Keynote
Spin-Off
Fund

Global equity markets stagnated during the month under review. The MSCI World Net Total Return Index gained 0.8% in July, while the MSCI World SMID Cap Net Total Index lost 1.0%. The Keynote Spin-Off Fund (KSOF) declined by 4.6% over the reporting month (all performance figures in USD).

Equity markets have been shaped by exceptionally strong momentum in recent years. Companies benefiting from the artificial intelligence boom in particular have accounted for the bulk of market returns — roughly 85% of this year's price gains came from this group. As a result, the performance of the major equity indices is increasingly determined by a small number of technology stocks, which makes it difficult in the short term for differentiated investment strategies to keep pace with the broader market. As in the late 1990s, there are signs of a "melt-up" in equity markets. However, the enormous investments by the large technology groups in expanding AI infrastructure now absorb a large share of their free cash flow, so that the scope for further share buybacks — a key driver of the equity bull market since the financial crisis — is shrinking significantly. At the same time, J.P. Morgan expects net US equity issuance to grow to around USD 1.2 trillion by 2027 — the strongest increase in supply since 1999. This additional supply of equity has to be absorbed by investors, even though US households already hold a historically high share of their wealth in equities. In addition, the information technology sector is expected to step up new share issuance over the coming twelve months. This points to high valuations and increasing competition — factors that experience shows tend to go hand in hand with declining returns on capital. Against this backdrop, the high concentration of the major equity indices in a handful of AI and technology stocks appears increasingly problematic. Our investment strategy, by contrast, is deliberately positioned differently: through the spin-off mechanism (initial selling pressure, followed by margin expansion and, with it, a re-rating of the shares), attractive returns are effectively "built into" the system.

The three largest negative performance contributions in the month under review came from Solstice (-2.17%), GPGI (-0.86%) and Amrize (-0.60%). In early July, Solstice announced the acquisition of Element Solutions, a manufacturer of electronics and semiconductor products, in a cash-and-share transaction valued at around USD 14.5 billion. Solstice's timing could hardly have been more unfortunate. With this acquisition, Solstice has essentially taken on a high "AI beta" at precisely the worst possible moment. The original investment thesis for Solstice (as the market has also increasingly come to recognise) was not based on AI materials, but on the expectation of rising margins resulting from its regional monopoly position in nuclear fuel conversion. We have sold the shares, as the acquisition creates uncertainty and dilutes and complicates the investment case. At GPGI, the temporarily higher level of debt following the latest quarterly figures, which came in below expectations, continues to weigh on sentiment. Over the medium term, organic growth in the mid- to high-single-digit percentage range, together with annual margin expansion of more than 100 basis points, should meaningfully accelerate free cash flow and drive a re-rating of the stock. At Amrize there was no share-price-relevant news. Stocks with exposure to the construction sector are currently out of favour. Amrize has a strong market position and will benefit disproportionately from infrastructure investment in the US. Continued share purchases by management and an attractive valuation — both in absolute terms and relative to its peer group — argue in favour of the stock.

The largest positive contributions to fund performance came from SAP (+0.75%), Constellation Software (+0.60%) and Honeywell International (+0.42%). SAP should be among the potential AI beneficiaries. Following the equity carve-out and the complete sale of Qualtrics, SAP is strategically more focused and can concentrate more heavily on cloud migration and its AI-driven core business. With a customer retention rate of 97%, double-digit earnings growth and full conversion of earnings into free cash flow, the company offers a high degree of visibility — and this despite the fact that the shares currently trade at just 17 times expected forward earnings. Constellation Software should likewise benefit, as it can deploy AI productively across its entire software portfolio. Its true competitive advantage lies not in program code, but in proprietary data, deep industry expertise and close integration into its customers' business processes. Honeywell International, in turn, benefited from the spin-off of Honeywell Aerospace, which was completed at the end of June.

We used the temporary share price weakness at Honeywell International and Honeywell Aerospace to increase both positions. In return, Resideo Technologies was reduced. The cash position of just under 5% will be used in August for investments in new spin-offs.