATEGY

Despite facing cyclical headwinds, the secular trends driving the global electrification movement remain firmly intact. Over the last couple of years, numerous regulators and governments implemented climate-related legislation. The United States introduced the Inflation Reduction Act (IRA) in 2022, which was further clarified in 2023 through guidance issued by the US Treasury. These measures are expected to accelerate the growth of the clean energy sector in the US. In response, Europe introduced the Green Deal Industrial Plan in February 2023, followed by the NZIA in March 2023, with the goal of enhancing Europe's net-zero industry and supporting a rapid transition to climate neutrality. In late June 2023, the European Community announced the establishment of the Strategic Technologies for Europe Platform, aimed at promoting and increasing investment in critical technologies across Europe.

Despite the challenging performance of our key investment themes in 2023, we maintain a positive outlook on their long-term prospects. As interest rates are being lowered globally, apart from the specific case of Japan, the narrative of an economic soft landing is starting to take shape, potentially favouring a broadening of the equity market performance in 2025 . Our portfolio delivers superior growth and higher returns compared to the index, all while maintaining an attractive valuation. We believe that our diversified exposure to the global power system transition provides robust growth opportunities while mitigating downside volatility.

FUND STRATEGY

Electrification is poised to become one of the most transformative system changes in the history of capitalism, presenting one of the most significant investment opportunities to date. The convergence of falling costs, significant efficiency improvements, and widespread accessibility is paving the way for numerous electrification tipping points. An estimated USD 24.5 trillion in capital expenditure is projected to be deployed over the course of this decade. We anticipate a substantial shift in revenue streams across various aspects of energy demand, supply, and enabling solutions.

Our investment strategy revolves around capitalising on opportunities arising from regulations, innovations, services and products that align with the transition to a more environmentally friendly, circular, leaner, inclusive and cleaner world. The key themes of our investment strategy encompass demand-side electrification, including mobility, and the building and industrial sectors. We also focus on green power supply, encompassing renewables, battery technology and related infrastructure such as cables. Additionally, we target electrification enablers, including critical components such as infrastructure, semiconductors and materials that support the electrification ecosystem.