December Report

Market Commentary

Global equity markets fell steeply in local currency terms during December. In the US, the S&P500 declined 2.4%, while the smaller cap Russel 2000 plummeted 8.3%. This reflected some profit taking in the wake of the strong November rally, which followed the decisive US presidential election. This had left some market valuations looking stretched, which weighed on investor sentiment. Market confidence was also impacted by fears that some of the incoming Trump administration’s policies could be inflationary, which could keep interest rates higher than had been previously expected.

However, the US economy remains resilient, expanding by 3.1% in the September quarter. Headline inflation edged up to 2.7%, while the core reading remained steady at 3.3%. This gave the Federal Reserve (Fed) confidence to reduce US interest rates by 0.25% to a range of 4.25% – 4.50% during December.

European equities also moved lower in December. The euro region continues to struggle with a steep slowdown in its manufacturing sector while restrictive monetary and fiscal policies weigh on demand for services. Sentiment was impacted by political turmoil in France and Germany, where Chancellor Olaf Scholz lost a confidence vote, triggering an early election. US President-elect Trump’s threats of imposing sanctions on European goods only added to the gloom.

The UK equity market also fell back in December. This followed disappointing economic data, rising inflation and concerns that the new government’s budget measures would dampen business investment and economic growth.

Japanese equities delivered a positive return in December upon improving market sentiment as corporate governance reforms improve the position of shareholders. Share buybacks have reached record levels in Japan, while M&A activity appears to be gathering pace.

Emerging markets showed some resilience following a challenging period. China’s economy was boosted by improving domestic demand following recent stimulus measures, although the outlook is clouded by the threat of steeper US tariffs. Brazil raised interest rates to 11.25% to address inflationary pressures. Meanwhile, Mexico’s economy surged in the quarter, although high interest rates and the risk of higher tariffs overshadowed the outlook.

Portfolio Highlights

The Fund returned +2.9% in Australian dollar terms during December, while the MSCI World SMID Cap Index returned -0.2%. The outperformance was driven by strong stock performance in industrials and consumer discretionary, while weaker stock performance in communications services detracted from relative returns. Performance was strong in the smaller cap (<US$5 billion) segment, with those under US$1 billion making particularly impressive gains.

The Fund’s most significant contributor to relative performance during December was its holding in UK-based travel agent On the Beach. It focusses on short and medium haul flight and hotel package holidays to Continental Europe. The stock outperformed after the company announced better than expected fourth quarter earnings, driven by robust growth in bookings and profitability. It reported a 15% increase in total transaction value (TTV) and an 84% jump in profit before tax. These were supported by record summer volumes and a strategic focus on premium holidays, which now represent 80% of total sales. The company’s capital-light business model and strong free cash generation enabled strong dividend payments and stock buybacks, which further boosted investor confidence.

Another strong performer was Latin America’s leading travel technology company Despegar.com, in which the Fund only established a position in early November. In December, the company’s board agreed on a takeover deal from global technology investor Naspers, which valued the company at US$1.7 billion or US$19 per share, a 33% premium on the previous day’s closing share price. Regardless of whether the deal closes, Despegar is well positioned to deliver sustainable earnings growth from its exposure to Latin America’s growing travel market.

The largest detractor from the Fund’s relative returns in December was its holding in UK-based Integrafin, which operates the investment platform Transact, which is widely used by UK financial advisers and clients. The company delivered strong full-year earnings results, but investors were concerned when it announced targeted fee reductions for pension wrap products and non-advised clients. It also announced a 9% increase in forecast administration expenses for 2025, partly related to the relocation of its London office. This led to lower consensus earnings forecasts, which appear excessive since the company raised its 2025 forecast.

The Fund established a new position in Grupo Aeroportuario del Centro Norte, which operates 13 airports in Mexico. This includes Monterrey International Airport which serves as its primary hub and accounts for 48% of its aeronautical income. The company has demonstrated strong operational efficiency, delivering a 60% EBITDA margin in 2024. Earnings should be further boosted by a planned 60% increase in capacity at Monterrey by the end of 2025. It will also focus on increasing non-aeronautical revenue streams, having grown revenue-per-passenger 23.6% year-on-year in the third quarter upon increased food, beverage and parking revenues. It also stands to benefit from the nearshoring trend in the northern Mexico regions close to the US border. Its strong market position, operational efficiency and multiple growth drivers make it an attractive investment.