Market Review

Global equity markets finished the fourth quarter in positive territory, driven by renewed optimism of a soft-landing scenario. With inflation continuing to ease and without a significant increase in unemployment, the Federal Reserve’s tightening cycle is coming to an end, with the Federal Open Market Committee now signalling rate cuts in 2024. While this is a clear pivot from the Fed, there remains the risk of recession, with tight monetary conditions continuing to feed through the economy with a lag, and recent macroeconomic indicators suggesting a slowdown in manufacturing activity and private hiring for the US, in the fourth quarter. Geopolitical risks have heightened with the situation in Israel-Gaza ongoing and with the potential for escalation into a broader regional conflict, which could lead to further disruption to supply chains and energy prices

Performance

The strategy outperformed the MSCI ACWI IMI reference index during the period, driven by positive stock selection led by Autolus and Horiba. Autolus, the early-stage biotech developing CAR T-cell immunotherapies, was the most significant contributor during the quarter, gaining 176% following positive data released at the American Society of Haematology conference, confirming the favourable safety and efficacy profile of Obe-Cel, its adult Acute Lymphoblastic Leukaemia treatment, which is close to commercialisation. Alfen, the Dutch-based European market leader in EV charging solutions, also performed strongly during the quarter, driven by better-than-expected earnings across all business lines and with positive developments in EV Charging with customers starting to order again 
after a period of destocking.

Stevanato, the leading provider of drug containment and delivery solutions, reported weaker than expected backlog growth, with an unfavourable mix towards its engineering business, which comes at lower margins. However, we continue to believe Stevanato is well positioned to benefit longer term from the opportunity in its high-value solutions business, especially with capacity expansions, which are on track to generate first revenues from 2023Q4. Lonza, the global CDMO (contract development and manufacturing organisation) leader, also contributed negatively, following surprisingly soft guidance announced at its Capital Markets Day.

During the quarter, we initiated a new position in Kardex, a Swiss-based global leader in intralogistics solutions for automated storage, retrieval and material handling systems. Kardex intralogistic solutions improve the efficiency of logistics processes within manufacturing or distribution centres through automation and can drive an 80-85% reduction in space requirements, significantly improving the carbon footprint of operations. We also re-initiated a position in Hannon Armstrong Sustainable Infrastructure, which we had benched in mid-2022 on the back of structural margin concerns. The specialist financial services provider has devised an impressive plan to limit the rise in their funding costs, which gives us more visibility and conviction in our forecasts.

Outlook

The Fed’s latest commentary signals a shift in market sentiment towards small and mid-cap companies, which have been out of favour for over 18 months, with headline valuations below those of larger companies impacted the most by rising rates in recent years. However, the risk of recession remains with monetary tightening continuing to feed through the economy with a lag, with recent indicators suggesting a slowdown in economic activity in the fourth quarter.

We remain optimistic about the portfolio’s growth profile given the highly innovative solutions that drive the investment case for each of the businesses we are invested in and will continue to use volatility to reaffirm and strengthen our conviction, increasing position sizes at attractive valuations when the timing is right and adding new, exciting businesses to the portfolio along the way.