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What is the Sustainable Finance Disclosure Regulation?

The Sustainable Finance Disclosure Regulation (SFDR) was introduced by the EU Commission as a core component of its 2018 Sustainable Finance Action Plan. As a key pillar of the EU Sustainable Finance agenda, SFDR aims to improve transparency, prevent greenwashing and help investors make informed sustainable investment decisions. To do so, the SFDR introduced mandatory disclosure requirements around environmental, social and governance (ESG) metrics at both the entity and the product levels.

An imperfect system

Since taking effect in March 2021, the SFDR has faced implementation challenges and criticism from market participants. In a 2023 consultation, the EU Commission found that 83% of respondents believed the regulation was being used as a product label and marketing tool, rather than solely as a disclosure framework. Respondents highlighted several concerns, including greenwashing risks linked to inconsistent product classifications, unclear definitions, limited ESG data availability and higher compliance costs. Together, these challenges have made implementation more difficult and limited SFDR’s ability to provide transparent, comparable information on sustainable investments.

This has prompted the EU Commission to consider revisions to the framework, culminating in the draft SFDR 2.0 proposal.

Is it the end of Article 8 and 9?

Not quite. Rather than eliminating these categories altogether, the proposal replaces the existing Article 6/8/9 disclosure framework with a revised product classification system that introduces clearer definitions, eligibility criteria and sustainability thresholds.

What might change?

Contribution requirement

One of the most significant proposed changes is that at least 70% of a fund’s assets would need to satisfy the sustainability criteria of its chosen category, whereas the current SFDR provides managers with greater flexibility to determine the applicable threshold.

Transition (Article 7)

This entirely new proposed category, Transition, is intended for funds investing in companies that are on a credible pathway towards improved sustainability performance.

ESG Basics (Article 8)

To qualify under the category of ESG Basics, investments would generally need to satisfy at least one of several sustainability tests such as: outperforming the benchmark on ESG ratings or key sustainability indicators, demonstrating improved sustainability characteristics or meeting minimum sustainability standards. This marks a significant shift from the current framework, replacing the broad flexibility currently afforded to managers with more standardized qualification criteria.

Sustainable (Article 9)

The Sustainable category remains the highest sustainability classification and is expected to be subject to the most stringent eligibility criteria. Although there is broad support for maintaining this as the highest sustainability category, negotiations continue around how sustainable investments should be defined in practice.

Mandatory exclusion criteria

Under the current regulation, investing in an ESG or sustainable fund does not necessarily prevent exposure to controversial sectors, such as fossil fuels, tobacco or prohibited weapons. Under the proposed SFDR 2.0 framework, mandatory exclusion criteria would apply across all sustainability categories, with the scope and stringency of exclusions increasing for higher-ambition categories.

These proposed changes would work to ensure that a fund could substantiate its sustainability claim with clearly measurable criteria, assuaging greenwashing risks.

Where do negotiations stand?

The legislative process is progressing rapidly. The EU Council published its negotiating position in June, while the European Parliament is expected to adopt its position shortly. Once both institutions have finalized their positions, trilogue negotiations with the European Commission will begin alignment on the final SFDR 2.0 framework.

Implementation timeline

The trilogue negotiations are expected to begin this autumn. While the timing remains uncertain, the legislative process is likely to extend through 2027, followed by a transition period before the new rules apply. Based on the current timetable, SFDR 2.0 is unlikely to become applicable before 2029, although the exact implementation date will depend on the pace of negotiations and the final transition period.

What does this mean for investors?

While the final rules are still being negotiated, the overall direction is becoming increasingly clear: sustainability claims will need to be supported by more objective and measurable criteria. An analysis by Clarity AI estimates that around 40% of current Article 9 funds would not meet the proposed exclusion rules of the highest sustainability category. 80% of Article 8 funds would experience the same challenge.

For asset managers and investors, these reforms could materially affect how sustainable funds are designed, marketed and compared, making the final outcome particularly relevant for investment strategies with ESG objectives. Funds currently designated as sustainable under Article 8 or 9 may need to be strategically revisited with portfolio or policy adjustments if the intent is to maintain the same designation levels.

At Global Alpha, we are following these developments closely. While SFDR 2.0 remains subject to negotiation, the direction is clear: sustainability claims will increasingly need to be supported by objective, measurable criteria. We will continue to monitor the legislative process and its implications for the sustainable investment landscape as the final framework takes shape.

Banyan Capital Partners (“Banyan”) is pleased to announce the promotion of Simon Gélinas to the role of Managing Director and Head of Investments. In this capacity, Simon will assume day-to-day leadership of Banyan’s investment function, including pipeline management, investment selection and execution and asset management across the firm’s portfolio.

Jeff Wigle will continue to lead Banyan as Managing Partner with overall leadership accountability for the business including its investment philosophy, partner development, origination strategy and fund-level oversight. This promotion reflects Banyan’s ongoing commitment to building leadership depth and ensuring continued execution excellence as the firm grows.

“Simon has been an integral part of Banyan’s evolution and has earned the confidence of our team, our partners, and our portfolio companies. This promotion formalizes the leadership role he has already been playing, and positions Banyan well for our next chapter of growth.”
— Jeff Wigle, Managing Partner, Banyan Capital Partners

Simon joined Banyan in 2015 and has been involved in every facet of the firm’s investment activities. He brings more than two decades of experience across private equity, operational management and corporate finance. Prior to Banyan, Simon held senior roles at TRU Simulation & Training (a Textron Company) and its predecessor Mechtronix Inc. and was previously a Vice-President at Richardson Capital Limited. Simon holds a Bachelor of Commerce from McGill University, an MBA in Finance from the University of British Columbia, and is a CFA charterholder.

Why are Japanese longer-term government bond yields continuing to trend higher, in contrast to range-bound trading in other major markets?

The conventional explanation is that monetary policy remains too loose. Inflation is back and the Bank of Japan is “behind the curve”. Investors are reluctant to buy bonds until a rate peak is in sight.

The “monetarist” view is opposite. Bonds are selling off because monetary conditions are restrictive. M3 and M1 grew at annualised rates of just 1.3% and 0.1% respectively in the six months to June – see chart 1.

Chart 1

Money growth is being crushed by massive and still-rising QT. The BoJ’s net disposal of JGBs amounted to 7.0% of GDP in the year to June. Plans to reduce monthly purchases further imply an increase to c.8.5% by mid-2027 – charts 2 and 3.

Chart 2

Chart 3

Consistent with the monetarist view, annual core CPI inflation is below 2% and falling even adjusting for government subsidies, despite upward pressure on import prices from the weak yen – chart 4.

Chart 4

Real yields may be reaching an attractive level but potential buyers are understandably reluctant to fight the BoJ “whale”. With JGBs off-limits, available money is being directed towards equities and foreign markets, contributing to the yen’s slide.

Stopping QT would probably trigger a surge in demand for JGBs, including by foreigners. Lower yields would ease concerns about fiscal sustainability. Capital inflows would strengthen the yen and add to the lift to money growth from ending the QT drag. Stronger money growth would support medium-term achievement of the inflation target without reliance on currency depreciation.

Continued QT on the planned scale, by contrast, promises sustained monetary weakness and an eventual return to deflation.

Fixed income allocations are typically constructed in silos based on product labels, such as universe bonds, long bonds, high yield and private credit. This fragmented decision-making approach often leads to suboptimal outcomes.

This paper challenges that model. It explores how a more integrated approach, grounded in investor objectives, liabilities and risk tolerances, not product labels, can lead to better risk-adjusted results.

The siloed approach

Fixed income portfolios are often presented as diversified, yet in practice they are typically constructed in silos. Allocations are made to individual strategies, like long bonds, high yield, private credit, justified on their own merits. What looks like portfolio diversification on the surface can mask unintended concentrations, such as duration risk through long bond exposure, equity‑like drawdown emerging from high yield allocations, and liquidity challenges in private credit. These risks are not always obvious, when viewed individually, but they can reveal themselves simultaneously at precisely the moment they are least welcome.

This is often a by-product of the decision-making process where the portfolio is gradually assembled, rather than holistically designed. New allocations are typically introduced incrementally to enhance returns or address perceived gaps in legacy portfolios, without fully appreciating the overall structure and revealing unintended risks. Over time, this can anchor portfolios to yesterday’s opportunity set, even as market conditions, liquidity dynamics and relative value evolve.

A more effective approach begins by stepping back and treating fixed income as an integrated system. This means evaluating the portfolio holistically, understanding how each component contributes to income, liquidity, capital preservation and diversification, as well as ensuring that these roles are consciously chosen rather than unintentionally inherited.

Integrated approach

A more integrated approach begins by reframing fixed income, not as a collection of individual allocations, but as a coordinated system with an aim to achieve a specific goal. In this system, risk, return and liquidity are intentionally balanced across the full opportunity set, and every allocation must earn its place based on the role it plays, not simply the label it carries.

One way to think about this is through the lens of a high-performance racing car, where each component has a distinct and essential function, and overall performance depends on how those parts work together.

Traditional bonds, in this analogy, serve as the chassis. They anchor capital preservation and support liability matching. However, their limitations in certain market regimes have prompted investors to look beyond traditional exposures, incorporating complementary sources such as commercial mortgages, private credit and emerging markets debt to broaden the toolkit and enhance resilience.

Long bonds function as the suspension system, absorbing shocks and stabilizing the ride. They are especially valuable for defined benefit (DB) plans, where their sensitivity to interest rates help align with liability movements. When rates fall and liabilities rise, long bonds can provide a critical counterbalance, helping preserve funded status.

High yield bonds, by contrast, serve as the engine, the source of power and forward momentum. Their returns are driven more by credit spreads than by interest rate movements, making them an attractive source of income through carry when fundamentals are stable.

Emerging markets (EM) credit acts as a powertrain that expands the opportunity set. By providing exposure to economies and market dynamics that differ from developed markets, EM credit can enhance yield while reducing overall portfolio correlation. Diversification across countries, sectors, and issuers helps mitigate localized risks and adds an additional layer of resilience, particularly when developed market cycles are under pressure.

Commercial mortgages and private credit can provide grip in corners providing a steady income stream and a performance turbo boost. These assets are typically backed by secured cash flows, and the illiquidity premium can translate into smoother, more stable income with some downside protection.

Finally, absolute return fixed income strategies function as the adaptive control system, designed not to follow the market, but to navigate it. Rather than being anchored to benchmarks, these strategies aim to generate positive returns across a wide range of environments. By incorporating flexibility, whether through unconstrained positioning or the ability to short, they reduce reliance on traditional sources of return such as yield and duration. In doing so, they can enhance diversification and improve the overall efficiency of the portfolio.

These characteristics are not without their detractors. For example, the trade-off for long-bonds is that the duration exposure can feel like a drag when real yields rise, creating opportunity costs and, at times, convexity-related surprises. Like any high-performance engine, they can overheat under stress. In periods of market turbulence, high yield can behave much more like equities, with drawdowns that challenge its role as a stabilizer. The grip in corners of less liquid assets can be misleading since the liquidity trade-offs often only become apparent in stressed market conditions.

Taken together, the effectiveness of a fixed income portfolio does not come from the individual components alone, but from how they are deliberately combined. When each allocation is viewed through the lens of its contribution to the whole, its role in providing income, liquidity, protection or diversification, the portfolio becomes more than the sum of its parts, it becomes a system designed to perform.

Fixed income asset class features
	Role	Strengths	Limitations
Long bonds	Liability hedging for DB plans.	Duration alignment	Opportunity cost when real yields rise
High yield bonds	Income enhancement	Spread-driven returns	Equity-like drawdowns in times of stress
Emerging markets credit	Diversification	Differentiated growth and policy cycles	Currency, liquidity, and geopolitical risks
Commercial mortgages/ private credit	Stable income, downside protection, illiquidity premium	Secured cash flows, diversification	Liquidity constraints
Absolute return strategies	Diversification	Downside protection and adaptive to changing environments	Can be more complex and returns more dependent on skill

Portfolio construction

A more effective fixed income framework begins by challenging a deeply ingrained assumption: how portfolios are typically built. Rather than starting with product labels and working backward to an outcome, this approach flips the process, by beginning with the outcome itself.

The starting point becomes the portfolio’s core objectives, whether income generation, liability hedging or capital efficiency, and then deliberately engineering exposures to deliver on those goals. While this may seem like a subtle shift, it fundamentally changes the conversation. The focus moves away from how capital is allocated across categories, and toward the risks that are consciously being taken.

In this framework, duration, credit, liquidity and convexity are no longer by-products of allocation decisions, they become building blocks. Each is selected, sized and combined with intention to achieve a coordinated system, where every exposure is chosen for its role in delivering outcomes, not simply because it fits within a predefined label.

This perspective also enables portfolios to be designed with greater adaptability. Instead of being implicitly tied to static benchmarks, portfolios can be constructed to respond dynamically to changing market environments. As interest rates shift, credit conditions evolve and liquidity ebbs and flows, the portfolio is positioned to adjust.

It also opens the door to a more thoughtful integration of public and private credit, capturing illiquidity premiums where appropriate, and creating space for less traditional strategies, such as absolute return fixed income, which are designed not to track a benchmark, but to deliver consistent outcomes across varying market conditions.

By incorporating the different fixed income strategy characteristics, portfolios can become more adaptive, more capital-efficient and better equipped to manage risk, particularly in periods of stress. The shift in implementation is from building portfolios that reflect categories, to designing portfolios that deliver outcomes.

Tailoring strategies by investor type

The actual design of a fixed income portfolio depends on investor type and associated objectives, liabilities, governance and risk tolerance.

DB pension plans

For DB pension plans, portfolio construction works best when liability awareness and return generation are treated as two sides of the same decision, not competing priorities. Longer-dated bonds play a vital role by anchoring the hedge ratio and stabilizing funded status, while credit can add a reliable source of liquidity and carry.

Layered on top, absolute return strategies can help dampen surplus volatility, providing flexibility when markets are uncertain. Selective allocations to private credit can further enhance returns, capturing illiquidity premium.

The real advantage comes from integrating these elements into a cohesive liability-driven investing (LDI) enhanced return framework. Rather than managing hedging assets and return-seeking assets in isolation, this approach aligns capital efficiency, liquidity needs and risk management with a plan’s long-term obligations. The result is a portfolio designed not just to meet liabilities, but to navigate market cycles with greater confidence and control.

Defined benefit pension plan illustration
Emphasis on integrated LDI enhanced return
Objectives	Liability matching, surplus stability, capital efficiency
Illustrative blend	Long bonds for hedge ratio Core credit for liquidity Absolute return strategy to manage surplus volatility Select private credit for return enhancement

Insurance company general accounts

For insurance company general accounts, portfolio construction is about getting the most yield out of every unit of balance sheet capital while maintaining predictability and regulatory discipline. High‑quality core credit forms the foundation, delivering steady income and supporting capital efficiency under regulatory frameworks. Commercial mortgages can build on this base, offering enhanced yields and durable cash flows to align with liabilities. Selective allocations to opportunistic credit can further improve outcomes, provided they are sized within capital constraints.

Insurance company general accounts illustration
Focus on yield per unit of capital and asset-liability matching.
Objectives	Capital efficiency, regulatory constraints, predictable cash flows.
Illustrative blend	High-quality core credit Commercial mortgages Opportunistic credit within capital limits

Endowments and foundations

For endowments and foundations, portfolio construction is about generating real returns, preserving capital and supporting spending needs through different market environments. This is best achieved through a blend of complementary strategies. Shorter‑duration bonds can play a stabilizing role, helping to manage interest‑rate risk while preserving liquidity. Layered alongside, diversifying absolute‑return strategies can provide income and downside protection when traditional markets become unsettled.

A meaningful allocation to commercial mortgages and/or private credit further strengthens the portfolio, offering the potential for attractive risk‑adjusted returns and contractual cash flows. Together, these components can help manage the level of drawdowns, supporting the ability to fund missions with confidence, regardless of where we are in the market cycle.

Endowments and foundations illustration
Emphasis on resilience and drawdown control
Objectives	Real return, capital preservation, spending support
Illustrative blend	Shorter-duration bonds Diversifying absolute return strategies Meaningful commercial mortgage and/or private credit allocation

Governance considerations

Breaking away from asset class silos to a more integrated approach, is about redefining how to think about investing that requires a change in mindset, and potentially governance practices. Instead of selecting individual asset classes, investors focus on outcomes that better align with their objectives.

It demands investment managers who can dynamically allocate risk, stay agile as markets evolve and provide transparency into how value is created. It challenges boards to be comfortable with customized benchmarks, rather than public benchmarks for comparison purposes, placing less weight on beating a benchmark, and more on protecting against downside risks and strengthening overall portfolio resilience.

From silos to solutions

For institutional investors, this is an opportunity to step back and rethink fixed income, not as a set of product allocations, but as a tool to deliver superior total portfolio outcomes. By starting with objectives, focused on income, liability hedging and capital efficiency, investors can design exposures more deliberately. The result is a more cohesive portfolio, where each component works more efficiently, risk is managed more effectively and outcomes are better aligned with overall goals.

Before we discuss the silver economy, let’s talk about the markets as we are at the mid-year mark.

Rumbling grows louder and louder that we are in stock market euphoria. By many metrics, including trading volume, margin debt and multiples, in our view, this is shaping up to be one of the biggest stock market bubbles in history.

If we go back to 2000, we had a different market composition.

Passive investing was less than 20% – today, it is over 50%.
Retail share of trading was less than 10% – today, it is above 20%.
There were no leveraged ETFs, zero-day options, etc.
Hedge funds managed around $600 billion – that number is now above $6 trillion.
Active managers were mainly fundamental bottom-up, split about equally between value, growth and core.
Systematic investing (quantitative funds) accounted for the management of $200 billion – today, around $2 trillion.

So, what happens when this bubble deflates? In our view, today’s market structure differs materially from prior cycles, making historical comparisons more challenging.

What is risk in this situation? Is it underperforming the market or is it losing money? Pension funds have an estimated rate of return of 6 or 7%. Should they look to reduce risk? Diversify their portfolio?

Diversification, quality and long-term opportunity

At Global Alpha, we believe in building true small cap portfolios, diversified by country, currency, sector and industries. At the same time, we remain exposed to different long-term secular industries. We buy quality companies, defined by stronger growth and margin profiles; with strong balance sheets and low debt.

Unfortunately, this approach has not been rewarded over the last few years. Not even for famed investors like Warren Buffet who underperformed the S&P 500 by 20% and the Nasdaq-100 by 30% year over year.

As he famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps he viewed the overconcentration as others being greedy, which recalls another Buffet quote:

“Only when the tide goes out do you discover who’s been swimming naked.”

As investors clamoured to the top ten, the rest of the small cap universe was left a little stark.

On that note, there’s still opportunity in the markets, represented by the silver economy.

A trend that never gets old

From Japan to Italy to the United States and Canada, the world is facing the largest demographic shift in its existence. According to data from World Bank Group, about 16% of the current population (ex-Africa) is over 65. And 18% is less than 14. By 2050, it is expected that less than 15% of the population will be less than 14 and over 26% will be over 65.

World Bank Group also indicates that Japan is the globe’s fastest aging society. 35% of its population is over 65 years of age, with 6% of that older than 85. By 2050, more than 50% of the population will be above 65 years old.

Countries like Korea and Italy are not far behind. What does an aging, “silver” population mean for investments?

A population that is only getting older means that there are growth prospects for companies that offer or adapt their products to cater to that demographic.

In our portfolio, we have several names that are in that category:

Extendicare Inc. (EXE CN): a Canadian operator of long-term care as well as one of the largest providers of home health care in Canada.
Service Corporation International (SCI US): one of North America’s largest providers of death care services.
Challenger Limited (CGF AU): one of the largest providers of annuities in Australia.
Globus Medical Inc. (GMED US): a medical device company focused exclusively on spine disorders.

We also have many other companies in the portfolio who have a growing part of their revenues addressing this market. One such company is Shanghai Conant Optical Co. Ltd. (2276 HK), which is the second largest global manufacturer of optical lenses and a leading manufacturer of lenses for smart glasses.

We also own WeRide Inc. (800 HK, WRD US) a diversified, Robotaxis, Robobuses, Robovans, autonomous driving stack and software licensing, deployed globally in China, the Middle East and Europe.

Back to the top

Overall, while current markets may be expensive and structurally different from past bubbles, investors should focus on diversified, quality small-cap companies exposed to durable secular trends. Our team is constantly looking at thematics to identify long-term trends like this one of the silver economy.

The securities identified and described do not represent all securities purchased, sold or recommended for client accounts. It should not be assumed that investments in these securities were or will be profitable.

Global six-month real money growth has fallen back since early 2026, crossing below industrial output expansion in April – see chart 1. This suggests that the global economy will lose some momentum during H2, while the monetary backdrop for markets has become less favourable, at least temporarily.

Chart 1

From a cyclical perspective, housing indicators remain weak, while the stockbuilding cycle appears to be reaching a peak, with a downswing likely to extend well into 2027.

The optimistic case is that real money growth will be supported by a reversal of the H1 boost to inflation from higher energy prices, assuming that the reopening of the Persian Gulf proves lasting, while the business investment cycle remains in an upswing driven by seemingly insatiable demand for AI compute. Still, upward pressure on financing costs from the vast spending could start to constrain momentum soon, while the disinflation lift to real money growth could be offset by slower nominal expansion, reflecting H1 interest rate rises.

A conservative view of equity market prospects, therefore, appears warranted, as least until monetary indicators give an “all-clear” signal. The cyclical framework employed here suggests that equities will perform poorly over the medium term: weak phases in the three investment cycles are scheduled to coincide at some point in 2027-28, a condition historically associated with major bear markets.

An important recent change has been a divergence of money growth across major economies, with US expansion picking up to a level inconsistent with 2% inflation, in contrast to weakness in Europe and Japan – see charts 2 and 3. This suggests superior US near-term economic prospects and a need for opposite monetary policy adjustments. If forthcoming, these could sustain a recent recovery in the US dollar, likely acting as another headwind for markets.

Chart 2

Chart 3

US monetary acceleration gathered pace after the Fed’s December decision to resume balance sheet expansion, a policy that Chair Warsh wants to reverse. Action is unlikely before late 2026 but – if combined with a near-term interest rate rise – could cause money growth to slow sharply in H1 2027.

Despite US strength, global annual broad money growth is below its pre-pandemic (i.e. 2015-19) average, reflecting softness in China as well as Europe / Japan. This suggests that inflationary pressures globally will remain contained, even if US medium-term risks are rising.

The judgement that the stockbuilding cycle is peaking is supported by the global manufacturing purchasing managers’ survey, with an average of the finished goods inventories and stocks of purchases indices reaching its fifth highest level on record in May – chart 4. Downswings in the cycle were historically associated with underperformance of cyclical sectors – notably materials, financials and communication services – versus defensive sectors, especially health care and consumer staples.

Chart 4

Cycle fluctuations were also reflected in prices of production inputs including electronic components as well as industrial commodities. A coming downswing could challenge optimistic forecasts for medium-term earnings growth of chipmakers and other hardware suppliers.

CC&L Infrastructure is pleased to announce the release of its 2025 Responsible Investment Report and 2025 Climate Report.

The reports reflect our commitment to responsible investment and sustainable infrastructure, highlighting the initiatives undertaken across our portfolio over the past year. As long-term owners and active managers of infrastructure assets, we believe operating responsibly is fundamental to protecting and enhancing asset value while contributing to resilient infrastructure and stronger communities.

Today, our team of more than 45 professionals manages over $7.5 billion in infrastructure assets across transportation, social and renewable energy sectors, including approximately 2.4 GW of renewable energy capacity. As an employee-owned business, we invest alongside our clients, aligning our success with theirs and reinforcing our long-term approach to value creation.

The 2025 Responsible Investment Report highlights progress across our five Responsible Investment focus areas:

Asset resilience: Strengthening the long-term resilience, reliability and performance of our infrastructure assets through active ownership, disciplined risk management and operational excellence.
Climate & transition: Advancing our approach to climate risk assessment, emissions measurement and reporting while investing in renewable energy and supporting the transition to a lower-carbon economy.
Shared value: Building long-term partnerships with local communities, Indigenous groups and other stakeholders to create lasting economic and social value where our assets operate.
People focus: Maintaining a strong commitment to health and safety, fostering an inclusive workplace and supporting the employees, contractors and communities connected to our assets.
Governing with integrity: Promoting strong governance, ethical business practices and transparent reporting to support accountability and informed decision-making.

The accompanying 2025 Climate Report provides an update on our approach to managing climate-related risks and opportunities across the portfolio. The report is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which continue to underpin global best practices for climate reporting, and reflects our ongoing efforts to strengthen climate governance, risk assessment, greenhouse gas emissions measurement and disclosure. Through transparent reporting and continuous improvement, we aim to enhance our understanding of climate-related risks while supporting the long-term resilience of our portfolio.

Together, these reports provide an overview of our approach, our progress and the initiatives underway across our portfolio as we continue to strengthen our responsible investment practices.

International equity markets fully recovered their March losses and made significant gains over the quarter as investors focused on AI driven earnings growth rather than the unstable geopolitical backdrop and volatile oil prices. The MSCI EAFE index returned 11.6% in local currency terms and 10.8% in US dollars. IT rose 55% as the scale of AI investment was reflected in strong demand and pricing across the AI infrastructure complex including semiconductors, hardware and equipment. The worst performing sector was energy, down 17.2%, reversing the gains made in Q1.

New Federal Reserve Chair Kevin Warsh has inherited a solid US economy currently enjoying a growth boost from the enormous capex on AI compute. Our analysis suggests a rate rise is justified in the US but is not necessary in the Eurozone, the UK or Japan, where money growth is much weaker. Inflation pressures globally should remain contained and we expect the economy to slow in the second half of the year. In the UK, Prime Minister Keir Starmer has accepted the inevitable and resigned after his main rival for the leadership of the Labour Party, Andy Burnham, returned to parliament by winning a by-election. Favoured by the membership and less unpopular with the wider public Burnham was highly likely to win any leadership contest with the much-maligned Starmer.

The dominant feature in stock markets remains AI with day to day moves seemingly binary between ‘AI on’ days, when stocks related to AI infrastructure spending perform well while the perceived disrupted names suffer, and alternative ‘off’ days, when the disrupted recover and the infrastructure names decline. Examples of the potentially disrupted can be found in software, business and professional services, data vendors and IT services and outsourcing. Infrastructure winners include semiconductors and their equipment makers, data centre related businesses, power generation and electrical equipment, cooling, networking and optical equipment, and some automation companies. Leadership within the infrastructure group shifts with perceptions of where bottlenecks might develop. More neutral areas include banks, which stand to gain from cost savings but may be disrupted, along with healthcare and staples, although the latter has been negatively impacted by GLP1 weight loss drugs. Headline volatility for the whole market remains subdued but the divergence of returns between subsectors is, in some cases, extreme.

Portfolio relative performance was better in Q2 with added value from stock and sector selection and a positive impact from emerging market exposure. The overweight in IT was a significant contributor with Japanese stocks such as Murata Manufacturing (+233%), and Screen (+98%) making substantial gains while unowned German software giant SAP (-6%) fell, although we re-introduced the stock late in the quarter. Other AI related holdings include Australian real estate play Goodman and Hong Kong listed power tools maker Techtronic (+30%) – both are seen as beneficiaries of high demand for data centres, with the latter also boosted by spending on infrastructure and energy projects.

In communications conglomerate Softbank is the AI play of choice in Japan, reflecting its 86% holding in UK chip designer Arm and roughly 13% stake in OpenAI acquired in return for a commitment to invest $65bn. Not owning Deutsche Telecom was also a positive as telecoms came under pressure from the competitive threat posed by SpaceX’s Starlink offering. In financials the strength of the Spanish economy continues to support Caixabank (+27%), which raised guidance over the quarter, while UK-listed Asian focused bank Standard Chartered (+34%) has been benefiting from stronger earnings growth partly due to improved cost efficiencies.

On the downside some unowned IT stocks posted big positive moves such as German chip maker Infineon (+117%), Japanese IT bellwether Tokyo Electron (+106%) and flash memory card maker Kioxia (+368%). In financials the London Stock Exchange continues to suffer from concerns that generative AI could weaken the value of financial data terminals and analytics platforms, while in healthcare unowned Novo Nordisk (+37%) recovered on an easing of supply constraints and signs that oral obesity treatments are stabilising the company’s market share in the US. More defensive stocks such as East Japan Railway (-7%) and food retailer Kobe Bussan (-24%) tended to lag the market, with the latter also hit by a poorly received acquisition of an airline catering business with few obvious synergies. In an underperforming Hong Kong, casino operator Sands China (-17%) suffered from continued weakness in Chinese consumer trends while insurer AIA (-13%) was impacted – unfairly in our view – by recent Chinese regulatory actions aimed at clamping down on online brokers and offshore securities sales.

Activity over the quarter has raised exposure to IT, consumer discretionary and industrials with reductions in energy, materials and utilities. In Japan, we have introduced Murata Manufacturing, which is no longer simply a smartphone component supplier, now representing a leveraged play on AI infrastructure, data centres and vehicle electrification. We have also added Lasertec, which is effectively the only meaningful supplier of EUV photomask inspection systems. In industrials we have bought Italian cable specialist Prysmian, which will benefit from renewable energy build-out driven by electrification of transport and industry, as well as the installation of new interconnectors between countries and data-centre power requirements. We have also added building equipment company Belimo and valve specialist VAT, both in Switzerland. The former provides critical flow control and HVAC components for liquid cooling systems in hyperscale AI data centres, while the latter manufactures high-precision vacuum valves used in semiconductor fabrication equipment and benefits from rising chip complexity.

In consumer discretionary we have re-introduced Sony, which has lagged the recent strength in the Japanese market, and UK food services company Compass – the US business is exceptionally strong and margins are recovering back to historic levels. On the sell side we have taken some profits in miner Rio and exited engineer Weir Group in industrials. Other disposals include Thales, reflecting a loss of momentum of the defence buy case, and Kone, where weak China new-build remains an overhang. In utilities we have exited SSE in the UK after the stock re-rated and sold Sartorius in healthcare, where a recovery in sales after customer de-stocking is taking much longer than expected.

The portfolio remains focused on broad exposure to the different layers of the ‘AI stack’ with the current emphasis on semiconductors and manufacturing, infrastructure and energy and smaller exposure to models and applications. We are net overweight the theme, acknowledging that in the longer term the applications area may be the best place to be but focusing for now on where the money is being spent. This approach leads us to be overweight IT, real estate, communications and industrials while also liking healthcare for its defensive qualities. Financials are an underweight, with a preference for banks over insurance and services. Our emerging market checklist is still net positive but we are mindful of the strength year to date and the dominance of the tech heavy Taiwanese and Korean markets. The focus is on companies with continued positive earnings revisions as markets have already experienced strong profit upgrades and may be vulnerable to a weaker second half economic and liquidity backdrop.

The Composite rose by 13.7% (13.54% Net) versus a 10.82% rise for the benchmark.

Emerging markets shrugged off concerns over the US-Iran conflict during the second quarter to focus on the AI picks and shovels earnings boom. The quarter caps a strong period for EM equities, nearly doubling since the beginning of 2025. Overweight positioning in companies which harnessed tailwinds from both AI hardware demand and corporate Value-Up reform led outperformance in South Korea. Taiwan exposure was a negative contributor, with our overweight in AI supply chain niches positive but offset by selling our position in Mediatek after a strong rally, which subsequently went on to more than double in a month. In China, strong relative performance came from the rotating out of consumer exposure and into technology and industrials names while remaining underweight a weak market overall. Defensive exposure in India was a negative as the market bounced. In Latin America, Argentinian shale oil producer Vista Energy was a detractor and overweight positioning in Brazil was negative. Banking exposure in the GCC underperformed as the oil price fell, offset by underweight positioning in Saudi Arabia, Kuwait and Qatar. We added to Saudi Arabia, UAE, China, India and Taiwan; trimmed Hong Kong, Malaysia, Philippines, Greece, Brazil and South Africa.

Performance in EM this year has been incredibly narrow with only 25% of stocks outperforming the benchmark with most of this coming from the AI capex beneficiaries in South Korea and Taiwan. Over the last 12 months the portfolio has generated significant alpha largely from strong stock selection across the tech supply chain, with an added boost from modest overweight positioning in these countries. Our holdings control bottlenecks across memory, advanced logic, packaging, networking, connectors and thermal cooling, capturing extraordinary cash flows as US hyperscalers race to expand compute. Portfolio activity in the region has been aimed at sweating the capital through stock picking and disciplined risk control helping to generate stronger risk-adjusted returns.

An underweight and stock selection in China was a positive. Current positioning reflects a view that authorities in Beijing are content pursuing exchange rate stability and investment in strategic industries over domestic reflation. Our response has been to tilt the portfolio away from companies being squeezed by weak domestic demand and towards companies leading efforts to bolster energy security, industrial upgrades, and technological sovereignty. Our consumer exposure in Tencent and Alibaba underperformed. Market doubts over the ROI from AI investment, concerns their LLM models lag behind AI-native disrupters like Deekseek and Zhipu, and the potential for agentic technology to disrupt traditional ecommerce and consumer apps are weighing on these stocks. However, we opted not to exit as we believe there are arguments for both companies being beneficiaries of AI deployment.

Defensive positioning in India was a detractor as the market rallied. Telecoms infrastructure provider Indus Towers was the worst performer as a period of favourable economics fades with a large volume of site renewals due over the next 12 months, exposing the company to greater competitive pressure from rivals. Foreign investors have abandoned Indian equities having been designated an “AI loser” due the disruption of its 5 million strong IT services sector. Since the end of 2024, India’s weighting in the MSCI EM benchmark has fallen from nearly 20% to 9% today, as Taiwan and South Korea have surged from a quarter to almost half the benchmark. On a price to earnings basis MSCI India trades one standard deviation above a 20-year average premium to MSCI EM of 1.5x. However, there are pockets of value and positive earnings revisions across financial services, banks, real estate, software, healthcare and retail staples.

In Latin America, contributions from stock selection and an overweight to Brazil were negative as concerns over government fiscal policy, inflation, high debt levels and a slowing economy weigh on sentiment. Portfolio companies sensitive to the rate environment such as residential developer Cyrela and Sao Paolo water utility SABESP underperformed. Despite the backdrop, the operating performance of our core holdings in Brazil has been robust. The market is among the cheapest in the world on a forward P/E of 8x, and domestic allocator positioning is at record lows. Argentinian shale oil producer Vista was the largest single detractor in the region as oil plunged on the news of a US-Iran deal to end their conflict. Underweight positioning in Mexico was a contributor as the market underperformed. Domestic demand is weak, remittance payments from the US have been falling, and corporates are delaying investment decisions due to uncertainty over the outcome of upcoming USMCA negotiations.

An underweight in South Africa was a positive contributor, while at the stock level outperformance by Firstrand was offset by a poor period for Goldfields. Firstand was boosted by country level credit upgrades from Fitch and Moodys, along with a positive reception to news that it may sell its UK operations. Miner Goldfields was sold as a combination of headwinds are building including a peaking stockbuilding cycle (gold is positively correlated with the cycle), the excess monetary environment becoming less favourable and extreme prior gains in the gold price. Exposure in Egypt was the largest beneficiary of conflict easing in the Middle East with the broader market rising over 20%.

Global monetary data suggests economic weakness ahead. Rather than fade the short term spike in inflation stemming from the US-Iran war which appears to be cooling as energy prices fall, central banks risk fighting the last war by keeping monetary policy tight with negative consequences for economic activity and equities. These traditional drivers of economic and market weakness appear partially offset by a frenzy of investment and activity as AI is rolled out across industries. The process of AI diffusion is in its very early stages, but we have already had a taste of its potential for creative destruction in areas like software coding. Just as railways, automobiles and the internet created new industrial ecosystems that were hard to envisage when these technologies were in their infancy, investors face the difficult task of imagining how AI will create new sources of demand and arenas for wealth creation. The portfolio today is focused on critical infrastructure providers where earnings and margins are surging and where new supply will be difficult to bring online. While these companies trade on reasonable valuations relative to their growth and profitability, we participate with healthy scepticism based on a view that transformative innovation is rarely a linear process.

The Composite rose 28.73% (28.48% Net) versus a 24.05% rise for the benchmark.

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From a cyclical perspective, housing indicators remain weak, while the stockbuilding cycle appears to be reaching a peak, with a downswing likely to extend well into 2027.

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