February was a poor month for the Fund and the wider UK Mid and Small Cap equity market from a relative performance perspective, as the market moved into a more risk-off mode having been spooked by a flurry of executive orders on tariffs by the new Trump administration, with their negative implications for global growth and US inflation. At the same time, domestic economic activity remains muted, with earnings and investment by domestic cyclicals, particularly those with high labour content, coming under pressure ahead of the employer National Insurance increases come into force in April.

At the individual stock level several of the Fund’s leading detractors – namely GB Group, LBG Media and Everplay - gave back recent share price gains without any negative newsflow. Indeed, dotDigital fell back despite posting good results coupled with an in-line trading update forecasting ongoing growth. Conduit Re, the insurer, sold off after reporting higher losses than the market had expected on the California wildfires, whilst Warpaint was impacted by a slowdown in trading in its important calendar fourth quarter trading period. SigmaRoc, the Fund’s largest holding, made the largest contribution to returns, as it continued to attract more buying interest, following its transformational limestone acquisition. Elsewhere contributions were muted at best, as UK Mid and Small cap shares continued to drift, despite valuations looking increasingly compelling across the portfolio and the wider market.

As managers, we added to Warpaint, averaging down after its disappointing trading update, as we believe the outlook for 2025 remains promising. We also used softness in the DiscoverIE share price to build up the Fund’s holding. We started a new position, buying into Pinewood Technologies, a dealer management software developer for the automotive industry, which is enjoying market share growth thanks to its modern cloud based offering, by participating in a placing to finance its acquisition of Seez, a software business with AI and machine learning capabilities addressing the same end market. On the sell side we exited the Fund’s small holding in Venture Life, the branded healthcare products business, which has failed to meet our expectations over a sustained period of time. We also sold down part of the Fund’s holding in Learning Technologies Group, which is subject to an agreed takeover offer, to provide liquidity and we trimmed the Fund’s positions in Alpha Group International and SigmaRoc into strength, to manage position sizes.

At the geo-political level we have seen a tumultuous start to 2025, with the commencement of Trump’s second term as President. The slew of executive orders around tariffs, initially on Canada, Mexico and China, followed by partial retractions, have caused a high level of unease and uncertainty in financial markets. Of equal if not greater significance is the USA’s rapprochement with Russia under Trump, and its implications for European fiscal policy on defence spending, with Western European countries now having to fend for themselves against a belligerent Putin regime. Plans in Germany for a loosening of the constitutional limits on fiscal deficits, to enable increased defence spending and to finance a €500bn ten year infrastructure investment programme, should kick start the languishing German economy. At home all eyes are on the forthcoming Spring statement, with slowing domestic growth in part caused by the Chancellor’s first budget’s private sector tax raid, meaning tax receipts are now insufficient to meet the government’s spending plans, so that either spending cuts and/or more tax rises will be required to balance the books. Overlaying this is a requirement, alongside our European allies, to increase defence spending, to disentangle the UK’s interdependency with US military programmes. One helpful initiative, from a UK equity market perspective, would be a move to direct a greater share of UK Pension Fund investment into its home market from its current derisory level, in line with Labour’s Manifesto plans. Any such move would provide a welcome boost to our very oversold stockmarket, which hosts many excellent businesses, which in our view trade on derisory valuations relative to their international peers, not on merit but because they’re starved of fund flows.