MARKET REVIEW
Q1 2025 began like a roller coaster, with numerous developments unfolding. These included a reversal of the prolonged US growth and tech trade, and a value recovery led by Europe and emerging markets. Additionally, interest rates displayed divergent trends, with rates declining in the US and rising in the eurozone. Even the typically sluggish European region has provided reasons to invest in its future. These changes have led to rapidly evolving shifts in trends, favouring value-oriented trades. The level of uncertainty was most acute in March due to US-led trade tensions.
Key events during the quarter occurred in Europe and the US. Germany made a historic move by shifting away from its conservative and debt-averse fiscal policy to support increased defence spending and a special fund for infrastructure. In parallel, the EU announced the ReArm Europe plan, which could mobilise close to EUR 800 bn for defence spending. In the US, the Trump administration remained fully committed to its aggressive trade proposals, with widespread reciprocal tariffs to be announced in early April.
The equity market was therefore caught in significant cross-currents. In the US, investors worried about the negative implications of higher tariffs on the US consumer, growth, inflation, and the reaction function of monetary policy. On the European side, however, the mood was somewhat more constructive as cyclical equities benefited from the positive perspective of fiscal loosening (mostly banks and construction/defence-related sectors).
PERFORMANCE COMMENT
In the month of March, the Future Electrification Fund outperformed the index by 80 bps, with both allocation and selection driving performance over the period. The thematic overweights in Utilities and Industrials were the main drivers of performance from an allocation perspective. From a selection perspective, Wheaton Precious Metals delivered considerable returns of 24.5% and, more broadly, we saw very strong performances from our regulated utility assets SSE, Enel and National Grid, with the market attracted to defensive cash flows.
If we zoom out and consider the quarterly trends, the Fund lagged the index by c1.3%, with selection being the key driver of the drag. Wheaton was again one of the top performers (+75%), joined by BYD (+47%) and Siemens (+20%). At BYD, we saw the brand overtake Tesla in terms of EV sales, while Siemens’ restructuring into a pure-play technology infrastructure business continues to take shape. Regarding the drags in the portfolio, we saw AES down 12% on concerns regarding its debt profile in a higher-for-longer rate environment, while PTC and Delta caught up in the broader technology risk-off environment.
FUND ACTIVITY
Over the first quarter, the portfolio took advantage of market weakness to increase exposure to businesses with long-term resilient growth profiles where the market has near-term concerns. This included Honeywell, where concerns on the nearer-term growth outlook for the US economy muddies the longer-term structural case for its industrial automation and building efficiency solutions, and Cummins, where its positioning, both in backup power and low-carbon truck and rail engines, remains very attractive. From a resilient cash flow perspective, we took the opportunity to add Linde, following a rare pullback for this industrial gas business, and we also saw very select opportunities in deeper-value names in the auto space, with Mercedes and Aptiv entering the portfolio. To fund these changes, we took profits in some of our cloud hyperscaler exposure as well as industrial European names where performance had been very strong.
OUTLOOK
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 have implemented climate-related legislation. The US 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 over an economic soft landing is starting to take shape, potentially favouring a broadening of the equity market performance into the second part of 2024 and 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 largest 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, 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.
