Performance, Commentary & Portfolio

Fund Manager’s Review

In 2024, US markets dominated global equity returns. The performance gap between the MSCI USA and MSCI Europe was almost 20%. Bearing in mind that developed world indices have become very highly correlated in recent decades, this divergence was without recent precedent. Euphoria in America, centred on the AI driven tech sector, superior economic growth and the supposedly bullish re-election of Trump, reached its zenith at the tail end of last year with pundits declaring this age of American exceptionalism.

So far in 2025, that narrative has rapidly reversed. In the first two months of the year, European markets have roared ahead whilst US markets have languished. Partially, this reflects the yawning valuation gaps seen at the start of the year. It also reflects mounting doubts about the sustainability of AI tech spend (doubts we share), emerging evidence that Trump’s unpredictability on issues such as tariffs and government expenditure is affecting consumer confidence and business investment, and a realisation that the wide budget deficit in the US means further fiscal stimulus or tax cuts are unlikely to be implemented, at least in a healthy way. In his recent letter to shareholders, Warren Buffet warned against further ‘fiscal folly’. We concur

In Europe, meanwhile, sentiment was very depressed. Economic growth has been mediocre at best whilst Germany has been in recession. Germany has always been a model for economic prudency. This cultural predilection can be traced back to the hyperinflation experienced during the interwar Weimar Republic. As such, German debt levels are low and deficits minimal. Recent changes in tone around defence spending suggest that Germany may now be willing to compromise slightly. As a huge economy with the ability to unleash fiscal firepower, the multiplicative potential of this has been received very positively.

The Net Asset Value (NAV) total return for January was -2.65% versus -0.94% from the benchmark index. February saw technology names fall across the board. Our biggest detractors from performance included our investments in this area, such as Taiwan Semi and Alphabet, the parent company of Google. Our biggest contributors to relative performance included names we didn’t hold such as Tesla, Amazon and Broadcom. Our single biggest positive contributor to performance was Bank of Ireland, a poster child for the sort of unfashionable, neglected European investment that we believe offers exceptional value. The notion of more European stimulus is positive for interest rates, a key driver of banks’ profitability. As such Bank of Ireland looks increasingly likely to sustain its current, very high levels of profitability and, as such, very high levels of cash return. We note that in 2024 the cash return yield for Bank of Ireland (dividends and buybacks) was in the mid teens.

We initiated one new position during the month. We took a small initial position in Amazon, a company we have long admired. The moat they have built in their consumer business is extraordinary and we expect strong continued growth. Recent margin expansion has been dramatic, unleashing profitability. We think their ongoing investments may have masked the true potential of the business. Overall, we think the investment case provided a balance of quality, growth and value in the manner we look for

We also added to a few names such as GSK and Auto Trader. These purchases were funded by some small reductions to larger holdings in names which had seen multiple expansion such as Visa and GE Aerospace. We also sold our small holding in Nestle after the shares bounced following better than expected results. As a relatively expensive consumer staple that is struggling to grow, we believe the likes of Amazon provided a better long term opportunity

Julian Bishop & Christian Schneider
11 March 2025

This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.

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