March was a volatile month. The weak US market performance was partly offset by depreciation in the AUD (increasing the value of our US holdings in AUD terms). In USD terms, we fell 4.7% (vs 4.3%, benchmark). However, in AUD terms we declined 0.81% (vs the benchmark falling 0.47%). However, it is important to put this into the context of longer term performance.

To consider the performance, our long term performance has been solid (see below), with consistently above-benchmark performance.

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What happened in March?

March was a stark reminder that markets can be reshaped overnight by events far from any trading floor. After entering 2026 with hopes for cooling inflation and a friendlier Federal Reserve, investors instead spent the month digesting the consequences of the US–Iran war that erupted in late February, and the ripple effects touched nearly every corner of the U.S. equity market.

The Headline Numbers

U.S. stocks closed sharply lower across the board. The S&P 500 fell roughly 5%, the Nasdaq 100 dropped 4.8%, and the Dow Jones Industrial Average declined 5.2%. For the S&P 500, it was the worst month since September 2022, and the index briefly flirted with correction territory before staging a late-month bounce. Volatility, predictably, surged: the VIX peaked at 35.3 in March, its highest reading in many months, though still well below crisis-era extremes.

The Driver: Oil, Hormuz, and Inflation Fears

The dominant story was energy. The Strait of Hormuz (the narrow waterway that handles roughly 20% of the world’s oil supply and 20% of its liquefied natural gas) became the focal point of investor anxiety as hostilities disrupted shipping. Brent crude traded above $110–$115 per barrel at various points during the month, while West Texas Intermediate moved well above $100. The energy sector was one of the few bright spots in U.S. equities, while airlines, consumer discretionary names, and other fuel-sensitive industries came under heavy pressure.

The oil shock fed directly into a renewed inflation narrative. With gasoline prices climbing and supply chains under strain, fears of 1970s-style stagflation crept back into the conversation, a toxic mix for both stocks and bonds that hadn’t been seriously discussed since 2022.

The Fed Holds, Markets Reprice

The Federal Reserve responded to the new environment with caution. The FOMC voted 11-1 to hold rates steady at its March meeting, with the updated dot plot still pointing to just one rate cut in 2026, and even that has become questionable. The market is now starting to price in no Fed cuts for 2026 at all, a dramatic shift from the optimistic outlook investors carried into the year. Treasury yields reflected the repricing: the 10-year yield jumped from 4% to 4.3% over the course of the month, pressuring long-duration assets and rate-sensitive sectors alike.

An AI Wrinkle

Geopolitics wasn’t the only story. Memory chip names like Micron Technology and SK Hynix gave back some of their recent gains as Google’s new TurboQuant technology was reported to reduce the memory intensity of AI models, raising questions about whether the AI hardware boom had been over-extrapolated. More broadly, software and SaaS valuations continued to face skepticism as investors wrestled with which business models AI accelerates and which it threatens.

Consumers Wobble, Then Steady

Consumer signals were mixed. The University of Michigan Consumer Sentiment Index dropped sharply to 53.3, its lowest reading since late 2025, weighed down by higher gas prices and market volatility. Yet the Conference Board’s measure painted a more resilient picture, edging higher to 91.8 in March, better than the consensus forecast of 87.5. Underlying activity (air travel, restaurant bookings, retail spending) remained surprisingly steady even as headlines worsened.

A Late-Month Rally Offers Hope

The month didn’t end on a low note. On March 31, stocks staged their best day since May after reports surfaced that Iranian President Masoud Pezeshkian was open to ending the war with appropriate guarantees. The Dow climbed 2.49%, the S&P 500 gained 2.91%, and the Nasdaq jumped 3.83%. Ten of eleven S&P 500 sectors finished higher, led by consumer discretionary, communication services, and technology, a clear sign that investors were eager to put risk back on at the first credible hint of de-escalation.

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Looking forward

The Iran conflict has continued throughout April. There are some signs of progress towards a ceasefire. However, as at the time of writing, talks have faltered. Nevertheless, markets moved positively in early April. Ongoing disruptions in the middle East are negative for markets. And, they do motivate us to carefully manage risk. However, geopolitical concerns tend to have short-lived impacts on markets. We also remain broadly constructive on markets over the long term, meaning that we retain long positions.

Our constructive view is consistent with that of analyst consensus forecasts. Notably, analyst consensus forecasts predict the S&P500 (to which we are benchmarked) will increase slightly more than 20% over the next twelve months. We broadly anticipate further movement towards a resolution in the Middle East and remain long, albeit with risk limits.

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February was a solid month for the fund. After fees, we delivered 2.65% in USD terms (vs benchmark of -0.86%) and 0.89% in AUD terms (vs -2.56% benchmark). As this indicates, the AUD appreciated during February, weighing on AUD performance.

Performance has been strong since inception. However, past performance is not a guarantee of future performance.

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What happened in February?

The market was somewhat unhappy in February: the S&P 500 fell around 0.8%. The Nasdaq fell around 2.3%. This was not a good outcome, being the worst return since March 2025. Interestingly, the equally weighted S&P 500 increased 3.5%. So, what explains these curious trends?

The SAASpocalypse! The anecdotal holy grail of revenue is recurring revenue. And what is more recurring than SAAS where customers are locked-in with painful switching costs? Well, it turns out that those lockins might be slightly less sticky than assumed. AI could enable customers to solve some of the use cases that had previously required expensive software subscriptions. This fear underscored some slippage in tech stocks.

The AI-focused stocks, however, did not gain significantly from the concerns that AI might replace jobs, however. Thus, while Block shed 4000 workers due to AI-related efficiencies, Nvidia also fell around 7.3%. This reflects growing concerns about hefty AI valuations and growth projections. It also reflects concerns about the viability of significant capital expenditures.

Meanwhile, energy, healthcare, and industrials all outpaced technology, confirming a broadening of market leadership. Small-cap stocks remained “attractive” at roughly 18 times earnings versus 28 times for large caps. Thus, the Russell 2000 performed better than the S&P500, ending up around 0.67%. However, within the Russell 2000, there is heterogeneity based n profitability.

Tariff chaos. Again. It was 12 months ago that President Trump started discussing tariffs in earnest, resulting in “Liberation Day” on 2 April 2025. However, one year on, and the US Supreme Court has struck down many of the tariffs.

The most consequential policy event of the month arrived on February 20, when the U.S. Supreme Court ruled 6-3 in Learning Resources, Inc. v. Trump that the president lacked authority under the International Emergency Economic Powers Act to impose sweeping tariffs. The decision effectively dismantled the legal foundation for the reciprocal tariff regime that had imposed duties of up to 25–50% on goods from major trading partners including Canada, Mexico, and China.

Markets rallied on the news. The S&P 500 rose 0.69%, the Nasdaq gained 0.9%, and tariff-sensitive retailers surged—Etsy jumped 8%, Amazon and Wayfair each climbed 2%. However, the rally was tempered by uncertainty: President Trump responded within hours by imposing a new 10% global tariff under the Trade Act of 1974, later raising it to 15%. Analysts estimated the ruling could reduce projected 2026 inflation by roughly 0.6 percentage points, but cautioned that continued trade-policy improvisation would sustain uncertainty.

The Fed Pause: The Federal Reserve held its benchmark rate steady in the 3.50–3.75% range at its January meeting, a decision that shaped market expectations throughout February. Minutes released on February 18 revealed a deeply divided committee. Two governors dissented, favoring a quarter point cut. However, the majority opted to hold with inflation running at approximately 2.9%, well above the 2% target.

The producer price index released on February 27 came in hotter than expected, reinforcing concerns about sticky price pressures. Core PCE inflation has hovered near 3%, and the combination of rising oil prices and trade-policy uncertainty clouds the near-term outlook.

The debate was further complicated by the upcoming leadership transition: Chair Powell’s term expires in May. Nominee Kevin Warsh awaits Senate confirmation. Treasury yields declined meaningfully, with the 10-year falling 30 basis points to 3.94%, reflecting growing confidence that inflation was moderating and that rate cuts could resume later in the year.

Iran, oil, and shipping: February ended with a dramatic escalation in geopolitical risk. On February 28, the United States and Israel launched joint military strikes against Iran, targeting leadership and military infrastructure. Oil prices, already climbing on rising tensions, spiked sharply. Brent crude surged roughly to around $80 per barrel; WTI crude had already risen 2.8% during February before the late-month escalation, pushing year-to-date gains above 24%.

Energy stocks benefited directly, and defense names like Lockheed Martin and Northrop Grumman rallied. The broader market sold off, however, as investors weighed the risk of prolonged disruption to the Strait of Hormuz, through which approximately 20% of global oil transits. Gold gained 7.9% in February for its thirteenth monthly advance over the past fourteen months. Thus far, in March, the market has been volatile, partly reflecting geopolitical concerns.

Looking forward

Analysts remain positive on the S&P500, with the 12 month target return being 23.5% above the current index level. Analysts can of course be incorrect. However, analyst predictions are indicative.

We remain constructive on the United States. The geopolitical tensions have created volatility. However, as at the time of writing, the tensions appear contained, at least partly because Iran has alienated itself from most regional players. Disruptions in the Strait of Hormuz could weigh on markets. However, President Trump has signaled moves to support shipping insurance and protect shipments. Historically, geopolitical tensions have generally not resulted in significant adverse market impacts. In March, inflation data will remain important, giving some insight into future fed moves.

We performed reasonably in January, with a modest outperformance. In USD terms, we achieved 2.15% (vs benchmark of 1.47%). However, the AUD increased significantly in January on the back of anticipation that the Reserve Bank would hike interest rates. Thus, in AUD terms, we delivered -2.4% (bs benchmark of -3.03%).

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What happened in January?

US markets opened 2026 with a constructive, but volatile, month. Key considerations included speculation about future Federal Reserve interest rate decisions, the new Fed Chair, scrutiny of tech stocks, and ongoing (if muted) geopolitical issues. However, the strong AUD weighed on returns in AUD terms. The S&P500 briefly crossed the 7000 ‘psychological milestone’. However, this was shortlived, suggesting a degree of resistance at this level, potentially in anticipation of future Fed moves.

Rates and the Fed: “hold,” but the debate sharpened. The Federal Reserve’s January 27–28 meeting delivered a widely expected pause, leaving the target range at 3.50%–3.75% and characterizing activity as expanding at a “solid pace,” job gains as “low,” and inflation as “somewhat elevated.” Importantly for markets, the vote revealed a more active internal discussion: two voters dissented in favor of a 25 bp cut.

That dissent mattered, because it signaled that the Fed’s center of gravity is increasingly sensitive to labor-market cooling—even as policymakers remain wary of declaring victory on inflation. Notably, one of the dissenters had previously supported a 50bp cut; however, suggested that at this point the Fed had already made progress in the easing cycle and a slower easing rate could be warranted.

Jerome Powell’s tenure as Fed Chair is drawing to a close. Currently, Kevin Warsh is the candidate to replace him. While Kevin Warsh had been hawkish in the past, his recent rhetoric has been more dovish. The reaction to his nomination has been mostly positive. However, it is clouded by predictable partisan talking points on either side.

Inflation and macro: progress, but sticky pockets. The key macro release in January was the December CPI print. Headline CPI rose 0.3% m/m and 2.7% y/y, while core inflation was 2.6% y/y. This was slightly cooler than expected and supportive of the “disinflation continues” narrative. Markets reacted as expected: Treasury yields dipped after the release and equity futures steadied, reinforcing the view that the Fed could regain “breathing room” if the trend persists.

On growth and the consumer, January data flow was broadly consistent with an economy that is slowing but not breaking. Retail sales for November beat expectations (released mid-January), pointing to still-resilient demand into year-end. At the same time, the labor market continued to cool: December nonfarm payrolls increased just 50,000, and unemployment edged down to 4.4%, a combination that kept “soft landing” hopes intact while underscoring hiring fatigue.

Earnings and “AI capex” narrative: scrutiny rises. January also marked the heart of Q4 earnings season, with mega-cap tech in focus. Ahead of results, investors increasingly debated whether the next leg of AI-linked gains would be driven by revenues and margins, or weighed down by escalating capital expenditure plans. Reuters noted that the scale of expected AI spending (across Microsoft, Alphabet, Meta, and Amazon) has become “unprecedented,” sharpening investor scrutiny of payoffs and free-cash-flow trajectories. This theme did not derail markets in January, but it reinforced a key 2026 setup: even in a strong tape, leadership can rotate quickly if the market starts discounting “too much spend, too little payoff” risk.

Australia: Australia has two notable issues:

1. Australian interest rates are heading in a different direction to those in the US. In January, the market anticipated the RBA’s February meeting. The strong inflation data raised expectations that the RBA would hike. The inflation itself appears largely driven by excessive government spending. The spending has several underlying problems. It adds to aggregate demand, so is tautologically inflationary. Furthermore, the government is inherently less productive than the private sector. Thus, that demand push is not mitigated by an increase in supply. It eventually hiked by 25bps. This has supported the AUD, causing US assets to fall in value in AUD terms.

2. Australia has been undertaking a review into whether to increase capital gains taxes. This did not directly drive markets in Australia, or the AUD. However, it is a significant concern for Australian investors. We address it below.

Looking forward

At the time of writing, we are at the start of February. Already, we have seen some “interesting” movements in markets.

Broadly, February has been muted thus far. There has been volatility in the S&P500. This is partly attributable to tech stocks. It is also partly attributable to on-going analysis of what Kevin Warsh’s nomination for Fed Chair will mean for financial markets.

Crypto, in which we do not directly invest, nosedived amidst boarder risk off sentiment. The sell-off offers a glimpse into risk management practices. Charlie Munger once said that there is no surer way to go broke than ‘liquor, ladies, and leverage’. And so it is with some crypto investors: they over-levered and needed to sell to cover their losses. This is a cautionary tale for all funds. Excessive leverage can dramatically worsen the impact of a period that a less levered fund could sail through. We always keep this concern in mind when structuring our positions.

We remain constructive on the US. Nothing has changed our view that the US is the preeminent market for growth, capital, and investment. While some pockets of Europe might perform well for tactical or valuation reasons, we believe that European, UK, and Australian markets will lag the US over the long term. This is because the microeconomic settings in the UK/EU/AU are bad. All through countries feature a lack of fiscal discipline coupled with an overbearing government that stymies growth. The US does run large deficits, and accrue large debt, but it is more growth focused, allowing it to grow its tax base and give it a greater cushion should it need to recalibrate. By contrast, the UK/EU/AU only address budgetary issues via higher taxes, which is a drag on the private sector and on growth.

Concerns in Australia

Australia is a significant concern. Given that the fund is an Australian entity, we are extremely concerned about mooted changes to the “capital gains tax discount”. The CGT discount essentially holds that if you hold an asset for more than 12 months, the CGT rate is halved. The government is looking tor educe or eliminate the CGT discount. This is – to be frank – absurd given.

Australia has the highest headline CGT rate (at 47%) in the world. By contrast, Singapore, Hong Kong, UAE, New Zealand, Vietnam (run by the Communist Party) all have CGT rates of 0%. The US also has a 12 month capital gains tax discount. Given that the federal tax rate in the US is 39% (halved to 19.5%, with the long term discount), and only applies to incomes above USD 600k, the tax rate is significantly lower than in Australia.

Australia is looking to make itself more uncompetitive. We encourage you to reach out to your local member to express your concern. Here are some resources and articles that we have prepared to which you can refer them:

• AFR: Hiking CGT is bad for Australia’s economy

• Capital Brief: Hiking CGT will not help the ‘housing crisis’

• Submission to the senate review: Full analysis of why hiking CGT is a bad idea.

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December was a good end to the year. We delivered a return of 3.67% in USD terms (vs benchmark of 0.08%) and 1.19% in AUD terms (vs benchmark of -2.60%). Of course, part of this was due to fund flows, which helped to insulate us from the appreciate in the AUD, and subsequent fall in the AUD value of USD assets. But, nevertheless, it was a good end to the year.

What happened in December

U.S. financial markets finished December 2025 in a “pause that refreshes” mode: equities largely consolidated after a strong year, while rates markets digested a pivotal Federal Reserve cut and a shifting mix of growth and inflation signals.

How the market moved: flat-to-mixed month, strong year intact. The S&P 500 was essentially flat in December (down about 0.05%; SPY was up around 0.08%, at least partly owing to dividends), while the Dow Jones Industrial Average rose about 0.73%; the Nasdaq Composite slipped about 0.5%. Even with the late-year breather, major indexes still ended 2025 with double-digit gains (roughly +16% for the S&P 500, ~+13% for the Dow, and high-teens/around +20% for the Nasdaq, depending on index methodology and rounding).

The AUD appreciated in December. This was at least partly due to the risk that the RBA would further hike interest rates. The increase in the AUD reduced the value of the USD assets, which caused the benchmark to deliver a negative return in AUD terms.

The Fed set the tone with a December rate cut. The key macro event was the Federal Open Market Committee decision on December 10, 2025, which lowered the federal funds target range by 25 bps to 3.50%–3.75%. For equity investors, the cut mattered less as “instant stimulus” and more as a signal that policymakers judged the balance of risks had shifted enough to reduce restrictiveness, while still emphasizing data dependence for what comes next. The updated projections and communications were widely interpreted as a “cut, but not a pre-commitment” message, helping keep financial conditions from easing too dramatically.

December’s bond market story was a mix rather than a one-way rally. In broad terms, the front end (which is most sensitive to expected Fed policy) had room to fall after the cut, but longer-dated yields were pressured by growth and inflation cross-currents. Commentary from major asset managers noted a bull-steepening dynamic (i.e., front-end rates down while longer yields rose), with 10-year Treasury yields up around the mid-teens of basis points over the month. This pattern is consistent with a market that is incrementally more comfortable with the near-term policy path, yet not ready to price a rapid return to very low long-term yields.

Inflation and activity data kept “soft landing” debates alive. Incoming data through the month provided ammunition for both camps. On one hand, inflation remained much cooler than the highs of prior years; for example, reporting released in mid-January showed December CPI up 0.3% m/m and 2.7% y/y (roughly in line with expectations). This supported the view that disinflation was continuing, albeit unevenly. On the other hand, markets also contended with episodes of “hotter-than-expected” activity signals that pushed yields higher and briefly favored cyclicals and value over long-duration growth. A notable example came late in the month, when a batch of stronger growth indicators coincided with an S&P 500 record close around Christmas week.

Geopolitics (here we go again?): Geopolitical tensions did increase in late 2025 and early 2026. For example, on January 2026, the US arrested Nicolas Maduro. Present Trump continued his strident rhetoric against the Federal Reserve, which escalated into a criminal investigation of Jerome Powell. This occurred in January 2026, and has created some fears in relation to Fed independence. Similarly, concerns about Greenland and volatility surrounding tariffs have somewhat shaken markets.

What December means going into 2026. The month’s price action was less about a regime change and more about consolidation after gains. Equities closed the year near highs, but December’s flat results two important sensitivities: (1) the market’s ongoing dependence on the inflation/real-rate path, particularly for long-duration growth; and (2) the potential for leadership to broaden when the macro narrative becomes less one-sided. The Fed appears set to continue the easing cycle. However, the precise magnitude of the cycle will depend on inflation remaining contained. We remain constructive on the US. We see the US as heading on the right path towards lower rates and contained inflation.

How we performed

We delivered positive – but low returns in November. Disappointingly, we marginally underperformed the benchmark. In November, in AUD terms we delivered returns of 0.38% after fees (vs benchmark of 0.47%); in USD terms we delivered returns of 0.11% after fees (vs benchmark of 0.19%). We attribute some of the modest performance to reducing our exposure towards the end of November (which caused us to miss some gains in the final days).

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What moved markets

US equities delivered a volatile but ultimately resilient performance in November 2025. The core indices were flat-to-modestly-positive. The S&P 500 rose about 0.13% in November, with SPY increasing around 0.19% (in USD terms). The AUD modestly declined, resulting in slightly stronger performance in AUD terms. The Nasdaq Composite declined, largely due to big tech stocks.

Market themes aside, one of the most interesting events in November was Michael Burry closing Scion Asset Management. This may have been in the wake of some bearish bets on big tech. However, Scion’s 13F filings only give us an incomplete snapshot of what was in Scion’s portfolio at one point in time. However, we do not share Michael Burry’s extreme bearishness.

We saw several key themes in November.

• Late-cycle feel with resilient growth: Earnings and economic activity remain sufficiently strong to support equities, but progress on disinflation has slowed around 3%, and policy is transitioning into an easing phase from a still-restrictive level.

• From narrow to broader leadership: While 2025’s rally has been led by AI-linked mega-caps, November saw better breadth, with mid-caps, equal-weight indices, healthcare and other defensive/value sectors outperforming even as the headline S&P finished roughly flat.

• Valuation and concentration risk in focus: Multiple warnings—from central-bank research to independent strategists—highlight that US equities, particularly large-cap tech, now embed optimistic assumptions about growth and profitability. Rotation into more reasonably priced sectors and geographies is gaining traction. Michael Burry – whose opinion is always important but not always correct – voiced increasingly loud concerns over valuations.

• Policy and data uncertainty remain elevated: The shutdown-induced data gaps, coupled with an approaching Fed meeting, keep the near-term policy path uncertain. Markets are pricing a December cut but remain sensitive to any surprise on inflation or labour-market data once normal publication resumes.

Monetary policy, rates and the data vacuum

Monetary policy expectations remained the central macro driver. Markets spent much of November debating the likelihood and depth of a Federal Reserve easing cycle, with futures increasingly pricing a 25 bp cut at the December meeting and a relatively shallow path of additional cuts through 2026. Bond investors have shifted positioning toward the “belly” of the curve, reflecting a view that long-term yields may remain structurally higher around a 3% neutral rate.

Complicating the policy outlook was an unusual data vacuum. The extended US government shutdown forced the Bureau of Labor Statistics to cancel the release of the October CPI and the October employment report, and to delay the November CPI release into December. However, data has suggested disinflation progress.

Markets leaned more heavily on alternative gauges during November. The Fed’s preferred inflation measure, core PCE, was last reported at 2.8% year-on-year for September—still above the 2% target but much improved from earlier peaks—while nowcasting models from the Cleveland Fed suggested month-on-month CPI and PCE inflation in October and November remained in the 0.2–0.3% range, broadly consistent with a 3% annualised rate.

Growth, earnings and consumer signals

The macro backdrop remained broadly supportive for risk assets. Q3 earnings season concluded with a strong set of results: roughly 80-plus percent of S&P 500 companies beat consensus estimates, with aggregate EPS growth in the low-teens year-on-year and technology companies delivering particularly strong profit growth.

At the same time, there were signs of strain at the household level. The New York Fed’s November Survey of Consumer Expectations showed that US households had become more pessimistic about their personal financial situations and medical costs, even as their inflation expectations remained broadly stable (around 3.2% at the one-year horizon and 3% longer term) and perceptions of the job market actually improved.

Valuations, AI, and sector rotation

Valuation concerns persisted throughout November. The concerns partly related to the valuation per se of the Magnificent Seven and of big tech stocks. Deeper concerns related to the circular nature of some of the firms’ earnings, raising fears of potential contagion in a downturn. Cynics also implied that the apparently circular nature of the firms’ earnings was to create the appearance of earnings rather than merely due to the concentrated nature of the sector, implying potentially nefarious business operations.

These concerns manifested in notable sector rotation during November. Technology underperformed sharply. The S&P 500 information technology declined by more than 4% on the month. By contrast, defensive and value-oriented sectors, particularly healthcare, outperformed as investors sought earnings stability at more reasonable valuations.

Geopolitics, commodities and cross-asset signals

Geopolitical developments provided a mixed backdrop. On balance, geopolitical moves were modestly supportive for risk assets. Progress toward a US-China trade truce and ongoing efforts to broker a peace framework in the Russia-Ukraine conflict contributed to swings in energy prices and risk sentiment. Hopes of an eventual easing of sanctions on Russian exports helped push oil prices lower at times, which in turn supported consumer-facing sectors and weighed on energy equities.

At the same time, gold remained near record highs around $4,200/oz as both central banks and retail investors sought a hedge against lingering inflation and fiscal concerns. The unusual combination of elevated gold and buoyant equities underscores the degree of speculative activity in parts of the market and reinforces the case for disciplined risk management.

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Going forward

We have a generally constructive view on US stocks. This is especially given our use of derivative overlays. However, we believe that a measured stance appears warranted: maintaining core exposure to US equities, but with an emphasis on quality balance sheets, diversified sector allocation beyond mega-cap tech. We do not invest directly in fixed income. However, we pay attention to moves in yields. We anticipate the Fed to cut rates. However, the market’s reaction will turn more on commentary surrounding the rate decision.

The S&P500 analyst consensus remains strong. However, as was clear from November, this does not necessarily translate into strong returns each month. In the early part of December, we see risk in relation to the Fed’s interest rate commentary. Thus, we will adopt a constructive but cautious position in the lead up to the rate decision.

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October was a good month, albeit with volatility. The month started very strong, although returns moderately tapered towards the end of the month. In AUD terms, net of fees, we delivered a return of 4.75% (vs benchmark of 3.18%); in USD terms, we delivered 3.94% (vs benchmark of 2.38%).

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What happened?

Major gains in stocks: The month was volatile. However, it still ended on a positive note. The S&P 500 advanced roughly 2-3%. The Nasdaq Composite outperformed on the back of large-cap tech results, advancing around 4.8%. Gains were concentrated in the “Magnificent Seven,” where upbeat cloud and advertising trends, plus continued AI-capex momentum, helped offset mixed prints elsewhere. Amazon jumped after Q3 results on a re-acceleration in AWS growth; Alphabet posted double-digit revenue and EPS growth; Apple delivered modest beats; while Microsoft, Meta, and Tesla were more mixed versus elevated expectations. Concentration risk remains notable, with these mega caps now comprising an outsized slice of the S&P 500.

Rates: The Federal Reserve cut rates by 25bps. This was in line with expectations. On October 29, the FOMC lowered the policy rate 25 bp to 3.75%–4.00% and signaled balance-sheet runoff would conclude December 1. The Federal Reserve, and Jerome Powell, noted moderately expanding activity, slower job gains, and inflation that “moved up since earlier in the year.” However, the FOMC’s vote was divided: there was one dissent for a larger cut and one dissent for no cut. However, it was not all ‘good news’ for stocks: Chair Powell indicated that a December rate cut is not a “foregone conclusion”, suggesting that rate cuts might be less significant that had been priced. This cooled the foregoing market upswing.

Inflation: September CPI (released Oct 24) stayed at ~3% y/y; near-term nowcasts point to moderation. With the October CPI report due in mid-November, the data investors had in hand was September CPI, which rose 0.3% m/m and 3.0% y/y; core CPI was roughly 3.0% y/y as disinflation in shelter and goods met firmer energy prices. The print, released Oct 24, reinforced a “cool but sticky” inflation narrative. High-frequency nowcasts into October suggested headline inflation may have eased on a monthly basis, but core remained closer to a quarter-percent pace, consistent with the Fed’s cautious tone.

Growth & activity: manufacturing slipped back into contraction. Softness in the industrial economy re-emerged. The ISM Manufacturing PMI fell to 48.7 in October (from 49.1), with new orders and production indices signaling renewed contraction. Executives cited weak demand and tariff-related cost pressures as ongoing headwinds. The report tempered the “soft-landing” narrative and helped anchor rate-cut hopes even as the Fed avoided pre-committing to further easing.

Government shutdown: The government shutdown persisted throughout the end of October into November. The market appeared sanguine about the shutdown. This is largely because government shutdowns have become routine, and the market expects a relatively orderly resolution.

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Going forward

Going forward, we anticipate a muted November. As at the time of writing, the US and China reached a trade detente. However, this had a modest impact on stock prices. We also look forward to additional data, some of which will be relatively stale owing to the government shutdown. This will give more texture to interest rate forecasts.

We note that some investors appear to have become ‘bearish’. This includes Michael Burry, who appears to have purchased puts over Nvidia and Palantir, according to his latest 13F filings. However, the 13F filings do not record ‘short’ positions. Thus, it is also possible that he entered into a put credit spread. And, Michael Burry has historically been “early” with his market-crash predictions.

We remain constructive on US markets. As indicated in prior reports, we see little reason for the US to lose market share to other developed markets, including the UK and EU. Furthermore, we do not anticipate a significant downturn. This is consistent with analyst consensus forecasts.

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How we performed

September was a strong month for markets and for the Otso US Opportunity fund. In USD terms, we delivered 4.84% (vs benchmark of 3.56%). However, the USD declined during September relative to the AUD. Thus, in AUD terms, we delivered 3.83% (vs benchmark of 2.27%). This was a strong month. Our returns were mostly attributable to our derivative overlays performing best (in relative terms) in a flatish-to-positive market.

The September performance continues a track record of stolid historical performance. However, we note that our strong performance occurred during a period of strong market performance. As you can tell from the below table, there has been volatility. While we outperformed the broad market, past performance is not necessarily an indicator of future performance. Our goal is to reduce the volatility as funds under management increase, enabling us to incorporate more of best ideas into the portfolio.

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What moved markets

The S&P 500 rose about 3.5% and the Nasdaq Composite gained roughly 5.6%. This was the best September performance since 2010. The key drivers were relatively dovish tones from the federal reserve, consistent macroeconomic data, and continued strength in AI-linked earnings and capex.

Dovish fed: On 17 September, the FOMC delivered a 25 bp cut. This was the first cut since late 2024, potentially signaling a cutting cycle. The cut was relatively dovish, with one dissenting vote favoring a 50bp cut (rather than a 25bp cut). The FOMC’s statement noted that the employment market is moderating. The market interpreted the FOMC’s move as consistent with additional rate cuts.

Solid data: The macroeconomic data mostly supported a dovish fed. However, inflation remains resilient, which could underscore the moderate market pullback in late September. The August CPI report (released 11 September) showed headline CPI up 0.4% m/m and 2.9% y/y, with core up 0.3% m/m and 3.1% y/y. The data was close to expectations. It suggested that inflation is slowly moving towards target. While the market did interpret the data is sufficient for rate cuts, it still remains well above the Federal Reserve’s target level.

Geopolitical considerations: The market largely shook-off tariff related concerns. These included the threat of sectoral tariffs in areas such as furniture, pharmaceuticals and movies. Furthermore, the looming government shutdown did not derail the strong market. This likely reflects historical precedent: government shutdowns have rarely lasted long. Furthermore, from a matter of political strategy, the market might see the Democrats as having an unusually weak hand in the shutdown, with many policy demands being politically unpopular. This includes the Democrats’ push for healthcare for illegal immigrants. This could underscore why the market was relatively unperturbed by the possibility of a shutdown.

Rates-sensitive pockets stabilized. Real estate and longer-duration growth names benefited from the softer yield backdrop. Financials were mixed as net-interest-margin pressure from cuts was offset by improved credit sentiment tied to a softer-landing narrative. Lower long rates and optimism on AI demand supported large-cap tech.

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Looking forward

We remain ‘constructive’ on stock markets throughout 2025. However, we will continually adjust our outlook as information arises.

Analyst expectations remain positive. Analysts are not always correct. Indeed, during April 2025, the market deviated significantly from prior analyst expectations (i.e., due to Liberation day). However, analyst expectations can be partly self-fulfilling; and thus, give an idea of potential future movements.

In October the top three factors we are focusing on are:

1. Macro data and the Fed. Markets are pricing additional interest rate cuts. We will watch for inflation data and employment data. Inflation remains above the Fed’s target level, and an upward surprise could reduce rate cut expectations. We do not expect the government shutdown to significantly influence markets. However, it will delay some data releases.

2. Earnings: Some earnings will continue, with guidance on capex and pricing power being especially important. This will be more of a theme throughout Q4.

3. Geopolitical issues: We do not expect the situation in the middle east to dramatically move markets. However, continued stability is a positive. For example, easing in Israel-Gaza tensions incrementally reduces risks in the shipping and oil sectors. However, the market has already adjusted to uncertainty in the region and we do not expect that a Israel-Gaza peace plan will be a dominant market river.

How then are we positioning for this? Well, we are constructive on equities markets. We do not presently anticipate a significant pull back. However, adverse data could trigger one. But, we also do not anticipate an extreme increase. Therefore, we continue to maintain our positive exposure to the market – broadly speaking – primarily benefiting from derivative overlays.

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We performed adequately in August, net of fees. In AUD terms, after fees, we delivered a 1.01% return (vs benchmark of 0.97%). In USD terms, we delivered 2.09% (vs benchmark of 2.05%). The modest beat net of fees was certainly better than underperforming. But, we aim to do better.

In terms of performance drivers: We will discuss highlights, and lowlights, below. However, in short, a position in VIX was the main laggard in the portfolio. We do not anticipate VIX worsening significantly more. Other parts of the portfolio, including derivative overlays over index-ETFs performed well. We also had small positions in Cracker Barrell and Terrawulf, which boosted performance.

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What happened in August?

The market performed well in August 2025. The S&P500 rose around 1.9% in USD terms (and SPY very similarly). But the USD weakened marginally, resulting in lower AUD returns. Key factors were relatively sedate inflation, and a dovish tone at the Jackson Hole meeting.

The Jackson Hole meeting reassured markets. Chair Powell’s dovish tone reinforced the possibility of a rate cut in the September meeting. Treasury yields fell after the remarks, reflecting an increased chance of a rate cut. This generally boosted markets. Furthermore, the move towards an internal assessment of the Fed’s decision-making process, highlighted a proactive approach to addressing perceived shortcomings.

Fed independence was a topic for discussion, but did not significantly shift markets. While President Trump did browbeat the Fed, and Governor Cook came in for scrutiny, the market was relatively sanguine. Governor Cook is being investigated for alleged mortgage fraud (i.e., allegations that she lied about having two principal places of residence). This is reminiscent of the allegations against President Trump in New York. The debacle underscores the problem with relying on criminal statutes that appear to be applied arbitrarily and with significant prosecutorial discretion. The market speared unperturbed.

Inflation data released during August mostly supported a dovish Fed. July CPI (published in August) rose 0.2% m/m and 2.7% y/y; core CPI rose 0.3% m/m and 3.1% y/y—still above target but in a gentle downtrend from earlier highs. The Fed’s preferred gauge, PCE, showed headline prices up 0.2% m/m and 2.6% y/y in July, with core up 0.3% m/m and 2.9% y/y. Taken together, the CPI/PCE mix suggested disinflation hasn’t stalled, even as services prices remain firm, and it reinforced market expectations that the next policy move is likely a cut.

Macro growth inputs leaned constructive. The second estimate of Q2 GDP was revised up to 3.3% annualized, a notable snap-back from Q1’s contraction; BEA attributed the improvement largely to a swing in trade (imports fell after prior front-loading) and steady consumer spending. That backdrop helped stocks absorb mixed micro news without breaking trend.

Earnings also supported the month’s positive tone. Nvidia posted another record quarter (fiscal Q2 FY26), with revenue of ~$46.7B (+56% y/y) and data center sales of ~$41.1B. The board also authorized an additional $60B in buybacks. Shares slipped on nuances (data-center sales a touch light vs. whispers and China uncertainty), but the report broadly affirmed ongoing AI capex and helped keep the market’s “AI-spend” narrative intact. Semiconductor peers were choppy, yet the sector remained a leadership pocket on the month.

Trade and the dollar were additional cross-currents. The advance report showed the U.S. goods deficit widened sharply in July to $103.6B as imports jumped, partly a re-acceleration tied to tariff timing, raising the risk that net trade will weigh on Q3 GDP after having flattered Q2. Meanwhile, the dollar posted its worst monthly drop of the year (~-2%), loosening financial conditions at the margin and aiding risk assets.

Otso performed slightly better than the market. A position in VIX weighed on returns. By contrast positions in Terrawulf and Crackerbarrel helped. Terrawulf performed extremely well in August. We only captured a small portion of that performance. But, it was helpful nevertheless. Crackerbarrel faced “scandal” in August over their logo redesign. This was argued to be “woke” and the stock initially faced a selloff. However, a reasonable marketer could also conclude that the ‘new’ logo was objectively ‘cleaner’ and more modern. And, Crackerbarrel capitulated and reversed the logo change. This supported the portfolio.

We remain constructive on the US going forward. Our view quadrates with that of analyst consensus forecasts. We also strongly disagree with arguments that Europe or the UK will surpass the US. While there can be tactical arguments for Europe and the UK, we prefer to invest in markets where we have conviction. Notably, much of the drive in Europe appears to relate to increased government spending (see e.g., Germany). That is not a sustainable way to drive growth. Thus, even if the fund were not focused on the US, we would see little reason to invest elsewhere over the medium-to-long term. Otso is presently based in Australia. We accept that there can be good reasons for Australian investors to invest in their own market. These include franking credits and reducing foreign exchange risk. However, the focal fund invests in the US in order to deploy derivative overlays.

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July was relatively calm. At least compared to the prior months of significant trade volatility. Otso performed reasonably in July. After fees, we delivered a 3.61% return in AUD terms (benchmark was 3.58%), and a 2.33% return in USD terms (benchmark was 2.30%). That is, we marginally beat the S&P500 benchmark net of fees.

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What happened in July?

The market did well in July. The S&P500 rose around 2.3%, increasingly relatively consistently throughout the month. The USD also strengthened in July, bolstering the value of the fund’s US holdings in AUD terms.

What then moved the market in July? Well, there were several factors.

1. Earnings: Earnings grew around 6.4% year-on-year with 34% of the S&P500 reporting thus far, according to Factset. Assuming that earnings grew at 6.4%, earnings growth will be low by historical standards. But, it will have grown for eight consecutive quarters. Furthermore 80% of reporting companies have reported an actual EPS that is above forecasts, even if the magnitude of the earnings surprise is relatively low.

   

2. Progress towards a rate cut… hopefully: The Fed kept rates unchanged at its latest meeting. Furthermore, June CPI was 2.7% and core PCE was 2.6%. Inflation is above the Fed’s target level. However, there are some signs that employment is weakening, with significant downward revisions in employment data. Optimism remains that the Federal Reserve will start easing in September.

3. Growth surprised to the upside. The advance Q2 GDP estimate (July 31) printed 3.0% q/q saar, aided by trade swings as imports fell; that helped quell fears of an imminent slowdown and supported cyclicals.

4. Relatively quiet tariff month: July had relatively little negative tariff news. The EU and US agreed on a 15% tariff on EU goods (with the EU imposing no tariff on US goods). The EU also promised to increase investment in the US and to purchase more US energy and defense items. The agreement came on the back of a similar agreement with Japan. The progress towards trade deals has supported optimism that the US and China will progress towards a constructive outcome.

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Looking forward

We remain optimistic about the US and do not believe that the US will enter a recession or that there will be a significant downturn. Indeed, in our recent interview, Diana Mousina – the deputy chief economist of AMP – also suggested that a recession in the US is unlikely.

Analysts consensus forecasts suggest an 11% upside on the S&P500 over the next 12 months. Predicting precise index levels is fraught. However, predicting directionality is less so. Only 5% of analysts maintain a sell rating on the S&P500. Given that interest rates are falling (reducing the yield on cash), we see more upside in the S&P500 than in holding cash per se. We particularly believe this to be the case when coupled with a derivative overlay strategy.

We strongly believe that talk of the end to “US exceptionalism” is greatly exaggerated. While our investment mandate restricts us to the US, we remain convinced that the US has significantly better policy settings than other “Western” markets. In short, the UK, Europe, and Australia cannot compete with the US because of their burdensome regulation and high taxes. Europe and the UK have higher personal, corporate, and capital taxes than the US. The corporate taxes directly weigh on corporate performance. The personal and capital taxes also weigh on individual incentives. In all cases, Europe and the UK have precisely the wrong policy settings to “grow the pie” so as to both encourage economic growth and performance. Unless, and until, the US starts to copy Europe (or vice versa), we remain bullish on the US relative to other “western” economies.

Going into August, our positioning remained positive beta and relatively diversified across names in the Nasdaq Composite and S&P500. Given that we tend to prefer derivative overlays, so as to enhance returns and reduce losses, we are focused on the more liquid names.

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The market continued its positive momentum from June. The market was broadly optimistic due to continued relief from trade uncertainty and progress towards the passage of the “Big Beautiful Bill”. This helped to offset geopolitical tensions and concerns about stubborn inflation, and a slightly Hawkish Fed.

Both the market and Otso Capital performed positively in June. The benchmark return was approximately 5.1% in USD terms (3.3% in AUD terms). Otso Capital delivered 5.8% in USD terms (3.95% in AUD terms) net of fees, delivering a modest out performance.

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What happened in June?

The S&P500 did well in June. The index consistently increased, reflecting relatively broad based optimism. Throughout June, the 10 year treasury yield decreased modestly from 4.45% to 4.28%. The 1 year treasurer yield also fell modestly from 4.13% to 4%. This underscored broader market positivity.

Several broad themes emerged in June.

1. Trade and tariffs: June was relatively quiet in relation to trade and tariff news. The lack of news helped to boost markets by reducing volatility. However, towards the end of June, commentary and analysis suggested some caution about the looming July 9 tariff deadline.

2. Tensions rose and then cooled in the Middle East: June featured escalated tensions between Israel and Iran, including some fears that this could influence oil prices and shipping. However, the US involvement appeared to ‘escalate to deescalate’, resulting in middle east tension remaining relatively contained.

3. Optimism about the tax bill: June featured much talk of President Trump’s “Big Beautiful Bill”, which subsequently became law on 4 July 2025. The main features were an extension of the 2017 tax cuts and modest spending cuts. While some economists had warned that extending the tax cuts could exacerbate the deficit, both fixed income and equity markets were less concerned. Indeed, investors appeared to agree with Treasury Secretary Scott Bessent’s argument that failing to pass the bill (and thus, hiking taxes) would undermine growth, by undermining capital formation, capital utilization, and incentives.

4. Potential for a rate cut: Fed Chair Jerome Powell remained cautious about a rate cut. Core PCE inflation remains above 2.5% (relative to a target of 2%). Furthermore, the employment situation is relatively stable. The Fed’s June Summary of Economic Projections showed officials raising their full-year inflation forecast to about 3.0% (up from 2.7%) and trimming their 2025 GDP growth forecast to ~1.4%, reflecting concerns that new tariffs could slow the economy while pushing prices higher. Fed Chair Jerome Powell struck a cautious tone: he warned that import tariffs could start driving goods prices up over the summer, a remark that prompted a brief jump in Treasury yields and caused the S&P 500 to surrender its earlier gains on the day of the announcement. Overall, the Fed’s message was viewed as slightly hawkish – officials appeared “laser-focused” on containing inflation and signaled willingness to tolerate some weakness in growth to achieve that goal.

Otso modestly outperformed the S&P500 (proxied by the SPY ETF) net of fees in June. We adopted a relatively cautious approach in June, especially heading into July. This is because while we believe that the US stock market is resilient, the July tariff deadline has the potential to introduce significant volatility. Nevertheless, the fund benefited from our derivative overlay strategy. Stronger performers included some exposure to small caps, including related derivative overlays. A weaker performer included an exposure to VIX in the latter part of June, again via derivative overlays on a VIX ETF. We entered the relevant ETF (UVXY) at $20 (i.e., via cash secured puts). It had fallen precipitously from its highs during the Iran/Israel/US tensions. The logic behind the exposure was heightened tensions in the middle east and the looming tariff deadline. We entered this position as a quasi-hedge against trade, and geopolitical, tension.

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Looking forward

July promises to be an ‘interesting’ month for markets. At the time of writing, the US has passed the Big Beautiful Bill. We regard the Bill as positive for markets and for the US economy. If the Bill did not pass, corporate taxes and higher-income taxes would increase significantly, undermining growth and capital formation. It would also render the US less attractive to myriad other countries: indeed, Vietnam – oft in the news for trade reasons – has a corporate tax rate of 20%. The US smartly realized that human, and financial, capital is mobile and acted accordingly.

The tariff negotiations in July will add volatility. At the time of writing, the US has announced a tariff deal with Vietnam, reflecting a 20% tariff. It has also imposed 25% tariffs on South Korea and Japan, which President Trump has noted is a recalcitrant negotiating partner. Given that the latter tariffs are similar to those imposed on 2 April “Liberation Day”, this suggests, that countries that fail to make sufficient progress could face significant tariffs, which in turn could weigh on markets.

We remain positive about the US equity market. We do not believe that Europe is more attractive than the US. From a technical standpoint, the fund focuses on the US. But, that aside, Europe’s fiscal settings are manifestly inadequate to spur innovation: Europe’s corporate, capital, and personal taxes are far too high to attract human and financial capital. It will not overtake the US for long term growth or innovation. Thus, we regard the debate between the US and Europe as being one of short term valuation differences (as opposed to long term growth differences). Our view could change should the US start implementing European-style policies, in which case we would adjust-down our US growth views.

Additionally, we see positive sentiment in US markets and this is in alignment with analyst consensus, which broadly forecasts the S&P500 to increase over the next 12 months, albeit at a tepid rate.

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May was a good month for the market. The market largely rose on the belief that trade tensions might [finally] be near an end. However, the optimism was largely based on hopes of trade relief rather than many significant agreements being reached.

During May, the benchmark increased around 5.5% in USD terms from open to close (and 5.2% in AUD). Otso US Opportunity (hereafter Otso) increased 7.7% in USD terms (and 7.3% in AUD). It was a welcome positive month, given that both the benchmark and the fund had suffered under trade tensions in March and April.

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What happened in May?

What then happened in May and why was it so positive for the market? We can see that the S&P500 increased steadily throughout May, with a short pull back.

The primary positive news was that the US and China intended to further discuss tariffs and trade tensions cooled. While the US and China formalized meetings in June, progress underlay the positive market movements. Similarly, a federal appeals court ordered a stay on President Trump’s tariffs, which raised hopes that the Trump administration would be forced to pare back tariff hikes.

Earnings also progressed well. By month-end 95 % of S&P 500 constituents had reported and 78 % beat EPS expectations, delivering blended year-on-year earnings growth of 12.5 %, the second straight quarter of double-digit expansion. Mega-cap platforms (Apple, Microsoft, Alphabet, Meta) reiterated AI-driven cap-ex plans, while Nvidia’s 28 May results smashed revenue estimates and sent its shares up 4 % after hours, propelling the Nasdaq to its best May in more than two decades. Semiconductor, software, travel-leisure and auto names all caught a bid; defensives such as managed care, staples and utilities lagged.

Economic data also pointed towards inflation relief. The April CPI (released 15 May) rose only 0.2 % m/m and 2.3 % y/y, extending 2025’s cooling inflation streak; April non-farm payrolls (out 2 May) beat at +177 k with unemployment steady at 4.2 %. Together they reinforced a narrative of resilient but slowing growth that allows earnings to expand even as the Fed stays patient. Consumer-confidence surveys improved, the ISM services gauge re-accelerated, and housing starts stabilised, partially offsetting a sub-50 ISM manufacturing print. Together, this raised hopes that the Federal Reserve might be more inclined to cut rates and that the US would side-step stagflation concerns.

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The positioning going forward

The market performed well in May 2025. However, Much of the positive sentiment was based on future expectations. For example, there was optimism that tariffs would be less severe, and that inflation would continue cooling to enable the Federal Reserve to cut rates. However, markets appeared to factor in a good case scenario. This leaves the market negative news.

The portfolio going into June aimed to address downside risk. This involved reducing exposure to levered positions, including through reducing short put positions, ensuring that long persons were covered with calls, and undertaking a small exposure to VIX (via., selling relevant out of the money cash secured puts). The goal will be to closely monitor risk exposure, including in the lead up to the end of President Trump’s 90 day tariff negotiation deadline.

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April was a volatile month. However, by the end of the month, the total return was little changed. In AUD terms, the fund fell 0.8% (relative to a benchmark decline of 2.3%). In USD terms, the fund was up 1.3%. However, there was significant intra-month volatility, owing to “Liberation Day” on 2 April, its aftermath, and subsequent recovery.

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What happened in April?

April was extremely volatile. The volatility started around 2 April, when President Trump announced the “Liberation Day” tariffs. This is clear from the below graph. These tariffs were large and widely criticized. The criticism and market-disruption reached such proportions that President Trump paused most tariffs for 90 days. This gave the market hope that a the US would moderate tariffs. .

The volatility impacted most companies and industries. This especially includes companies that rely significantly on China for inputs. However, even some Chinese ADRs have mostly recovered from the early decline. Furthermore, in the initial stages, tech companies suffered significantly. This partly reflects both their high sensitivity to business conditions and vulnerability to tariffs.

The fund benefited from not being fully invested at the beginning of April, partially insulating it from the initial downturn in April. Throughout the month, we have taken a relatively conservative investment approach. This includes focusing on broad-based diversification, akin to the equally weighted index. We expect that tariff volatility could resume as we near the end of the 90-day tariff pause and are focusing on companies that might have less adverse exposure.

We maintain a long exposure to the market, albeit with caution about tariff-related risk exposure. This is for several inter-related reasons.

1. We agree with the market consensus that there is scope for positive returns over the next 12 months. Indeed, the analyst consensus is for a return of around 16%. Indeed, of the analysts recorded in Factset, only 5% have a sell recommendation.

2. We do not presently expect a recession in the US. We do anticipate GDP growth to be lower than target. However, the analyst consensus (of 77 analysts) reported in Factset points towards 1.9% GDP growth in 2025. The decline in GDP in Q1 appears to be at least partly driven by a surge in imports, which itself was partly attributable to companies trying to pre-empt tariffs.

For the foregoing reasons, we maintain a positive position towards the broader market. As always, we aim to enhance returns via derivative overlays. We thank all our investors for their support thus far. Don’t hesitate to contact if you would like to discuss the fund more.

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The broader market decline was attributable to concerns over tariffs. We can see a consistent decline throughout the month (see the below figure). This in large part is due to anticipation of “Liberation Day” on 2 April.

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The fund’s strategy in the lead up to 2 April is to remain partly invested. This is largely because the magnitude and scope of the tariffs is unknown ex ante. This creates significant downside risk exposure, suggesting that it is important to mitigate risk exposure.

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The fund had a disappointing February. The benchmark fell 1.03% in AUD terms. Otso US Opportunity Fund fell 2.3% in AUD terms. The poor performance is largely attributable to a legacy positions from January, which helped to boost performance. Specifically, a position in TNA weighed on performance. This weighed on performance because small caps performed poorly, which were amplified by TNA’s embedded risk profile. Nevertheless, the Fund has performed strongly in 2025, thus far. In 2025, the fund is up around 7.9% (vs the benchmark of 1.43%).

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What influenced returns?

The next question is what exactly happened in February? The answer is significant volatility due to two overarching issues.

1. Trade tensions

2. Economic confidence

Trade tensions: The US has moved to impose tariffs. The tariffs have changed frequently. The changes have included the initial decision to impose 25% tariffs on most goods from Canada and Mexico, and a 10% tariff on goods from China. The tariff on China was then doubled to 20%. The US briefly paused the tariffs on Canada and Mexico before deciding to introduce them from early March. The market had been hoping that the tariffs would be abandoned. They were not. This weighed on markets towards the end of February.

Subsequently, the threat of retaliatory tariffs has weighed on markets. This includes a back-and-forth between the US and Ontario. In March, Ontario moved to impose a 25% tax on electricity exports to the US. The US responded by threatening to double tariffs on some Canadian goods to 50%. Both parties subsequently resiled, with meetings to attempt to resolve the issue. The EU and China have also flagged retaliatory tariffs. This has continued to influence markets in March.

Economic confidence: Consumer, and economic, confidence data also weighed on markets. For example, the Conference Board revealed the third consecutive decline in consumer confidence and the largest monthly decline since August 2021. When coupled with tariffs, this raised fears about earnings growth and about whether the US might move towards stagflation. Given that the Federal Reserve would monitor the inflationary impact of tariffs, there would also be limited scope for rate cuts if the economy were to falter.

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Going forward

The market has been faltering on the back of tariff and growth concerns. This begs the question of whether one should trim holdings and move to cash, try to ‘buy the dip’ or a middle ground. At Otso, the uncertainty has influenced positioning in several ways.

1. We are not trying to catch a falling knife: It is impossible to know when the market will bottom. Indeed, at the time of writing, the market continued to struggle in March. Thus, we are not rushing to buy things that are “on sale” as they might be even more “on sale” if the market struggles further.

2. We are also not rushing to ‘dump’ positions. As indicated, picking the bottom is fraught, meaning that one might reduce a position only to see the market rebound. This is a real concern as there is significant negative news about tariffs in the public domain, meaning that the market should have priced in much of it.

3. We are focusing on defensive positions, including positions that have limited tariff-exposure. This includes focusing on ‘solid’, or ‘big cap’ companies that generate strong earnings. Some of these are tech companies. Furthermore, especial attention goes to the companies’ customer and supplier base and their ability to pass on any cost increases.

What then does this mean in practice? Well analyst forecasts still predict growth in the S&P500 over the next 12 months. This is especially so given recent market declines. Even considering that analyst forecasts often adjust slowly and herd, it suggests that the consensus is that the S&P500 will continue to grow, which points us towards remaining fully invested. We agree with the consensus forecast, and prefer not to take a contrarian approach to investing.

This means that we are focusing on overlay strategies on big cap names. Given the fund’s current size, and in order to maintain diversification, this includes derivative overlays over some ETFs. We are generally avoiding most consumer discretionary companies, avoiding oil & gas (due to trade issues and a seeming push for more supply), and avoiding companies that seem to require significant imports (i.e., most vehicle manufacturers).

For a discussion of the current state of US tariffs, see the below video. We are considering trade issues when positioning ourselves going forward.

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January was a good month for Otso! Our returns were strongly positive and exceeded the market. January’s performance was so strong that it should be considered an outlier. While we are very pleased with the performance, it is not realistically representative. Some of the performance is attributable to being in the ‘right place at the right time’. Some might call this luck. But, luck of this type also comes from strong positioning. Or, to an extent, laying the groundwork to benefit from such a market. Regardless of whether one calls it luck, skill, or both, a strong positive performance is a good performance.

The raw numbers are telling. The Otso US Opportunity Fund increased 10.19%(!) net of fees in January. This is an outlier event. We do not represent, nor expect, that such performance will be common. This was largely attributable to a position in TNA, which benefited significantly from the ‘good’ CPI data. The rationale for this position is simply that we are bullish on the overall market (see below). Thus, we believed that the prices at the beginning of January were a buying opportunity. The S&P500 (proxied by the SPY ETF) increased nearly 2.7% in USD terms. The AUD moderately appreciated in January (by 0.13% according to RBA exchange rates). Thus, the S&P 500 increased around 2.55% in AUD terms. We handily beat the benchmark in January.

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A volatile month!

January had several overarching themes. However, the two most pertinent for Otso were macro themes and AI. To see this, we can have regard to the S&P500 graph:

For macroeconomic themes: January was a volatile month. This was reminiscent of December. The month started poorly, with strong payrolls data causing the market to fall on the back of reduced rate cut expectations. However, the market became more positive on the back of subdued CPI inflation data, which attenuated interest rate fears. As January was ending, the month veered due to tariffs. President Trump announced tariffs of 25% on goods from Canada and Mexico and 10% on Canadian oil. He also announced an additional 10% tariff on goods from China. The market reacted negatively, initially. This will likely influence markets in February.

The seesawing market benefited Otso. This is because Otso had positions in small caps at nadir of the market. These positions performed significantly well following the CPI inflation data. An especially strong performer was a position in TNA, which was entered via a cash secured put, and, over which, Otso wrote covered calls.

AI was a less significant theme for Otso. However, it had some impact towards the end of January. The major AI-move came from DeepSeek V3 and Alibaba’s Qwen 2.5. DeepSeek and Qwen represented significant improvements in AI cost. The DeepSeek model was reportedly developed utilizing less computing power than were Chat GPT and other models. This harmed companies such as Nvidia. However, how much long term damage there is could depend on whether DeepSeek indeed used ChatGPT’s model to help train its own model. In turn, this might imply that chips are still necessary to develop more cutting edge AI, which can then train other AI.

The AI stock movements had a very contained impact for Otso. This is because Otso’s only exposure at the time was via cash secured puts, which expired out of the money. Thus, for a period, Otso was negatively impacted. But, this negative impact reversed when the options that Otso wrote ultimately expired worthless (which is good for Otso).

Going forward? Trade wars and tariffs?

It is impossible to predict financial markets with certainty. Exogenous shocks occur regularly. The announcement of tariffs at the end of January highlights precisely this. The tariffs on Mexico and Canada were then quickly ‘delayed’ (i.e., reversed) after both Canada and Mexico signaled that they would make further attempts to address concerns about illicit drugs and illegal immigration.

The three countries warrant separate discussion.

• Mexico: The US has imposed a 25% tariff on goods form Mexico. The stated reason is to encourage Mexico to better secure its boarder so as to halt the flow of illegal immigrants and drugs. This is the most defensible tariff. It dovetails into Jamie Dimon’s assertion thar tariffs can be useful to achieve short term tactical goals. In this case, Mexico has a clear off-ramp: show that it is taking border protection seriously and properly address cartels.

• Canada: The US has imposed a 25% tariff on Canadian goods other than oil, on which it has imposed a 10% tariff. The ostensible reason is to encourage Canada to tackle fentanyl production and illegal immigration. However, the precise deliverables to reduce tariffs are more unclear. Canada has signaled that it will retaliate against the US, potentially targeting Republican states. The US has signaled that it will retaliate against any retaliation.

• China: the US has imposed an additional 10% tariff on Chinese goods. The ostensible reason is as a penalty for suppling precursor chemicals to illegal drug operations and for facilitating money laundering. It is not precisely clear what steps the US expects China to take to address its concerns. One might hypothesize that the US would have found a reason to tariff Chinese goods in any case and the US was simply looking for a reason.

The tariffs initially weighed on financial markets. However, the market largely recovered after the tariffs were halted. This also provides some information about how President Trump might conduct international relations and about how he might see tariffs. It signals that President Trump’s actions can be both volatile and pragmatic.

How then will Otso position itself? Otso will remain fully invested as we believe that the market is likely to remain at least flat over the next 12 months. However, Otso will closely monitor the market in February given that it has some exposure to the Russell 2000. This exposure was a positive in January. It will be important to monitor and manage it in February. And, given that Otso utilizes covered calls, being invested in an ‘at least flat’ market is better than not being invested. However, we also believe that the market will increase in 2025. Indeed, the analyst consensus forecast is for the S&P500 to hit at least 6,700 over the next 12 months. This makes investing preferable to sitting in cash for us.

The market will certainly be interesting in February! We look forward to working on your behalf to navigate these potentially volatile times.

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Edit note: An earlier version of this article referred to the financial situation before tariffs were reversed in in early February. The post has been updated to reflect this change.

December was an ‘interesting’ month for US financial markets. Both the US markets and the AUD/USD exchange rate significantly influenced performance.

The month started with enthusiasm following Donald Trump’s election victory. However, enthusiasm waned following the FOMC’s Summary of Economic Projections (SEP), and Jerome Powell’s December statement. The statement predicted 50 bps of interest rate cuts in 2025 (vs 100bps of cuts in the prior SEP). The S&P 500 fell around 2.7% in December.

The US stock performance is only part of the issue: the Australian Dollar tells the other part of the story. The US Opportunity Fund is based in Australian Dollars. The AUD fell 4.6% relative to the USD. This means that in AUD terms, US assets increased in value. Conversely, the USD appreciated 4.8% relative to the AUD.

How then did this influence markets and performance? The benchmark return was 1.96%. This is the return on the SPY in AUD terms. The US Opportunity Fund returned 2.27% to investors net of fees. Again, this is in AUD and we must recall that both the US stock market and the Fund benefited from improvements in the USD.

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What drove markets in December?

December had two halves, bisected by the FOMC meeting and the Summary of Economic Projections. This is clear from the SPY (i.e., S&P500 ETF) price series. Before the FOMC meeting, SPY had a lukewarm month. After the meeting, the SPY’s trajectory turned negative.

Why was the FOMC meeting so negative for markets? The FOMC’s inflation projections for 2025 increased, slightly to 2.5% (as at December) from 2.1% (as at September). The higher inflation projections are inherently bad for many stocks, including small caps. They increase the costs of doing business, especially when there are limits to whether companies can pass on cost increases to customers.

The higher-inflation projections also manifested in higher interest rate projections. In the September projections, the 2025 policy rate was projected to be 3.4% (a 100 bps fall). By contrast, in the September projections, the 2025 policy rate was projected to be 3.9% (a 50bps fall).

The question is how to invest following the significant market declines in December. The median target price for the S&P500 is 6746, according to Factset. Thus, it is important to remain invested. However, it is equally important to be strategic about asset selection. This includes considering which firms are least likely to lose from higher interest rates.

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Themes looking into 2025

There are several themes looking into 2025. As indicated, interest rates might be higher than previously anticipated. Areas that we will look for are:

• Trade tensions: it is important to continually consider whether, and to what extent, the Trump administration imposes tariffs. The rhetoric surrounding tariffs changes frequently. However, the proposal presently appears to involve a universal tariff on ‘critical’ items. However, this could change. Further, the Trump administration has signaled a desire to use tariffs for geopolitical reasons, including in relation to Canada, Mexico, Panama, and potentially Denmark. Thus, supply changes are relevant when analyzing companies.

• AI Regulation: The EU and UK have signaled an intention to regulate AI. This could include copyright controls, and the use of AI in ‘sensitive’ areas, such as insurance and banking. However, AI will continue to be a dominant theme.

• US Deregulation and takeovers: The Trump administration has signaled a push for deregulation. This could benefit fossil fuel companies. However, it could also enable acquisitions in 2025 whereas acquisitions were more difficult and time consuming to complete under the Biden/Harris administration.

• Cryptocurrencies: The US Opportunity Fund focuses on stocks, rather than crypto. However, the incoming SEC Chair is positively pre-disposed to cryptocurrencies. Similarly, Donald Trump as flagged the possibility of a strategic Bitcoin reserve. Thus, the incoming administration is more positive – or less negative – than the prior one. However, significant changes inchoate at present.

• Interest rates and inflation: As indicated above, interest rates are projected to fall by less in 2025 than previously anticipated. This can create some headwinds for high duration stocks, and emphasizes the need to scrutinize corporate fundamentals, including balance sheets and earnings.

These factors – in addition to a slow normalization of interest rates – will influence financial markets in 2025.

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The below graph depicts the performance for the Otso US Opportunities Fund (the Fund) relative to the benchmark.

During November, the fund returned 4.27%, net of fees. The benchmark return was 3.22%. The benchmark is the S&P500, as proxied by the SPY exchange traded fund, in AUD. The fund issued units on 11 November and the first trade date was 14 November. Thus, November was a partial month of performance and the benchmark return reflects that. Net of fees, the Fund beat the benchmark by 1.07%.

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Commentary

Welcome to our first monthly report for the US Opportunity Fund!

This is a partial month of performance. The relevant trust was established from 1 November. Thereafter, owing to lags associated with bank accounts and prime brokerages, additional units were issued on 11 November and the first day of trade was 14 November.

November was a very strong month for US equities. The month also saw the AUD depreciate. During the whole month, in USD terms, the S&P500 rose nearly 6%, as proxied by the SPY ETF. However, in AUD, it rose around 6.8%, based on RBA day-end exchange rates. However, during the periods relevant for the US Opportunity Fund, the benchmark return was 3.22%, reflecting the fact that the fund only traded from 14 November and additional units were only issued on 11 November. During this time period, the fund returned 4.27%, net of both management fees and performance fees. This represents an out performance of slightly over 1% over the course of around half-a-month.

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The strong performance in November occurred after Donald Trump’s victory. Thus, where – as here – the fund commences after 5 November, it commences after much of the returns for the month. Nevertheless, positive returns persisted during November.

The ‘optimism’ on President Trump’s victory likely reflects several factors. These are not mutually exclusive, and they are interrelated. First, President Trump will not increase buyback taxes (cf. the Democrats’ plan to do so). Second, President Trump has no plans to increase capital gains tax (cf. Democrats’ plan to do so). Third, President Trump has advocated for lower corporate taxes, potentially taking them as low as 15% (cf. Democrats’ plans to increase corporate tax to 28%). Fourth, President Trump intends to extend the Trump tax cut, whereas Democrats do not intend to do so and intend to impose a wealth tax. President Trump’s fiscal policies were largely positive for markets, manifesting in strong performance.

There is trepidation about President Trump’s intention to impose tariffs. The concern appeared to reduce after President Trump’s election. This reflects either (a) a reassessment of the tariffs, and/or (b) a tacit acknowledgement that pre-election ‘concerns’ about tariffs were overstated. The market might also be weighting the benefits and costs of President Trump’s full policy platform, and assessing that the likely benefits offset the potential risks. Notably, initial tariff rhetoric has focused on using tariffs as a tool to achieve policy goals, suggesting that future tariffs might be used strategically, rather than in an excessively economically harmful way. Furthermore, to the extent that tariffs are damaging, they can be reversed relatively easily (cf. tax policy, which is challenging to reverse, and which President Trump can lower given the republican control of the house and the senate).

Markets were more muted outside of the US. The US optimism did flow into most other markets, but to a lesser extent. These other markets indirectly impact the Fund. For example, the Shanghai index rose around 1.4% and the FTSE rose around 2.18%. These only indirectly impact the Fund to the extent that they influence US companies’ profitability and performance.

The current market level imposes some risks, to which the Fund is attuned. The S&P500 is at yearly highs. Further, there have been recent large gains in small cap stocks. There is also the risk that rates will remain higher than hoped for. If this reflects economic strength – as the market appears to believe – this will weigh less on stocks. However, if tariffs do trigger an inflation cascade, it could harm performance.

The strong surge in equities, coupled with risks, means that the Fund must adjust to the risk of a pullback in the short term. This does not mean that the fund ‘goes to cash’; market timing is inherently fraught. Rather, it means that the Fund will account for this risk when establishing derivative strategies. This includes considering a conservative approach to setting strike prices.

The main contributors to performance in November were derivative positions. This includes cash secured puts and covered calls. These were primarily over ETFs. This is because of the fund’s size, which makes ETF-derivatives preferable as they offer diversification, mitigating idiosyncratic risk for a small fund. This also helps to reduce tail risk in the portfolio (cf. selling derivatives in a small number of individual names).

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To this end, here are the fund’s investment memorandum and its application form.

Otso Us Fund Im 2024 11 07

446KB ∙ PDF file

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Application Form

1.9MB ∙ PDF file

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What does the fund do?

The fund is a US focused equity fund. The fund starts with deep fundamental analysis of the underlying stocks. The fund then utilizes derivtaive overlays to enhance performance. The fundamental analysis is based on years of experience and research. The founding manager - Mark Humphery-Jenner - has written more than 30 peer reviewed academic articles and worked as finance academic. He has honed his financial analysis skills through experience in venture capital and angel investing.

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The next issue is why you should consider the US Opportunity Fund. At present, the fund does not have a documented track record. But, we aim to proove our performance to you over time. Mark - the founder and CEO - has amassed over a decade of experience in finance academia. He has also invested in startups for half a decade, including serving on the Sydney Angels Management Committee. Subscribe to keep up to date with our performance.

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