Category: mcp-specific

“The Important Thing Is Not To Stop Questioning.”

–Albert Einstein

Dear fellow MEMF shareholder,

This quarter was characterised by strong equity market performance, although returns remained highly differentiated across sectors and companies. Continued investment in artificial intelligence (“AI”) infrastructure supported parts of the technology supply chain, particularly in Taiwan and South Korea, while the easing of the style headwinds experienced in 2025 created a more supportive backdrop for MEMF’s focus on quality growth businesses. Against this environment, the Fund delivered a NAV return of 29.4% (Private C USD Founder) and 30.9% (Private C EUR Founder), respectively, compared with 19.0% for the MSCI Emerging Markets Mid Cap Index (Net TR USD).

MEMF Performance YTD

The continued acceleration of AI capabilities and the widening gap between companies likely to benefit from this transition and those whose business models may be challenged by it remained the defining investment theme during the period.

As discussed in our Q1 commentary, this is a continuation of the trend we identified during 2025, when we began repositioning the portfolio to reflect the rapidly evolving AI landscape. During the quarter, we further refined portfolio positioning, reallocating capital towards companies offering greater long-term earnings visibility and more resilient competitive positions, while reducing exposure where rapid advances in AI have increased uncertainty around future business models. This was most evident within the software sector, where increasingly capable AI systems have the potential to reshape enterprise software and IT services business models. Capital was redeployed into businesses offering stronger growth drivers, greater earnings visibility and more attractive risk-adjusted return potential.

Evolution of Technology Sector Exposures Over Q2

Following strong share price appreciation across parts of the semiconductor and hardware supply chain, we also reassessed the long-term return potential of a number of holdings. Consistent with our disciplined investment process, we reduced positions where share prices approached our estimates of intrinsic value, recycling capital into opportunities offering a more attractive balance of long-term return potential and valuation, while maintaining meaningful exposure to our highest-conviction AI holdings. Importantly, we believe the opportunity extends well beyond semiconductor manufacturers, creating attractive prospects across the wider technology supply chain.

EM Technology Outperformed as Valuations Re-rated

India was one of the strongest-performing emerging markets during the quarter, outperforming most major regional peers, including South Korea and Taiwan, and second only to Thailand. The Nifty 50 Index rose 6.7% over the April–June period in USD terms¹, while performance was even stronger further down the market-capitalisation spectrum, with the BSE 500, mid-cap and small-cap indices outperforming the Nifty by approximately 5, 10 and 17 percentage points, respectively². As discussed in our Q1 commentary, our research, including regular visits to India with extensive on-the-ground research, reinforced our conviction that the country’s long-term investment case remained intact, leading us to increase exposure during the earlier period of market weakness. The subsequent recovery supported that positioning, particularly among what we consider quality smaller companies, where we continue to identify the most compelling structural growth opportunities.

Geopolitical developments, including tensions in the Middle East, evolving trade policies, an increasingly uncertain monetary policy outlook and broader macroeconomic uncertainty, contributed to periods of market volatility. We monitored these developments closely, assessing their implications for energy prices, inflation, financing conditions, supply chains and investor sentiment, while incorporating these factors into our ongoing assessment of portfolio risks and opportunities.

Overall, the period reinforced the importance of active portfolio management in a rapidly evolving investment landscape. While artificial intelligence remained an important driver of investment opportunities, our investment process extends well beyond technology. We continue to find compelling opportunities in Taiwan and Korea among companies supplying critical components, advanced materials and testing equipment to the AI ecosystem, while India remains an important area of focus, supported by resilient domestic demand, infrastructure investment and the continued financialisation of household savings. Recent research trips to India and Vietnam reinforced our conviction in several existing holdings and expanded our pipeline of prospective investments.

While geopolitical developments, shifts in trade, and monetary policy are likely to continue contributing to periods of market volatility, our investment decisions remain driven by company fundamentals rather than short-term market movements. At the same time, the pace of change across the AI landscape, together with evolving opportunities in India and other emerging markets, continues to create a dynamic investment environment. Against this backdrop, we remain focused on identifying exceptional businesses, led by capable management teams, with durable competitive advantages and the ability to compound value over many years. We believe this approach leaves the portfolio well positioned to navigate an evolving market environment and deliver attractive long-term returns.

1. Bloomberg ↩︎
2. CLSA ↩︎

In contrast to previous years, when MEMF delivered strong returns driven by small- and mid-cap emerging market companies despite broader EM equities lagging, the asset class entered a recovery phase in 2025. Emerging markets demonstrated to global investors that they can deliver strong returns in a market previously dominated by American exceptionalism.

However, the benefits were largely captured by a small number of mega-cap stocks, resulting in unusually narrow market leadership. While gains have been highly concentrated so far, a broader set of supportive dynamics for emerging markets should increasingly extend beyond the largest stocks and benefit quality small- and mid-cap companies.

At the same time, many of our holdings have continued to execute well operationally, but this has not been fully reflected in share prices due to macroeconomic headwinds. As these pressures ease, we see scope for a catch-up in valuations, providing support to the portfolio in the years ahead.

Emerging Markets Supported by Numerous Tailwinds

At year end, emerging markets were trading at a 38% discount on a P/E basis and a 60% discount on a P/B basis relative to developed markets. These valuation gaps are particularly pronounced in the sectors we focus on, such as technology and consumer discretionary. Importantly, the attractive discounts noted above are also increasingly evident across quality stocks, extending beyond traditional value segments.

Furthermore, emerging markets are supported by a 9.4% weakening of the US dollar in 2025, which is expected to continue into 2026. This typically benefits EM currencies, with the Brazilian real, Colombian peso and Taiwanese dollar among the strongest performers this year. Emerging markets continue to maintain healthier debt levels than developed markets (69% versus 109% of GDP in 2024), while simultaneously offering stronger GDP and earnings growth projections.

Higher Growth in EMs Combined with Healthier Debt Levels

Political risk related to elections is lower this year, with major electoral events in 2026 limited to Vietnam and Brazil across our key markets. However, geopolitical risks more broadly remain elevated. Recent developments, including tensions between the US and Europe over Greenland and events in Venezuela, have already added complications to the outlook for 2026, alongside long-standing risks such as the Russia–Ukraine conflict, instability in the Middle East, global trade wars, and ongoing tension between China and Taiwan. We remain highly mindful of geopolitical risks and always apply a macro risk overlay to our bottom-up stock selection.

The Federal Reserve’s expected rate cuts this year further enhance the outlook, as lower US yields generally push investors toward higher-return emerging market assets—particularly as many EMs benefit from moderating inflation and higher real rates themselves. While effects may vary across countries, the global easing cycle provides a broadly supportive backdrop for EM performance.

Furthermore, a number of country-specific tailwinds should support our portfolio exposures. Taiwan continues to benefit from a powerful semiconductor investment cycle and a globally competitive innovation ecosystem. South Korea is advancing structurally in high-end manufacturing, materials and automation, where we continue to find globally competitive businesses trading at attractive valuations.

Taiwan and Korea Well Positioned in Semiconductor and AI Markets

Despite a challenging start to 2026, marked by foreign outflows amid reduced risk appetite and heightened macro volatility following recent geopolitical developments, India’s longer-term outlook remains compelling. We continue to look through near-term volatility, supported by resilient GDP growth, rising discretionary consumption and improving capital expenditure trends. The year 2026 could turn into another period of significant progress for the country.

Brazil offers selective opportunities as inflation moderates, interest rates decline and corporate balance sheets strengthen. We remain cautious around the upcoming elections, which are likely to introduce additional volatility in 2026.

While emerging markets have delivered strong headline returns this year, dispersion beneath the surface has been significant. With valuation spreads at elevated levels and earnings revisions diverging meaningfully by country, sector and company, passive exposure increasingly reflects index concentration rather than the breadth of opportunity available.

In this environment, disciplined bottom-up stock selection is essential to identifying structurally stronger businesses beyond benchmark heavyweights. We believe the portfolio is well positioned should the recovery broaden into under-owned areas of the market where fundamentals remain intact.

With a portfolio built around high-quality, lesser-known companies and a disciplined, active approach to capital allocation, we remain fully committed to our investment philosophy and to delivering long-term performance and shareholder value.

”The best time to buy quality stocks is now”.

Ruchir Sharma, Financial Times 01.12.2025

Dear Fellow MEMF Shareholder,

Since the inception of the strategy in 2018, our objective has remained unchanged: to deliver long-term performance by identifying high-quality, innovative, under-researched mid-cap compounders with strong fundamentals that are not represented in the benchmark. This disciplined investment philosophy has driven strong results over prior years, culminating in 21.7% outperformance (MEMF Private C USD Founder) versus the MSCI EM Mid Cap Index in USD terms from inception through to the end of 2024.

However, 2025 played out differently, despite emerging markets finally ending a decade of underperformance versus developed markets. The year proved challenging in relative terms for the strategy, as the market environment was particularly difficult for quality-oriented mid-cap stocks. Returns were increasingly driven by a narrow group of large, liquid companies and by style dynamics that ran counter to our investment approach.

That said, Q4 showed early signs of stabilisation and improvement. During the quarter, MEMF’s net asset value increased by 2.9% (Private C USD Founder), compared with 2.2% for the MSCI EM Mid Cap Index (Net TR) in USD terms. This relative improvement was supported by solid operational performance across several portfolio holdings, with a number delivering results ahead of expectations.

Emerging markets recorded steady gains over the quarter, finishing the year as the strongest-performing global equity asset class. As is often the case in the early stages of a recovery, initial inflows were concentrated in the largest and most liquid stocks. Within the MSCI EM Index, the top five holdings accounted for over 40% of total returns in 2025 in USD terms, none of which MEMF holds.

Performance in EM Driven by a Few Large Companies

Our investment universe is deliberately focused on lesser-known, under-researched small- and mid-cap companies across emerging markets, where we believe our bottom-up research adds the greatest value by looking beyond well-known benchmark constituents. The under-researched nature of this segment—typically marked by limited coverage, lower visibility and minimal benchmark overlap—can give rise to pricing inefficiencies that are largely absent in the highly efficient mega-cap space.

Active management is more likely to add value in these less crowded areas of the market, where returns are driven more by company-specific fundamentals than by index flows. Against a backdrop of unusually narrow market leadership, we believe this positioning may offer meaningful potential for relative catch-up as fundamentals reassert themselves.

During 2025, the strategy’s emphasis on quality encountered significant style headwinds, with quality stocks—especially within emerging markets—suffering one of their worst periods of relative underperformance compared with the broader benchmark. Smaller companies, particularly growth-oriented businesses in the technology sector, were disproportionately affected by continued macroeconomic and geopolitical uncertainty.

Investor risk appetite remained constrained, with capital rotating towards perceived safe-haven assets such as gold and towards larger, more liquid equities viewed as more resilient in volatile markets. During this period, investors favoured sectors such as banks, commodities and defence-related industries, supported by higher interest rates, elevated fiscal and defence spending, and ongoing geopolitical tensions. This defence-led rotation provided relative support to parts of the industrials and commodities sectors.

These areas, which are deliberately excluded from the portfolio due to their regulatory complexity, capital intensity and limited pricing power, were generally trading at lower valuation multiples and tended to be more resilient during periods of market correction.

EM Quality Has Fallen Behind Value This Year

Additionally, China was a major contributor to emerging market performance in 2025, accounting for approximately 25% of MSCI Emerging Markets Index gains in USD terms while representing around 23.6% of the index. However, we believe the rally has been driven primarily by multiple expansion, improved sentiment and policy support rather than an improvement in underlying fundamentals such as earnings growth. Economic data remains weak, highlighting a disconnect between market performance and a meaningful recovery, and gains have been concentrated largely in the technology sector, where valuations have become less compelling.

Structural risks also remain, including the potential for abrupt and unpredictable regulatory intervention, as experienced in 2021. Against this backdrop, we continue to approach the market with caution, while remaining open to selectively deploying capital where individual companies meet our quality, governance and valuation criteria, without compromising discipline in pursuit of exposure.

Performance was also negatively impacted by our exposure to the software and IT services sector (20.2% in MEMF versus 1.8% in the MSCI EM Mid Cap Index as of 31 December 2025). The sector experienced tariff-related volatility, which led many corporates to delay discretionary IT spending decisions into 2026. As Gartner, a leading independent IT research and advisory firm, has noted, this resulted in “a business pause on net-new spending due to a spike in global uncertainty.”

Looking ahead, Gartner forecasts global IT spending growth of 9.8% in 2026. We view the recent weakness as cyclical, with recovery prospects supported by AI-driven demand and the resumption of previously deferred projects.

As a result of these factors, relative performance this year has not matched the strong returns achieved in prior periods. While disappointing, such outcomes are not unusual for strategies with a high active share. They are an inherent feature of a differentiated investment approach and a key driver of long-term results. Periods of softer relative performance have occurred in the past and have often been followed by improved outcomes as stock-specific fundamentals reassert themselves.

Active portfolio management remained central to our day-to-day process throughout the year. We increased exposure to existing high-conviction holdings trading at attractive valuations following periods of volatility and selectively initiated positions from our watchlist, taking advantage of temporary share price dislocations in companies we believe were unfairly impacted by broader market sentiment.

This approach has allowed us to acquire high-quality stocks at discounts to historical valuations during one of the weaker periods of relative performance for quality companies in recent years. At the same time, we trimmed or exited positions where changes in the macro environment had, in our assessment, materially weakened the investment case.

Over the course of the year, we rigorously revisited every investment case, challenging attribution, portfolio exposures and assumptions around earnings and valuation. Above all, we have remained committed to our investment philosophy. Our focus is unchanged: investing in high-quality, lesser-known, well-managed companies that compound value over time and align with our strategy and responsible investment principles.

Style Headwinds Have Driven Valuation Compression

In this environment, the portfolio’s underlying fundamentals remain supportive. Market consensus forecasts a 26% forward EPS CAGR (three to five years) for the average portfolio company, supported by strong balance sheets and profitability, including a three-year average ROE of 25%, net debt/EBITDA of -0.7 and profit margins of 15%. In several cases, companies have delivered results ahead of expectations and seen earnings estimates revised upwards, yet share price performance has remained subdued due to the macro headwinds described above.

MEMF Portfolio Offers Growth and Profitability

Periods such as these—following a challenging year but characterised by resilient fundamentals and improving growth prospects—are often when long-term opportunities in high-quality businesses begin to emerge.

Uncertainty and shock over the reciprocal tariffs announced on ‘Liberation Day’ by the new US administration has, to put it bluntly, created market chaos. The sharp global sell-offs are reminiscent of the turmoil experienced during the Covid-19 pandemic. As was the case then, few have been spared. Trump’s recent decision to delay reciprocal tariffs for 90 days applicable to any country that has not retaliated, has provided markets with what appears to be a temporary lifeline.  

However, we do not interpret this as a signal that markets have bottomed, nor do we assume this policy will necessarily hold given Trump’s unpredictability. Rather, this move appears to reflect a form of targeted pressure—some might say economic bullying—directed against China, particularly given that it remains the only country to have retaliated thus far. As a result, market confidence has been deeply shaken and we can expect elevated volatility and uncertainty to persist in the coming months. 

Like many, we had anticipated the possibility of rising protectionism under a second Trump administration, though not to the extent we seem to be witnessing now. In recent months, we have proactively assessed the potential impact of higher tariffs on our portfolio. Each individual position has been carefully reviewed under this assumption, and we continue to re-evaluate our holdings in light of the evolving situation.  

As far as the direct impact of Trump’s reciprocal tariffs is concerned, we believe companies exporting physical goods to the U.S. from countries facing the steepest approved tariff increases are likely to be most affected. Fortunately, although our portfolio includes companies based in several of these countries—which could be hit hard if the announced ‘Liberation Day’ tariffs are fully implemented—our current assessment suggests the immediate impact on our holdings may be limited. Many of our portfolio companies have minimal direct export exposure to the affected sectors, providing a degree of insulation from near-term disruption. 

Take Classys, a Korean medical device manufacturer facing a potential 32% tariff on its U.S. imports. The company derives less than 5% of its revenue from sales to the U.S., significantly reducing the potential impact on overall earnings. The bulk of its revenue, approximately 35%, comes from the domestic Korean market, while Europe and Southeast Asia each contribute around 20%. Japan and Brazil account for roughly 10% each, providing further geographic diversification.

Additionally, the top three US-revenue exposed companies in our portfolio are asset-light, IP-based software companies. As a services industry, they are not directly targeted by the new tariffs. Furthermore, semiconductors are currently excluded from the newly announced tariffs. But the situation remains highly fluid. While chips themselves are not directly taxed, components that contain them, such as laptops and smartphones, had been at risk of future levies. However, over the weekend, the White House appeared to grant temporary exemptions for certain electronics, including smartphones, laptops, hard drives and flat-panel monitors. At the same time, a Section 232 investigation into semiconductor imports has been launched, raising the prospect of targeted tariffs based on national security grounds. We are closely monitoring developments in this sector, as it remains a potential flashpoint in the broader trade narrative. 

Finally, we also prioritise business models oriented towards domestic consumption in select markets. As a result, our consumer holdings have minimal direct exposure to U.S. demand, with the exception being a Turkish apparel retailer, which derives less than 5% of its revenue from the U.S. 

Beyond the direct taxation of goods, few businesses are likely to escape the broader, more insidious effects of escalating tariffs. Even in cases where companies are not directly targeted, tariff-induced slowdowns in demand and profitability can ripple through global supply chains, dampening investment sentiment and tightening margins. These second-order effects pose significant risks—not just to individual companies, but to entire economies. From shifts in consumer spending patterns to declining trade volumes and tightening financial conditions, the cumulative pressure could contribute to a broader global economic slowdown. We are actively assessing these cross-currents as we evaluate portfolio exposure and position for resilience. 

In the meantime, the trade war between the US and China has exploded into full force. At the time of writing, the US has imposed tariffs of 145% on Chinese imports, while China has responded with tariffs of 125% on US goods. Who knows how much higher these could go.  This extreme tariff war between the US and China alone will have serious repercussions across the global economy. 

Amidst the chaos here are some glimmers of light on the tariff horizon. It’s worth remembering that we’ve been through a Trump-led trade war before, and global trade patterns had already begun to shift well before the current escalation. One of the most important structural changes over the past few decades has been the rise of South-South trade, particularly across Asia. Between 2007 and 2023, trade among developing countries more than doubled, from $2.3 trillion to $5.6 trillion, largely driven by Asia¹. Intra-Asia trade alone is projected to grow from $4.3 trillion in 2023 to $7.1 trillion by 2030². 

This diversification accelerated following the 2018 U.S.-China trade war, prompting countries to reduce reliance on U.S. imports. For example, China’s share of exports to the U.S. declined from 19% in 2017 to 14.7% in 2024³. At the same time, many countries have been pursuing bilateral and regional trade deals that exclude the U.S. Notably, the Regional Comprehensive Economic Partnership (RCEP), signed in 2020, includes 15 Asia-Pacific nations and covers around 28% of global trade. 

Although the U.S. will remain a dominant global importer, the accelerating pivot away from dependence on its market places many economies in a stronger position to withstand rising U.S. tariffs. We expect this trend to continue gaining momentum in light of recent developments, as countries intensify efforts to expand trade partnerships beyond the U.S. 

In this uncertain environment, our top priority is to stay close to our portfolio companies and continuously reassess our investment theses in light of new insights and ongoing dialogue with stakeholders. To that end, we have scheduled additional research travel to remain close to developments on the ground and ensure we are ready to adapt swiftly as conditions evolve—especially given the many unknowns that remain, including the durability of the 90-day pause and the potential for new trade deals. 

We believe experience and steadiness are vital during periods of heightened volatility. The MCP team has been through many market cycles, including the Asian financial crisis, the global financial crisis, and—during MCP’s own tenure—the Covid-19 pandemic. Since our launch in 2018, amid the first U.S.-China trade war, we believe we have guided the fund through an extraordinary period marked by global disruption, rising geopolitical tensions, inflationary shocks, tech sector uncertainty, and the renewed political ascent of Donald Trump. 

Today’s surge in market volatility bears strong resemblance, in our view, to the dislocation seen in early 2020, when fear overtook fundamentals. At that time, we believe the team responded swiftly and strategically repositioning the portfolio to take advantage of market dislocations and initiating positions in high-quality companies from our watch list. These were businesses with sound fundamentals and durable models, which we believed were being unduly punished by market sentiment. 

We believe this timely and deliberate response, combined with the quality of our portfolio holdings—characterised by competitive strength, solid balance sheets, robust corporate governance, and leadership in innovation—was a key contributor to the fund’s strong outperformance. By 14 September 2020, just 241 days after the Covid-related market peak, MEMF (Private C USD Founder) had recovered its losses. From the trough to the subsequent peak on 16 November 2021, the fund delivered a return of 136.5% over a 603-day period, before concerns around global rate hikes began to weigh on broader markets. 

As long-term investors, we view the current environment through a similar lens. We do not believe this is a time to retreat, but rather an opportunity to build positions in resilient companies with strong fundamentals—businesses we believe are well-positioned to benefit from a long-term recovery particularly as history shows that the subsequent bull market tends to outperform its preceding bear market.

¹ UNCTAD

² HSBC Forecast

3 FT Analysis