Market Commentary
Positive fund returns reflected the surging value of the US dollar. This was driven by the “Trump trade” as investors positioned their portfolios to reflect increasing expectations of Donald Trump regaining the US presidency in the November election. Tariff increases, immigration controls and unfinanced tax cuts would risk higher inflation, eventually bringing higher interest rates. This expectation pushed up the value of the US dollar against most currencies, including the Australian dollar.
September US inflation fell to 2.4%, edging closer to the Federal Reserve’s 2.0% target, as economic growth slowed slightly to 2.8% annualised. However, mixed September quarter earnings, fears of higher interest rates over the longer term and broader uncertainty ahead of the election pushed US equities lower in US dollar terms during October.
European equities weakened as the economy remains under pressure, although economic growth accelerated to 0.4% in the September quarter, growing 0.9% year-on-year. Eurozone inflation edged down to 1.7% in September, which allowed the European Central Bank to reduce interest rates by 0.25% to 3.25%.
UK shares – particularly smaller and mid-sized companies – underperformed, reflecting the weak macro-economic outlook. Investor sentiment was further impacted by the UK budget which raised business taxes and added to inflationary pressures.
Japanese equities rebounded in September, as exporters were boosted by yen weakness. Markets initially fell when Shigeru Ishiba became the country’s new Prime Minister and called a snap election. However, news of a coalition government, which is expected to bring looser fiscal policy, led equities higher.
Emerging markets were generally weaker upon US dollar strength and negative sentiment ahead of the election. China underperformed upon underwhelming government stimulus measures, while its over-indebted real estate market and high youth unemployment remain challenges. Taiwan equities outperformed upon ongoing AI-related demand.
Portfolio Highlights
The Fund returned 1.0% in Australian dollar terms during October, while the MSCI World SMID Cap Index returned 2.8%. The benchmark return was driven by the US equity market, which was largely due to the strength of the US dollar, which appreciated 5% against a basket of its major trading partners’ currencies. The Fund’s underweight position in the US did not fully capture the currency gain, leading to the Fund lagging the benchmark return. The underweight to the outperforming larger cap segment (>US$10 billion) further detracted from relative returns.
Despite these challenges, stock selection across most sectors, regions and market cap size segments was positive. This demonstrated the continued strength of the Fund’s fundamental, bottom-up approach to stock selection. However, the significant currency movements in October highlighted the impact that macroeconomic factors and geopolitical events can have on short-term relative performance.
The Fund’s largest contributor to relative returns in October was its overweight position in the US-based global analytics company EXLService Holdings. It specialises in data-driven services across industries including insurance and health care. It outperformed upon announcing September quarter revenue and earnings which exceeded market expectations. The company raised its full year guidance, reflecting strong confidence in its outlook as it makes further AI investments and strategic acquisitions. It is well positioned to continue to grow earnings at a high rate over the medium-term.
Canada-based Softchoice is a software company which helps enterprise customers transition their IT systems to the cloud and optimise their technology processes to improve workforce productivity. It outperformed in October after announcing gross profit and net income for the September quarter which were ahead of expectations. These were driven by growing customer volumes, increasing revenue from existing customers, effective cost management and margin expansion.
The Fund’s largest detractor from relative returns in October was its position in Japan-based audio equipment manufacturer Noritsu Koki, which specialises in DJ equipment. It underperformed as some investors took profits following strong performance in September, but there were no adverse company-specific developments during October.
In October, the Fund began to establish a position in the US-based manufacturer of factory-built homes, Cavco Industries. The company has a track record of delivering consistent earnings growth and strong margins. It is benefitting from growing demand for more affordable housing and a shift towards sustainable homes. It is currently the third largest producer of manufactured housing in the US with a 15% market share and is focussed on expanding its manufacturing capacity to enhance economies of scale. Cavco is financially strong and well aligned to the industry trends of lower cost and more sustainable housing, which should help it grow earnings over the medium-term.
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.
