IMC Global Small Companies Fund update – Q1 2025

In this IMC fund update, Travis Prentice, Chief Investment Officer of the Informed Momentum Company, shares his perspective on the Q1 2025 performance of the IMC Global Small Companies Fund. He explores the key events that drove market volatility, shifts in global stock leadership, and how the fund is positioned to capture emerging momentum trends in global small caps.

Transcript:

A rough start to 2025 after a strong 2024

After a very strong 2024, the first quarter of 2025 started a little rougher. The fund was down about 9.7%, underperforming the index by 500 basis points. But when we look at the market environment, we’ll see that, given the stock leadership changes we saw in the quarter, it makes much more sense that we struggled.

IMC fund update: What drove the leadership shift?

Two main events in the quarter really stoked the change of leadership within the global stock market universe in the March quarter of 2025. The first was in late January, DeepSeek Monday, January 27th, which really changed leadership, particularly in the technology and industrial complex, principally because of that news that we got out of China in terms of having a much more efficient way to build these long, large language models, which called into question the massive CapEx that the market was predicting relative to AI.

The second big change that stoked a significant shift in leadership in the first quarter was what was happening in the US regarding Trump’s agenda.

Market impact of US policy: Tariffs and spending cuts

The two most notable developments were the cut in government spending and the tariff talk. Those two things questioned economic growth and even economic deceleration and recession talk towards the end of the quarter. Those two developments really changed leadership and ushered in a momentum correction in the beginning and a bonafide stock market correction towards the end of the quarter.

Attribution review: Where underperformance occurred

From an attribution perspective, during the quarter, we underperformed principally because of our holdings in the United States. That was more than half of the underperformance, as the United States seeded market leadership during the quarter, but also in India, where India entered a bear market from one of the best-performing markets in the prior year.

From a sector perspective, our holdings in technology and industrials also hurt performance, largely due to the DeepSeek news in late January.

Where we’re finding momentum now

We found momentum in the first quarter in places we hadn’t seen in quite some time.

Our portfolio gravitated towards and our waiting increased in China, really across the board. Still, there is a lot within the technology complex, as China’s technology renaissance because of DeepSeek took off. The government has also supported the stock market in terms of stimulus.

So, we saw a lot of momentum in China. So we’re overweight in China at the moment. And the other part where we’re finding momentum is actually in Europe. So we’re seeing momentum in aerospace and defence companies, particularly in Germany and other European countries. We’re also seeing good momentum in financials within Europe and in Greek banks. So we’re seeing momentum in places we haven’t seen for quite some time, and our portfolio reflects where we’re finding trends and where we’re not.

So, on the other hand, where our weight has come down and where we’re seeing less strong trends is India, which I talked about, but also in the US, where we’re the most underweight we’ve been in the US for quite some time.

Outlook: Observing the fog and staying nimble

In terms of what we see going forward in the outlook right now, we’re in the fog of war regarding the market. As I’m recording this, we’re in the beginning of April. And so we’ve seen a continuation of the selloff, at least until today, when we saw some news from Trump on the 90-day pause.

The market has been a bit crazy, and there’s a lot of fog, but I mean, I think what we’re always preaching and what our process does well is adaptability and nimbleness. So, we’re staying on the pulse of what’s happening, what’s working, and what’s not working, and through this fog, ultimately, we’ll find the trends that will be in place coming out of this.

But we have to just observe, read, and react right now. You want to be more of a bamboo in these markets, not an oak tree. You want to bend, be open to wherever the trend may come, and be open-minded to where that may be. So, we’re very intently observing the market and being ready to act when the signal suggests we should.

Longer-term positioning: Why we’re optimistic

But if we look at the bigger picture, two developments get us excited about the longer term at this starting point. Number one has been the truly historic underperformance of small caps versus large. In fact, we’re in the worst 10-year period ever for small versus large.

As a starting point, small caps look to be a good diversification play in this particular environment, so that’s a positive. Number two is DeepSeek Monday in LA in late January, which ushered in a momentum correction – a momentum refresh. Historically speaking, this has been a median drawdown regarding momentum, so it is normal. It happened faster than normal, about 50% faster than usual. But every time this has happened similarly since 1985, it’s been a fantastic time to invest in with momentum going forward. So, coming out of these dislocations is when you want to own momentum.

IMC fund update takeaway: Momentum and small caps aligned for growth

If you combine those two things, momentum and global small caps look like pretty good bets over the long term at this starting point. We’re excited about the prospects going forward.

 

To find out more about the fund, click HERE.

*The text has been edited for clarity.

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The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Product Disclosure Statement and the accompanying Target Market Determination. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 1300 133 451, visit the website www.sghiscock.com.au or contact your financial adviser.  Any investment is subject to risk, including possible loss of income or capital invested.