LO Funds
Circular Economy

CIRCULAR ECONOMY

MARKET REVIEW

The June macro backdrop highlights a clear regional divergence. The US economy remains resilient, supported by strong consumption and a solid labour market, while inflation—partly driven by energy—keeps the Federal Reserve on a hawkish footing despite some moderation in core prices. In contrast, Europe faces a more fragile, stagflationary environment, with weak growth, contracting activity indicators, and still-elevated inflation, prompting cautious policy tightening. Asia presents a mixed picture: Japan and several economies are tightening amid inflation risks, while China continues to show an imbalanced recovery, with firm industrial activity offset by weak consumption and property sector pressures.

Against this backdrop, equity markets showed a clear broadening of leadership globally. In the US, headline weakness driven by sharp underperformance in mega-cap tech masked a strong underlying rotation, with equal-weight indices advancing and gains spreading across cyclicals, small caps, and defensives. European equities were more macro-driven but displayed greater balance and resilience, benefiting from easing energy prices. In Asia, markets remained more volatile and uneven, with volatile AI-driven rallies and drawdowns in Japan and Korea contrasting with persistent weakness in China, highlighting a more fragile equity dynamic.

PERFORMANCE COMMENT

A very strong period of performance for the strategy in the quarter, delivering more than 8% relative outperformance versus the benchmark. Roughly 75% of this was driven by stock selection while the remainder came from allocation across sectors. Stock selection was strongest in IT, Consumer Discretionary and Materials, while our overweight in IT and underweight in Energy also helped. All of our top performers came from the IT sector benefiting from a wave of AI infrastructure spending (Marvell +215%, Flex +148% and Ichor +140% for instance), while the laggards were mainly perceived AI losers, mainly PTC, which sells engineering software, Aecom, an engineering firm and Regeneron Pharma who, although unaffected by AI, saw concerns regarding its future drug pipeline.

The month of June was also strong, delivering 1.2% of alpha versus the benchmark. Similarly, this was driven by stock selection with the allocation effect detracting 40 bps of performance. Selection was strongest in the Materials, Consumer Discretionary and IT sectors while our thematic overweight to Materials and thematic underweight to Healthcare and Financials were the cause of the negative allocation effect.

Our top three contributors of the month were IT and Materials names. Ultra Clean (+67%) surged due to continued semi capex expansion. Crown Holdings (+18%), a top active weight position, benefited from the increased demand in US canned beverages due to the World Cup. Ichor’s (+57%) strong performance was also the result of continued semi capex expansion.

Our three largest detractors over June were a mixed bag. Alcoa (33%) fell on news that the tightness in aluminium might get resolved soon, HP Inc (-18.2%) gave back some strong gains seen in May, and Umicore (-21.6%) fell in sympathy with a broader weakening commodity backdrop.

FUND ACTIVITY

Our largest change in the quarter was the reduction of Consumer Staples in favour of IT. Given the strong performance of IT, its weighting grew organically. However, within IT, there was a shift away from higher beta, lower quality businesses, towards more stable earners that show less volatility towards the AI trade (it feels like the easy money has now been made). Within consumer staples, most of the reduction came from reducing our exposure to Darling Ingredients as the shares doubled and future returns looked less lucrative. For the first time in a while, our industrial exposure crept up. However, the mix within Industrials has changed significantly from a year ago with exposure to capital goods markedly reduced. We also increased our exposure to consumer discretionary.

At an individual stock level, our largest sell was exiting Intertek after the spread to EQT's takeout price narrowed considerably, while our largest purchase was our re-entry into Alchip that had derated significantly since we exited earlier in the year and subsequently rose 114% from trough to peak in the quarter.

OUTLOOK

As the inflation battle seemed over, countries began to move towards more accommodative monetary policies, with rate cuts across key economies, with the exception of Japan. The narrative of a soft landing in the US is starting to take shape, along with a potential recovery in Europe and China. This favours a broadening of equity market performance in 2026, after it had been concentrated in a narrow set of stocks since 2023.

Many of our themes were left behind and encountered cyclical headwinds. Despite these near-term pressures, we believe the structural trends we focus on are firmly established. We have identified several attractive opportunities that are unduly overlooked and could regain investor attention. Overall, our portfolio adheres to the principles of strong quality growth while maintaining disciplined valuation. With our dedicated sustainability research team identifying system changes across sectors, we are confident that the Circular Economy strategy is well-positioned to capture investment opportunities arising from a society transitioning to a nature-positive and digital-enabled end state. This approach aims to provide investors with a diverse range of opportunities exposed to often mispriced structural growth.

FUND STRATEGY

The Circular Economy strategy aims to capitalise on investment opportunities arising from the shift of our economic model from linear to circular.

The strategy's primary investment themes are closely tied to opportunities identified within two key revolutions associated with this transition: the bio-economy and resource efficiency. Within these revolutions, the thematic investment universe encompasses companies carefully mapped across regions and sectors. As a result, it presents a well-diversified investment universe that offers ample depth and breadth for our stock selection process.