August Report

• Global equity markets were volatile in August upon fears of an economic slowdown, but recovered when expectations of lower interest rates strengthened.
• Smaller companies are especially sensitive to signs of a slowing economy and underperformed large stocks.
• The Fund returned -2.6% in August, while the benchmark delivered -2.1%, as a weaker US dollar detracted from global equity returns in Australian dollar terms.

Join Fund Manager Jon Moog for a webinar update where he will discuss the Fund’s current portfolio holdings, the factors influencing recent performance, and some of the market variables the investment team is considering moving forward. Register here.

Top Holdings (alphabetically)

Baltic Classifieds Group PLC

United Kingdom

Communication Services

Baltic Classifieds Group Plc engages in the business of online classifieds portal for automotive, real estate, jobs and services, and general merchandise. The company was founded in 1999 and is headquartered in London, the United Kingdom.

ePlus Inc

United States

Information Technology

ePlus, Inc. engages in the provision of information technology (IT) solutions that enable organizations to optimize their IT environment and supply chain processes in the United States. It operates through the Technology and Financing segments. The Technology segment offers hardware, perpetual and subscription software, maintenance, software assurance, and internally provided and outsourced services, and advanced professional and managed services, including ePlus managed, professional, security, staff augmentation, server and desktop support, and project management services. The Financing segment specializes in arrangements, such as direct financing, sales-type, and operating leases, loans and consumption-based financing arrangements, and underwriting and management of IT equipment and assets. Its financing operations consist of sales, pricing, credit, contracts, accounting, risk management, and asset management. This segment primarily finances IT equipment, communication-related equipment, and medical equipment, and industrial machinery and equipment, office furniture and general office equipment, transportation equipment, and other general business equipment directly, as well as through vendors. The company was founded by Bruce M. Bowen in 1990 and is headquartered in Herndon, VA.

GILDAN ACTIVEWEAR INC

Canada

Consumer Discretionary

Gildan Activewear, Inc. engages in the manufacture and sale of print wear and branded apparel. Its products include activewear, underwear, socks, hosiery, and legwear. The firm operates under the brand names Gildan, Alstyle, American Apparel, Comfort Colors, GOLD TOE, Anvil, Secret, Silks, and Peds. The company was founded by Glenn J. Chamandy and H. Gregory Chamandy on May 8, 1984 and is headquartered in Montreal, Canada.

Noritsu Koki Co Ltd

Japan

Industrials

Noritsu Koki Co., Ltd. engages in the manufacture and sale of environment solution, kitchen, and photo processing equipment. It operates through the following segments: Monodzukuri, Health Care, Drug Discovery, Senior Life, Agricultural Food, and Others. The Monodzukuri segment handles research, development, production, and sale of pens and cosmetic parts. The Health Care segment provides radiology services, survey data, and genetic testing. The Drug Discovery segment provides research, development and sale of biopharmaceuticals. The Senior Life segment handles publication and mail order services for seniors. The Agricultural Food segment produces and sells fresh vegetables. The Others segment handles investigation and investment of new growth areas. It also offers mail order for dental materials and development and sale of drug treatment database for insurance companies. The company was founded by Kanichi Nishimoto in June 1951 and is headquartered in Tokyo, Japan.

On the Beach Group PLC

United Kingdom

Consumer Discretionary

On The Beach Group Plc operate as online travel agent. It provides interface between people and third party suppliers of travel products, such as flights and hotels. The firm also acts as an agent in processing customer booking with the airline not being the airline's agent. It operates through the following segments: OTB, International, CCH, and CPH. The company was founded on August 17, 2015 and is headquartered in Stockport, the United Kingdom.

Market Commentary

Global equity markets were volatile in August, falling steeply at the start of the month following weak US labour market data that raised investors’ fears of a broader economic slowdown. Markets bounced back later in the month upon stronger US economic data, weaker inflation and strong hints from the US Federal Reserve that it would soon begin reducing interest rates. Smaller companies modestly underperformed large caps in August, reflecting their sensitivity to any potential slowdown in economic activity.

The broader US share market finished August higher, but smaller companies unwound some of their recent outperformance relative to larger caps. European equities continued to lag global markets, held back by a weak domestic economy, relatively high energy prices and a lack of structural reform due to political uncertainty. The UK share market remained surprisingly resilient, supported by better-than-expected economic data and a more stable political climate, although inflation – especially services – remains elevated. Japanese stocks were volatile, with the appreciation of the yen especially impacting export-orientated companies.

The medium-term outlook remains broadly positive for global smaller companies as interest rates normalise over time. The evolution of the economic landscape, geopolitical developments and central bank decisions will continue to influence global equity markets.

Portfolio Highlights

The Fund returned -2.6% in Australian dollar terms during August, while the MSCI World SMID Cap Index returned -2.1%, as expectations of lower US interest rates brought a weaker US dollar. The modest divergence was driven by a small number of underperforming stocks in the consumer staples and financials sectors. This offset stronger stock performance in the technology and consumer discretionary sectors.

The Fund’s largest contribution to relative returns in August was the Fund’s overweight position in Canada-based manufacturer of branded everyday clothing Gildan Activewear. The company reported stronger than expected second quarter earnings, with its adjusted operating margin reaching 22.7%. Investor confidence was further boosted by a reaffirmation of earlier full-year guidance, a new share repurchase program and the return of former CEO Glenn Chamandy in late May.

Canada-based Softchoice Corporation is a leading provider of software and cloud solutions. It outperformed in August contributing to relative returns after reporting an 18.5% increase in EBITDA and an increase in margins. The company’s success was attributed to its expanded salesforce, strong ties with technology partners and investments in advanced technical capabilities, particularly in AI-powered cloud and digital workplace solutions.

Taiwan-based Nien Made Enterprise Co is a leading manufacturer of window coverings, including shutters, blinds, shades and related components. It outperformed after reporting a 7.5% year-on-year increase in revenue and a 9.2% rise in gross profit, as gross margins expanded to 57.9%. The company is benefitting from its strategic expansion into Mexico which has increased its production capacity for custom-made products by 20%, expanding margins by lowering production costs.

The Fund’s largest detractor from relative returns in August was its position in global nutrition company Glanbia. It underperformed after reporting mixed second quarter earnings results. Its Performance Nutrition business grew EBITDA by 13.3% year-on-year to US$156 million, but its US cheese business saw EBITDA fall 22%, due to lower market pricing. It maintained its full-year earnings guidance but forecast weaker growth in the second half of the year.

Qualitas is the largest car insurance company in Mexico. It underperformed in August as the broader market weakened upon ongoing domestic political and economic uncertainties. The company reported a 17% year-on-year increase in written premiums over the June quarter. However, investors appeared to focus on the economic environment in Mexico and the upcoming election. This brings political risk with possible changes to regulation in the auto and insurance industries.

DNOW is a US-based global distributor of energy and industrial products. It underperformed in August upon weakness in the broader oil and gas sector as the oil price has continued to fall. The company recently announced the acquisition of Whitco Supply, a supplier of pipe, valves and fittings to the downstream and midstream energy markets. However, this positive news was overshadowed by broader market concerns regarding oil demand and pricing.

The Fund remains focused on identifying high-quality smaller companies with strong fundamentals and growth potential, which will drive long-term outperformance for investors.