MARKET REVIEW
April was a highly volatile month of trade developments that whipsawed the equity market, with volatility levels (VIX) last seen during the Covid crisis or GFC. The month opened with the “Liberation Day” tariff announcement by President Trump. Although expected, the scale, breadth and methodology associated with this announcement took investors by surprise. Equities, in particular US equities, came under pressure as recession fears increased, while US rates rose on the back of the perceived risk of tariff-led inflation pressure, and the USD weakened against most major currencies. Some of these initial knee-jerk reactions receded as the US administration announced a 90-day suspension for some tariffs to allow for a negotiation period with a dozen countries, while escalating trade tension with China further. In a stark reversal of past trends, US equities were the weakest and closed the month down, while equities from other key regions ended in positive territory.
The volatility surrounding significant events such as Liberation Day creates opportunities for us as bottom-up stock pickers – as the picture remains unclear, our decisions are made on a stock-by-stock basis rather than sector by sector.
PERFORMANCE COMMENT
The strategy performed strongly in April, materially ahead of its reference index. Over 80% of this outperformance came from the allocation effect, while the selection effect also added to performance. Heading into Liberation Day, as a result of our valuation-based approach, the strategy was positioned quite defensively. Indeed, the strategy's beta was towards the low end of its historical range. This led to a strong outperformance on the way down. As global equities sold off, the valuation spread between defensives and cyclicals moved sharply in the opposite direction, directing us to gradually add back cyclicality. By the time the market reached its bottom, the Fund was less defensive and more constructively positioned, allowing us to continue to add to outperformance on 9 April, the day President Trump announced a 90-day tariff pause and markets rallied significantly. From here, the strategy broadly tracked the index into month-end.
In terms of individual stocks, two technology names appeared in our top 3 contributors, Cadence Design (US electric design automation leader, +17%), benefiting from robust data center demand, and Kinaxis (Canadian supply chain management software company, +22%), with investors predicting the company would be a beneficiary of tariff related supply chain disruptions. The third top contributor was Andritz, Austrian Industrials (+28%), whose cheap valuation was recognized against strong earnings.
Our bottom contributors were mainly driven by cyclical names such as Smurfit Westrock (US packaging, -7%) and Zebra Technologies (US supply chain management software, -11%). Fears of tariffs causing a recession impacted the former while Zebra's Chinese supply chain came under the spotlight. The third bottom contributor was Agilent, US Healthcare (-8%), whose weak earnings print disappointed investors.
FUND ACTIVITY
Given the volatility in the month, turnover was higher than usual. The broader theme across the portfolio was taking profit from defensive exposure and recycling it into cyclical areas. Some highlights were our exit of Cintas and reduction in Sysco, whereas on the cyclical side, we entered three new positions – Chipotle, Marvell Technology and Intertek – and increased the size of owned positions, such as in LKQ, SEB and ATS.
From a sector exposure perspective, the biggest changes were in Information Technology (+2.5%) and Consumer Discretionary (+2.0%). This was largely funded by taking profits very broadly across sectors, with the larger funding areas coming from Industrials (-80 bps) and Consumer Staples (-50 bps).
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 battleground). We continue to observe attractive market anomalies. Looking ahead into 2025-26, we anticipate that a broader equity market performance should 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 rising 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 on 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 two key revolutions associated with this transition: the bio-economy and resource efficiency. Across these revolutions, the thematic investment universe encompasses 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.
