The MSCI World Index rose 4.6% in May (USD terms), although the gains were highly concentrated once again. The Technology sector delivered over 85% of the benchmark's return, carried by continued enthusiasm for the AI datacentre build-out and intense speculation over which chokepoints will prove most valuable. Memory was the clearest example, with server DRAM^[1] prices reportedly up 60 to 70% over the quarter and the chip makers rising with them. The macroeconomic backdrop was less settled. The war in Iran continues, with talk of de-escalation but no resolution. The flow of oil remains disrupted, and the associated inflation risk leaves central banks in a difficult position; higher prices may require tighter policy rather than the cuts that investors had hoped for at the start of the year. The result is a market in which a single theme drives the index while much of the rest is left behind.

The fund, which declined 1.8% in May, falls into the latter camp. With no exposure to semiconductor stocks on valuation grounds, it has not participated in the narrow leadership that has driven index returns. This stands in marked contrast to the underlying fundamental performance of the portfolio companies, which completed their quarterly reporting during the month. Average portfolio organic growth, which has held steadily in the range of 7-9% over the past 13 quarters, accelerated to 10%^[2]. Most notably, many of the information services companies that have been perceived as AI-losers (incorrectly in our view), saw an acceleration in revenues, including Experian, S&P Global and LSEG. Wolters Kluwer, the most disparaged of our information services names, held 6% growth (excluding print). The portfolio’s AI-affected businesses continue to generate double digit cash flow growth on average, enabling steady dividend increases and accelerated shares repurchases.

At the start of June, we have seen the very early signs of multiple recovery for companies in an adjacent sector, software. These businesses had also been deemed victims of AI but have gradually demonstrated their ability to deploy the technology alongside their current business models. The information services businesses are even better protected, as it is their proprietary datasets that will determine the value of AI-enabled services. While we cannot yet assume a price-multiple rerating for information services companies, even the absence of further derating would enable the fundamentals of these businesses to drive improved shareholder returns in the coming months. In the meantime, the overall portfolio remains on its highest free cash flow yield to date and at a substantial valuation discount to the wider market.

^[1]Memory specifically designed for use in servers rather than consumer devices.

^[2]Excludes the Nintendo growth rate of 95% following the Switch 2 console launch.