Coeli Global Small Cap Select (now BMC Global Small Cap Select) February 2024

We believe investors in general are more positive towards small caps than they were in 2023. We anticipate further upside in small caps given their relatively worse returns versus large caps, and also as small caps are currently trading at lower valuations.

The best-performing shares during February were Napco Securities, Sterling Infrastructure, and Modine Manufacturing. Those with the weakest performance in the month were Aixtron, Alfen, and Axcelis Technologies.

Two stocks that really took off on reporting day were Sweden's Fortnox and the US's Sterling Infrastructure, which was up 20% on reporting day, with both issuing great reports that clearly surpassed market expectations. Some of our analyst team visited the Mobile World Congress (MWC) in Barcelona in February to learn about the latest trends in smartphones, semiconductors, and software.

Key market events and trends (what has influenced performance most?)

During the first two months of 2024, we've seen market interest rates rebound to slightly higher levels, affecting stock market sentiment regarding small caps. We note, however, that the market's reaction during reporting season was, in most cases, more positive than negative. We have seen something of a strengthening by the krona versus the US dollar, which is a sign that the markets is starting to favor more risky assets. The latest data points on US inflation statistics show an ongoing decline, although the movements compared with last month were minor.

Portfolio changes

During February, we made an unusually large number of changes to our small cap portfolio, with six new holdings and three holdings exited. Nine changes to the portfolio during one month might seem excessive, but it reflects our confidence in the market. It is our job to make these changes when we believe the conditions are most favorable to create good returns for our unitholders.

The companies we bought were Sweden's VBG Group; Patrick Industries, IDT Corporation, Covenant Logistics, and First Advantage, all based in the US; and Canada's Enghouse Systems. VBG Group is a leader in, among other things, the manufacture of trailer couplings, snow chains for trucks, and climate control systems for commercial vehicles. Patrick Industries operates in three areas: mobile homes and caravans; holiday homes and boats; and, through an exciting new acquisition, sports utility vehicles. IDT Corporation is a tech company operating in the fields of mobile telephony, telephony, and payments. It uses its robust cash flows to invest in smaller entities showing good growth and high margins, with a view to distributing them to existing shareholders once they have grown sufficiently and are profitable. Enghouse System reminds us of Sweden's VITEC, growing through acquisitions of other software firms. Covenant Logistics is a transportation company that is also growing organically via acquisitions targeting niche logistics companies. First Advantage offers services in background checks of potential employees to a company. It has more than 33,000 customers across the world and has carried out in excess of 100 million background checks for them.

To make space for these new holdings, we sold Comfort Systems, Technoprobe, and Qualys. We exited Comfort Systems as the company had, unfortunately, reached too large a market cap for it to remain in our small cap fund. Qualys lost its contract as a preferred partner for Microsoft's cloud platform (Azure), meaning we felt the investment case was no longer as appealing. We sold Technoprobe for valuation reasons and as we have chosen to focus on other areas of the semiconductor industry.

The fund's positioning—our market expectations

With the changes we've made during the month, we have increased our exposure to US companies. Given the vast range of available small caps, we consider the US market an excellent place to seek quality growth companies. We believe an environment of declining interest rates will be favorable for the equity markets, and small caps in particular. Once interest rate cuts start to take effect, consumers will have more money to spend. We anticipate a doubly positive effect on companies' income statements in the form of higher revenues and lower loan cost, which will push share prices up, with a subsequent boost to earnings per share.

We thank you for entrusting your capital to us.