Performance

Fund performance during February 2025 was -7.95% versus the benchmark return of -4.59%, as measured by the MSCI World Small Cap Index in GBP.

The MSCI World Small Cap struggled due to the ongoing discussion of tariffs by the new US administration. In terms of contribution to Fund performance, Australia and Denmark were the largest positive country contributors with the US and Canada being the main detractors.

In terms of sector performance, the Industrials and Consumer Staples sectors were the main detractors for the month while Health Care and the large underweight to Consumer Discretionary benefited the Fund on a relative basis.

Portfolio Highlights

Notable positive contributors over the period were EastGroup Properties based in the US and NKT in Denmark. Powell Industries in the US and Hammond Power Solutions in the Canada were the main negative contributors during the month.

EastGroup Properties is a leading industrial real estate company operating across the sunbelt states in the Southern US. EastGroup’s properties are focused on facilitating e-commerce, last-mile, and same day delivery. They predominantly own and lease smaller warehouses in metropolitan areas, a niche they have carved out for themselves over recent years. The company has a strong record of delivering robust cash flows and has increased or maintained its dividend for 32 consecutive years, increasing in each of the last 13 years. Their published results in February showed ongoing long-term growth in funds from operations as they continue to expand across their key markets.

Powell Industries is a leading provider of electrical equipment based in Houston, Texas. The company was founded in 1947 and has numerous manufacturing plants and distribution centres around the world. The company is one of the US leaders in the provision of switchgear and motor control systems which are essential for the control and protection of electrical circuits and motors. It also produces power management equipment providing advance solutions for managing electrical energy ensuring efficiency and safety in power distribution systems. The company reported ongoing strong quarterly results in February, beating market expectations as ongoing electrical grid expansion both in the US and globally drove demand for its products. The company highlighted new orders of $269m in the quarter and an order backlog of $1.3bn. Combined with the robust update, the company continued to highlight its strong financial position with nearly 20% of its market value as cash on the balance sheet at approximately $370m. The company was not however immune to the broader market decline.

Investment Outlook

Global equity markets experienced heightened volatility throughout February, driven largely by renewed policy uncertainty out of the United States. President Donald Trump’s escalating rhetoric around tariffs, particularly targeting China and Mexico, introduced renewed fears of trade disruptions, supply chain realignments, and higher input costs. Markets, already sensitive to geopolitical tensions, reacted sharply to comments regarding potential across-the-board tariffs and targeted levies on key imports such as autos, semiconductors, and agricultural products. This created considerable swings in risk assets, with cyclical sectors and exporters facing the brunt of the sell-off.

Several of the Fund’s holdings underperformed during the month even while providing robust earnings updates and strong guidance. Powell Industries’ results in February were robust and did not indicate a slowdown in its main segments.

Sterling Infrastructure, a leading construction company based in Texas also underperformed during the month while, simultaneously, delivering a strong set of results including beating the market consensus while also lifting its earnings guidance for the full year of 2025. Key highlights included: an ongoing large backlog of orders at $1.69bn (which represents close to a year’s worth of revenue for the company); and an increase in guidance for the full year’s earnings per share of 21.5% at the lower end of their range versus market consensus.

On a more robust note, global manufacturing surveys improved in February with numerous regions registering improvements in the survey data, with both the US and emerging markets delivering readings above 50. The global manufacturing PMI improved for the second consecutive month, rising to 50.6, an eight-month high. The trend appears to be constructive, indicating the global manufacturing PMIs are improving compared to the previous 12 months of lacklustre performance. Within the global survey data confidence reached a nine-month high, supported by a rise in the new orders-to-finished goods ratio, a key indicator of future production growth.

In this environment we continue to focus on high quality niche leaders in their industries like Powell Industries and Hammond Power Solutions where we see strong earnings potential in the coming quarters. The Fund continues to be underweight the US market and overweight Europe. Many European companies are attractively valued and an improving geopolitical environment, along with recently announced security spending by the German and EU governments could provide robust tailwinds for the region.

Global Economic Outlook

The month of February saw Trump’s policy uncertainty intensify with the threats of outright tariffs, reciprocal tariffs, restrictions on immigration, federal government cutbacks and geopolitical ructions reflected immediately in economic surveys and company earnings calls. Importantly, potential disruptions to supply chains and the upside risk to input costs are being factored into the decision making and investment intentions of firms.

On fiscal policy, the US House of Representatives passed a budget resolution bill moving the legislation into the Senate that calls for at least US$1.5 trillion in spending cuts and up to US$4.5 trillion in tax cuts. Fiscal conservatives will be seeking additional deficit reductions with moderate Republicans concerned about cuts to popular programs.

On trade, President Trump declared that the 25% tariffs targeted at Canada and Mexico will take effect on March 4th. He also imposed an additional 10% tariff on China, a doubling to effectively 20% since being sworn in on January 20th. The public disagreement between Presidents Trump and Zelensky seems to have been triggered by Ukraine being “not ready for peace” and being told that they are “in no position to dictate” terms to the United States. This unexpected setback consequently saw European leaders rally to form a “coalition of the willing” to “guarantee peace” in Ukraine. This agreement explicitly requires European NATO members to commit to increased military spending in the higher range of between 2.5% to 3.5% of gross domestic product (GDP), initially estimated at US$2.7 trillion over the next decade. Specifically, German Chancellor-elect Merz has called for a €200bn special purpose defence fund and is also proposing that military spending above 1% of GDP be exempted from the restrictions of the constitutional debt brake, which limits the structural budget deficit to 0.35% of GDP, except in emergencies.

The European Union (EU) President unveiled a €800 billion “ReArm Europe” defence spending plan. This represents an extra 1.2 percentage points of GDP in EU military spending per year over four years, collectively moving to the 3% target of GDP. The programme will be funded through activating a fiscal escape clause, allowing the 27 member states to use their national budgets to spend without triggering budgetary penalties under the EU Stability and Growth Pact.

Global macro settings are expected to remain within their ‘back to normal’ levels in 2025 and 2026, supported by a shallower global easing cycle. We are forecasting an incremental step-up in global growth to 3.5% for 2025, elevated but stable inflation relative to central bank target levels and limited real rate cuts. The recalibration of restrictive policy settings appears to have run its course, closing in a new higher neutral level relative to recent history. The US Federal Reserve has pivoted and paused rates in the target range of 4.25-4.5% as “inflation remains somewhat elevated.” The structural themes of decarbonisation and accelerating de-globalisation will continue under Trump 2.0 and will underpin activity. Underlying private demand, business investment, employment growth, and easier financial conditions will sustain the expansion of the global business cycle. We remain vigilant with respect to unpredictable geopolitical events, including the risk of underestimating the impact from Trump’s tariff policies that may materially impact our view.

Data source: Ausbil and Morningstar

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Risk Warnings

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The Fund will be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The Fund will be exposed to smaller companies which are typically riskier than larger, more established companies. Difficulty in trading may arise, resulting in a negative impact on your investment. Shares in smaller companies may be harder to sell at a desired price and/or in a timely manner, especially in difficult market conditions. The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of your investment. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or in a timely manner. In extreme market conditions redemptions In the underlying funds or the Fund itself may be deferred or suspended. This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. It’s provided for general information purposes only and is not personal advice to anyone to invest in any fund or product. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls will be recorded for training and monitoring purposes.