SUMMARY
The Fund fell 3.9% in February, outperforming the Small Industrials by 0.6% and underperforming the Small Ordinaries by 1.3%. For the 12 months to February, the Fund was up 1.2%, outperforming the Small Industrials by 0.1% and underperforming the Small Ordinaries by 21.9%.
The phenomenal rise in gold stocks during 2025 boosted the Small Ordinaries, and we remind our investors that we do not invest in that asset class due to the elevated risk. It is also worth noting that whilst the global rout in software stocks impacted our performance over January and February, this was not material from a portfolio perspective given our deliberate diversification across industry sectors.
COMMENTARY
February saw global markets reasonably firm, notwithstanding weakness in the US, caused primarily by a correction in tech stocks, as investors take a more sober approach to the potential returns on large AI-based capex budgets. Software companies were sold aggressively on fears that AI threatens their long term viability, a picture which remains far from clear. However, elevated valuations provided little protection once the fear kicked in.
The US market fell 0.9%, with NASDAQ down 3.4%. However, other markets, such as the UK (+6.7%) and Japan (+10.4%), were sharply higher as investors shifted out of US equities. US bond markets were firmer, following a correction over Dec/Jan.
The Australian market rose 3.7%, driven by the mining sector, which rallied 9.3% as gold and silver prices enjoyed double-digit gains. Small-cap stocks fell 2.6%, with industrial stocks off 4.5%, driven primarily by weakness in the tech sector. We have been busy with company results and management meetings during the month.
The conflict in Iran began at the end of the month, hence it did not affect price action in February. Whilst this event has potentially dramatic implications for oil prices, inflation, and hence interest rates, we are not heavily exposed to the sector and do not believe it is useful to make definitive predictions at this stage, given the range of potential outcomes.
Our positive contributors in February included:
Wagners (+30%) upgraded its earnings based on robust demand for concrete in the Queensland market, with net migration boosting housing activity. Aussie Broadband (+12%) revealed 25% profit growth and upgraded full year expectations. Imdex (+12%) also upgraded its earnings outlook after a 32% rise in first-half profits, noting increased confidence in exploration-based products and services, given the recent boom in capital raising by smaller gold companies. This effect also rubbed off on ALS Corp (+4%) in the absence of a specific update from the company. Netwealth (+5%) grew earnings 20% in the first half and remains well positioned to take further market share over the medium term.
Our negative contributors in February included:
Generation Development (-14%) continued to drift despite hitting profit expectations and growing first half profits by 63%, perhaps on fears AI would impact their business negatively – we believe AI is actually more likely to be an opportunity in this regard. Zip Co (-28%) grew earnings 86%. However, the market was disappointed by an increase in reported bad debt statistics, which were largely due to a change in customer mix. However, February was not a month for nuance given global skittishness. Lovisa (-23%) reported 20% profit growth. However, there was mild weakness in sales momentum in Australia in a patchy retail environment. Symal (-17%) achieved its forecast earnings. However, retraced after the stock had doubled in CY25.