February was another eventful month for markets. The major story and driver of capital flow continued to be AI capex and venture investment. We also saw issues for private credit funds while Trump gathered forces in the Middle East in preparation for war with Iran.

In February the fund returned -0.9% (USD terms) vs the MSCI World Index’s +0.7%, our comparator benchmark. Our focus this month was on company results releases. As expected, given the strengths we seek in companies, the fundamental business performance for the portfolio continues to be good. The fund’s underperformance in the market continues to be driven by valuation de-rating despite continued strong and superior underlying economics. This dislocation amongst concentrated market drivers increases the long-term opportunity and is broadening the set of investable companies, which we are taking advantage of through new positions.

The main detractors for relative fund performance were ‘industrials’ and information technology companies, while our consumer staples and financials holdings contributed positively. The latter contrasts with the prevailing trend of strong market performance for banks, which we don’t own. Our financials holdings are capital-light network-based companies like the derivatives exchange CME, which is benefitting from heightened market activity. Consumer staples have rallied quite strongly so far this year, helped by starting from depressed valuation multiples and a signal that their qualities are being appreciated.

Our industrials holdings are business services companies like RELX, Experian and Wolters Kluwer, rather than heavy industry. Their share prices have been sharply hit by the indiscriminate fear that AI will destroy their earnings power, despite reporting continued strong results. We remain confident in these businesses and have taken the opportunity to increase our holdings at very attractive valuation levels. The companies themselves are doing the same, using their growing excess cash flow to step up share buybacks which is highly accretive at current valuation levels.

AI increases the range of outcomes and is a serious threat to software with little differentiation. However our portfolio companies’ competitive advantages remain strong: unique, authoritative data and content assets that are not publicly available or replicable, serving high stakes, complex and ever-changing contexts where outcomes are both deterministic and nuanced, and where trust is critical. All companies have access to AI for product development but companies with the highest quality assets are well placed because their differentiation increases as commoditised information proliferates. We are seeing this already for companies like Wolters Kluwer, whose highly successful strategy has always been to bring more value to customers.