MARKET REVIEW
H1 2025 was marked by significant shifts. The US is now grappling with several self-inflicted challenges, including its trade policy (“Liberation Day”) and ongoing fiscal expansion (“Big Beautiful Bill”). These developments have broad implications for the USD, debt sustainability, interest rates, and both consumer and business confidence, as well as inflationary pressures.
In contrast, the outlook for the eurozone has improved modestly. Fiscal expansion linked to the EU’s defence initiative and Germany’s easing of fiscal constraints and mobilisation of its fiscal space are expected to gradually support economic activity over the coming quarters. However, even in Europe, the reset of US bilateral trade relations is weighing on business sentiment.
In China, the recent de-escalation of trade tensions with the US has been a welcome development. Authorities are now focusing on stimulating domestic consumption and investment. While the peak uncertainty surrounding US trade policy may be behind us, global economies are converging from different starting points.
In the US, slowing growth, a weakening labour market, and the risk of a rebound in inflation have placed the Federal Reserve in a wait-and-see stance. Meanwhile, in the eurozone, inflation has fallen below target, helped by lower energy prices and a stronger euro, prompting the ECB to further cut its benchmark rate. This could pave the way for a gradual improvement in activity levels.
All major equity indices have rebounded strongly from the early-April selloff triggered by “Liberation Day.” The corporate earnings season has been robust globally, with earnings surpassing expectations by nearly 8%. Notably, the gap in earnings growth between US and European equities has narrowed somewhat, contributing to the relative outperformance of European equities over the semester.
In a volatile environment, it is particularly noteworthy that small and mid-cap stocks performed on par with their large-cap counterparts, despite the prevailing risk-off sentiment. This resilience, in our view, underscores the elevated level of pessimism already embedded in this segment of the market, where valuations remain at historically attractive levels. Also worth highlighting is the historical outperformance of European cyclicals, led by Financials and Aerospace & Defence, relative to their US counterparts, which have been weighed down by mounting concerns over US growth and inflation. More defensive sectors, such as Staples and Healthcare, were left behind in H1 2025.
PERFORMANCE COMMENT
In the first half of the year, the Fund lagged its reference benchmark. In the last few days of the period, there were major factor moves which hurt relative performance. As we enter the second half, these swings have started to revert and improving the relative performance as we enter the second half of the year (>1% outperformance as at the time of writing).
A brief note on attribution: if we look at our attribution using the standard GICS sectors, our underperformance in H1 all comes from stock selection. However, given some of the intricacies in the first half and our thematic focus, it is important to go a level deeper. When attributing with GICS subsectors, the answer is the opposite, i.e., allocation drove the underperformance (-350 bps), while stock selection was positive (+170 bps). Take, for example, aerospace and defence (a subsector of Industrials), which is outside our thematic remit, is the best-performing subsector year to date. At a higher level of GICS sector attribution, not owning this space is identified as negative stock selection, whereas at the GICS subsector level, it is identified as a negative allocation effect, which is more appropriate given our thematic focus. So, strong performance in A&D, banks, gold and insurance (to name a few subsectors that we cannot own) all pushed the allocation effect (better thought of as thematic effect) negative, and on net, the allocation/thematic effect was very negative (-350 bps).
Our best-performing stocks in the half were Heidelberg (+40%), Republic Services (+14%) and Andritz (+52%), while our biggest detractors were Smurfit Westrock (-19%), TREX (-21%) and Tetra Tech (-10%). Heidelberg benefited from a strong cement market, while Smurfit Westrock, given its cyclicality, was caught up in macro concerns as the geopolitical situation worsened.
For the month of June, we lagged the reference benchmark. Similar to the first half, GICS sector attribution splits the blame nearly equally between stock selection and allocation, whereas GICS subsector attribution puts it all on allocation (stock selection slightly positive). Our largest headwind on subsector allocation was our thematic overweight in packaged food and meat (given the Fund’s focus on improvements within the food system). This subsector's allocation alone cost the Fund 50 bps, while our stock selection within it was flat.
Our best-performing stocks in the month were BESI (+23%), Marvell Technology (+29%) and Jabil (+30%), while our biggest detractors were Descartes Systems (-12%), LKQ (-9%) and Compass Group (-3%). BESI benefited as the market put more weight on its long-term technology portfolio versus shorter-term cyclical concerns.
FUND ACTIVITY
In the first half, we steadily reduced our exposure to Industrials (from 42% to 35%) and Materials (15% to 12%), which enabled us to spread the portfolio’s risk across a more diversified set of return objectives. The largest sector increases were seen in IT (from 13% to 17%) and Consumer Staples (from 11% to 14%). Our largest individual trades were exiting Heidelberg, Republic Services and Tetra Tech, all Industrials and Materials names.
In June, it was a similar story: we reduced Industrials and Materials exposure by about 2% and 1%, respectively, while diversifying into Consumer Staples and IT. Our largest trades in the month were the addition of HP Inc (now in the top 10) and switching United Rentals for Ashtead on a cheaper valuation and a preferable business model (organic versus acquisition-led growth).
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 started 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 in 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.
