Quarter 1 2026 update 

From inception on the 6^th November 2025 until year end the return on the GBP S Inc Share Class of the Fund was -0.2%. USD currency exposure detracted a little, with stocks posting a small positive return overall. The portfolio was only 35-40% invested in equities over this period, with the remainder in cash and short dated bonds. We think it prudent to scale up exposure slowly. We intend to increase stock exposure over the coming months, depending on market conditions and opportunity set, but we may hedge some of the resulting market risk with index futures to retain a defensively positioned portfolio overall.

We can’t have it all  

The Fund has a flexible tolerance for risk and market exposure, driven by our assessment of the opportunities we identify at a given time. The level of net market exposure we believe is appropriate can be seen as the foundation for the portfolio because it drives what fits and what does not. Our aim is to build the best portfolio possible within the context of our prevailing risk tolerance. And by “best” we mean the portfolio we predict will have the highest expected return across a range of scenarios. Understanding what we are “solving for” is very important to the process. At the moment, our aim is to structure a portfolio that seeks to have low downside participation. At the moment our aim is to structure a portfolio that would have no more than 20% downside capture if global equity markets were to fall over the next 12 months. So if global equity markets fall 25% over 12 months our aim is to not lose more than 5%. 

In order to achieve this (far from trivial) objective we need to be very careful about the absolute downside risk to everything we invest in. The current positioning is at the more defensive end of the spectrum. At other times we might reduce our risk tolerance even more but that would undermine the potential for attractive absolute real returns in less adverse markets. We certainly expect to increase our tolerance for risk when we believe it is warranted. Obviously, we cannot in any way guarantee that we will actually achieve our investment objectives but we can be clear in what we are trying to achieve at a given time, recognizing that we can’t have it all. We can’t build a portfolio to maximise upside potential and minimise downside risk at the same time. So the profile must flex over time. 

Beating a bear market  

Perhaps unsurprisingly we have been spending time thinking about how to compound absolute returns through a bear market. To us the distinction between a correction and a bear market isn’t captured simply by the magnitude of the fall. Corrections are just speed bumps really because the factors that were performing well before tend to reassert themselves quickly. A bear market lasts years and market leadership can change significantly, often emerging over a number of mini-cycles within the broader bear market itself. In our view the key to generating an absolute return through a bear market isn’t simply to have negative correlation to equities. Whilst being negatively correlated to falling markets is attractive it isn’t sufficient and often comes with a heavy tax on long term performance. Rather, we believe there are four key elements to generating an absolute return through a bear market: 

• Avoid the centre of the storm  

• Do not fear low market exposure 

• Invest early in the winners of the next cycle 

• Redeploy capital when genuine opportunities present themselves 

We think this simple framework is actually very useful for structuring the portfolio today, even if the next bear market is a year or two away. We will not be sucked into investing in stocks that have significant valuation risk or where earnings are heavily dependent on a broad economic upturn. We believe we can find enough compelling stock and theme ideas to generate a healthy absolute real return without depending on broad equity markets going up or relying on momentum in markets. Likewise, we are not looking for an “end of days” cataclysm in markets before we take on more risk. We simply need to find opportunities where our forward assessment of the absolute upside to stocks and themes warrants a higher tolerance for market risk in the short term. Perhaps most importantly, our key focus is on trying to identify long term winners – the ones that will be obvious through the rear view mirror in 10 years time. Easier said than done, clearly. 

The next cycle’s winners 

Commodity and Emerging Markets stocks were the winners from the cycle that began in 2001 as the TMT bubble was still bursting. “Quality” as a factor was the winner through and post the Financial Crisis, buoyed by the idea that the cashflows from “long duration” equities could be valued like bonds in an environment of low rates. Latterly the focus has been on the so-called hyperscalers, mag-7 and artificial intelligence. So who will be the big winners over the coming years? 

Unfortunately, we don’t think there will be one simple thematic tailwind for the next decade. We live in an age of disruption and geopolitical tension that will drive uncertainty and change. The era of secularly declining interest rates is over. Corporate taxes will have to rise globally in the coming years. Inflationary cycles are back. We cannot “have it all” anymore. The winners for the next decade are going to be the companies that help address key societal challenges. A cynic could argue this is rather obvious and has frankly always been the case. Companies have always thrived by developing new products to meet the evolving needs of customers. But we think the issues facing the global economy are becoming increasingly acute, and the “cost” of being wrong for companies is going up. The implications for the relationship between the state, people and corporations are going to be particularly important to understand.  

The North Star for the Fund’s investment process is to invest in companies that help address issues flowing from changes to the “four forces” that shape the world we live in. These forces are structural, long term, and necessarily interconnected. Ageing demographics will constrain growth in the global workforce, whilst intensifying inter-generational pressures. The impact will be profound for inflation, taxation, politics, healthcare and many other aspects of society. The earth’s natural resources are finite but our capacity to consume them is not. This inconvenient truth will drive tension between environmental sustainability and short-term productivity, stoked by political and geopolitical vested interests, both local and global. The grand experiment to turn the whole world into a democracy through globalization failed, and now looks decidedly naïve. The price of a washing machine fell considerably for US consumers as China became wealthier, more capitalist and more powerful. However, we are approaching 37 years after a brave soul stood in front of a tank in Tiananmen Square, and in our view, there is currently little indication that China will ever become a democracy. It actually seems more likely that the USA will cease to be one. Security in its broadest sense — spanning defense, cyber, energy, supply chains, data, and industrial capability — is set to have a stubbornly persistent impact on the investment landscape over the coming decades. Advances in technology are critical to humanity’s ability to address many of the challenges flowing from the other forces. But technological change creates its own challenges, whether that be disintermediating jobs for humans, consuming huge amounts of electricity, or undermining security in a multitude of ways. 

The next cycle’s winners, we believe, will be the companies that help address these immense challenges. They will be the companies that are able to innovate and apply new business models to solve problems, particularly through the use of technology. They will be companies that can do this profitably rather than rely on a never-ending wall of cheap capital. This is where our focus will be for the next decade as we seek to compound real absolute returns for clients. That doesn’t mean the Fund will always be invested in small cap high growth tech stocks. The defense primes are large capitalization, capital intensive “old-economy” industrials that have been perfectly positioned to benefit from rising geopolitical tension. The initial opportunity in defense stocks was arguably created by the market’s focus on climate change and green technology back in 2020. At this time many investment managers didn’t like the idea of explaining to their clients why they had bought companies that made missiles rather than wind farms. Times change. A core part of our thesis for the next decade is that we will have cycles – lots of them. Tensions between and within the four forces will be central to that. We must be willing to adapt and change as the opportunities evolve. When we think small cap high growth tech stocks are the place to be we will invest. But we are just as happy investing in large cap defense companies, domestic Japanese small cap “value” that will benefit from corporate governance reform, or any company in any industry, country, style or size band if we believe the absolute upside warrants it based on longer term fundamental analysis. 

Current portfolio 

The biggest portfolio theme (13.0%) is what we call resilient. This is an exposure to larger cap companies which in aggregate we expect to generate modest earnings growth with low economic cyclicality, pay reasonable dividends, and benefit a little from positive stock specific drivers or cycles. Based on our analysis we believe this exposure will compound total returns in the 6-8% range over the long term and be low beta in a falling market. It is very important to not overpay for companies in this space because the upside doesn’t provide a great deal of headroom. And over the last year it has become increasingly difficult to find companies that meet our thresholds. Whilst the attention in markets over the last six months has clearly been on AI and technology, companies meeting our resilient criteria performed very well earlier in 2025 and as a “universe” are no longer attractively priced in our opinion. This makes building a relatively defensive portfolio challenging.  

The Fund has a smaller exposure (4.8%) to resilient+ stocks. These are mid caps with underlying businesses that we believe to have little economic sensitivity. Because they are smaller they are less predictable than their larger cap resilient siblings. But we think they also benefit from more attractive valuations, stronger stock-specific drivers and greater potential to decouple from adverse markets. We would like to invest in more companies with this profile but the challenge is that when you peel away the layers of the onion on most companies they are ultimately more cyclically exposed than we need for this part of the portfolio. Viscofan is one example of a resilient+ holding in the portfolio. It makes sausage casings, which is not a cyclical business. Do not watch a video of how sausage casings are made if you ever want to eat a sausage again. Viscofan also feeds into another theme that we like, which is listed companies that compete with unlisted companies – ones that are backed by private equity. It used to be common to think private equity-backed companies had the advantage of limitless cheap capital available, but this is no longer the case. The pendulum has swung in the other direction now and we think many public market companies will gain market share at the expense of weak competitors that are controlled by private equity funds. Viscofan benefits from this dynamic in the US, where a key competitor is likely to file for bankruptcy because its private equity backer is unable to keep funding it. We love this sort of thing. It significantly increases the potential for Viscofan’s US operations to increase profitability over time, which has been the Achilles Heel of the business historically. 

2.7% of the portfolio is invested in stocks we believe have counter-cyclical potential i.e. stocks where we think there is a decent probability they could go up when global markets go down. GQG is a large long-only global equity investment manager that we have invested in for this reason, which is somewhat counter-intuitive and so warrants explanation. Its performance since Trump announced tariffs in 2025 has been awful because it is positioned very defensively. What this means is that GQG should be the standout performer amongst large global equity managers in a bear market. It is relatively light on US mutual fund assets and in this scenario we would expect it to grow assets and revenues significantly at the expense of other large asset managers that perform poorly. The potential for shares in GQG to go up when markets go down is valuable to us. It also pays a double-digit dividend yield which is attractive in the meantime. 

Geopolitical winners (6.0% of the Fund) are stocks we think will be long term winners from heightened geopolitical tension. The stocks in this theme currently are defense and oil companies. Defense companies aren’t as cheap as they were but we think returns over the coming years should still annualize at over 10%. The Fund’s exposure isn’t so much to the smaller more operationally geared defense “glamour” stocks. These are typically very expensive now. The Fund’s exposure is largely to the “primes”, the major defense contractors. We think the market is still underestimating how much the operating margins of these companies can improve as the mix of products they sell shifts, and quite how strong long term demand is going to be. The primes are notoriously inefficient as well, so there is plenty of room for improvements in core processes and controls to drive increased margins. We believe geopolitical winners will do relatively well if equity markets fall for geopolitical reasons, but less well if the driver is more broadly economic.   

We have been long term advocates for the Japan reform theme that is 4.4% of the Fund. Domestically focused Japanese small caps often perform very differently to global large caps as well, which is very valuable from a diversification perspective, as is the currency exposure. 

Cyclical value (5.6% of the Fund) stocks are so attractive (in our opinion) that even though they clearly have significant cyclical exposure we still think they should have a place in the portfolio. The key test is if we think sufficient upside exists regardless of the macro environment. So these tend to be stocks with strong stock-specific drivers rather than ones where we think their broader industry is set to enjoy a cyclical recovery. Bakkafrost, for example, has had issues with its Scottish operation and once they subside we believe it has substantial upside. Demand for salmon protein does have economic sensitivity but we do not think supportive macro is key to unlocking attractive upside for the stock. 

In aggregate we believe the portfolio is very defensively positioned with low debt, low valuation and reasonable yield. It is heavily exposed to companies that we believe have very durable businesses, offering products and services in “essential” areas like food, healthcare and defense. Exposure to discretionary consumer spending is very low, as is exposure to the USA and tech currently. Our conviction in the upside potential for the stocks held is high and we are optimistic about the investment opportunities that will emerge over 2026.  

The views expressed in this article are those of the author and do not necessarily reflect the views of Goodhart Partners or its affiliates.