Market Commentary
Global equity markets experienced mixed returns in November. These were driven by the decisive outcome of the US presidential election and its potential impact on global trade and economic policy.
The US dollar strengthened 3% against a basket of its major trading partners’ currencies during November. This reflected investor expectations that the incoming Trump administration will pursue policies that risk rising inflation and thus a shorter rate cutting cycle, with a higher terminal interest rate.
US equities made strong gains following the presidential and congressional elections, upon expectations of growth-orientated policies, tax cuts and deregulation. Sentiment was further boosted when the Federal Reserve (Fed) reduced US interest rates to a range of 4.50% – 4.75%, despite October inflation edging up to 2.6% from September’s 2.4%. Expectations of more favourable government policy helped small companies outperform.
In contrast, European share markets finished November little changed, upon concern that higher US tariffs would hit the continent’s exporters. Weak economic data, the collapse of Germany’s governing coalition, and the prospect of France’s government losing a confidence vote further diminished market sentiment.
UK equities performed better, especially those with a domestic focus. The Bank of England reduced interest rates by 0.25% to 4.75%, as September wage growth eased to a still strong 4.8% and unemployment rose to 4.3%. The end of the month saw an increase in takeover activity, which boosted sentiment towards smaller companies.
Japan’s share market fell 0.5% as the country’s large manufacturing exporters were particularly impacted by fears of rising tariffs. However, domestic-orientated stocks in the retail and services sectors showed greater resilience. Corporate governance reforms continue to progress, with the Tokyo Stock Exchange publishing best practice case studies.
The stronger US dollar and fears of higher tariffs led to capital outflows from emerging markets (EM), putting pressure on their currencies. EM equities underperformed, especially in smaller markets such as the Philippines and Indonesia. China underperformed due to its exporters’ high exposure to the US market, while India, which is less dependent upon goods exports, outperformed.
Portfolio Highlights
The Fund returned 3.8% in Australian dollar terms during November, while the MSCI World SMID Cap Index returned 5.5%. The underperformance was driven by the underweight to the US and larger companies, and the overweight to Europe, Asia and smaller companies. However, strong stock performance, especially in Europe and Asia, contributed to relative returns. Stock performance within the <US$1 billion segment of the market was particularly strong.
The Fund’s most significant contributor to relative performance during November was the position in the Switzerland-based global sports products distributor On Holding. It outperformed after announcing strong third quarter earnings results, reporting a 32.3% year-on-year increase in net sales. This was driven by the company’s direct to consumer channel, which grew by almost 50% and now accounts for 39% of total sales. Strong results in the Americas and Asia-Pacific regions helped increase gross margins to 60.6%. The company raised its full year earnings guidance as its focus on innovation, global expansion and operational excellence continues to drive its growth trajectory.
Another strong performer was Latin America’s leading travel technology company Despegar.com which announced stronger than expected third quarter earnings. It reported an 8.9% year-on-year increase in revenue to US$194 million and a 94% jump in EBITDA to US$48 million. The company’s focus on operational efficiencies and higher-margin travel package sales contributed to this impressive performance. Despegar’s renewed partnership with Expedia and the expansion of its AI travel assistant, SOFIA, into a software-as-a-service (SaaS) offering, highlighted its commitment to innovation and long-term growth.
The largest detractor from the Fund’s relative returns in November was its position in the US-listed IT solutions business Sapiens, which focusses on the insurance sector. It reported relatively strong third quarter financial results, as revenue increased 4.8% year-on-year to US$137 million and net income increased 10%. However, these were below market expectations and it lowered its full year revenue guidance. The stock has been an excellent investment for the Fund, which has now exited its position.
The Fund established a position in India’s leading registrar and transfer agent within the mutual fund sector, Computer Age Management Services, which holds a 70% market share. The company has a track record of delivering consistent revenue growth and strong profit margins, primarily driven by increasing demand for financial infrastructure and services in India’s rapidly growing mutual fund industry. It is well-positioned to capitalize on favourable industry trends, including the shift towards digital financial solutions and operational efficiencies that enhance its competitive advantage.
CIO and Portfolio Manager
The Fund invests principally in small and midcap listed (or soon to be listed) global equities. Its investment objective is to obtain returns greater than the MSCI All Country World Index SMID Cap unhedged in Australian dollars (‘Index’) over rolling 3 year periods after fees. The Fund’s investment manager, Lizard Investors LLC, uses a value oriented investment approach that seeks to identify and invest in quality businesses that create significant value but are mispriced, overlooked, or out-of-favour. The investment manager believes that unique opportunities exist due to limited available research, corporate actions, or unfavourable investor perception.
1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 1st April 2015.
3. Annualised standard deviation since inception.
4. Relative to MSCI All Country World SMID Cap index unhedged in AUD.
* For further information regarding fees please see the PDS available on our website.
