| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 7.9% | 5.2% | -9.7% |
Fairlight Global Small & Mid Cap Fund returned 5.2% in Q2 2026 but underperformed its benchmark by 6.3% for the quarter and 18.5% year-to-date. The fund's investment philosophy centers on quality businesses earning outsized returns on capital with characteristics allowing persistence, purchased with valuation discipline. The letter examines academic research showing companies in the top decile of asset growth delivered only 5% annual returns versus 18% for slow growers, highlighting behavioral risks where companies and investors mistake cyclical tailwinds for structural shifts. Key holding Halma exemplifies proper capital allocation, with its photonics business growing 52% in FY2026 driven by hyperscale data center demand. Rather than accelerating expansion in this narrow market, management is directing windfall cash flows into R&D and acquisitions in out-of-favor sectors with reasonable valuations, maintaining strict returns hurdles. Management guides for 30% photonics growth ahead based on order visibility rather than extrapolating hyperscaler capex, explicitly characterizing this as a cyclical tailwind while reaffirming unchanged long-term compounding ambitions for the broader group.
The fund invests in the highest quality businesses with demonstrable track records of earning outsized returns on capital, purchased with valuation discipline, while avoiding rapid asset growers that academic research shows underperform by 8-20% annually.
The fund expects Halma's photonics business to grow 30% in the coming year, well below the 52% delivered in 2026, based on near-term order visibility rather than extrapolation of hyperscaler capex. Management has been explicit that photonics growth differs from the wider group in pace, scale, and longevity, and the long-term compounding ambition for the overall group remains unchanged.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 15 2026 | 2026 Q2 | HLMA.L | AI, Capital discipline, global, healthcare, industrials, Quality, small caps | HLMA.L | Fairlight underperformed in Q2 2026 amid market strength but maintains conviction in quality compounders. The fund highlights academic evidence that rapid asset growers underperform by 8-20% annually, using key holding Halma as a case study in capital discipline. Despite 52% photonics growth driven by AI infrastructure demand, management directs windfall cash to acquisitions in out-of-favor sectors rather than chasing cyclical momentum. |
| Apr 16 2026 | 2026 Q1 | DPLM.L, FERG, G24.DE, HLMA.L, MEDP, RAA.DE, REC.MI, SCT.L, SPX.L | Distribution, global, healthcare, industrials, Quality, small cap, technology | - | Fairlight's quality-focused global small-cap fund underperformed with -14.2% quarterly returns despite strong underlying company earnings. Key holdings Diploma and Halma benefited from AI data center trends, rising 50%+ annually. Market volatility from geopolitical tensions created buying opportunities. Management added to discounted positions and initiated new investments, maintaining confidence in 13% forecasted EPS growth and long-term outperformance potential. |
| Jan 20 2026 | 2025 Q4 | CPRT, DPLM.L, FDS, G24.DE, HLMA.L, IDXX, IT, MEDP, REC.MI, ULTA | AI, global, healthcare, Quality, small caps, technology, underperformance | IT | Fairlight's quality-focused small-mid cap fund underperformed significantly in 2025 due to AI disruption fears and benchmark concentration in avoided cyclical sectors. Despite -8% returns, portfolio companies grew earnings 9% with strong fundamentals. Management remains committed to the process, forecasting 12% earnings growth for 2026 while adding to their own investments. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
AIThe letter discusses accelerating AI infrastructure investment and its relationship to corporate asset growth. Halma's photonics business, which manufactures optical switches for data center infrastructure, grew 52% in FY2026 driven by a hyperscale technology customer. Management views this as a cyclical tailwind rather than structural shift, guiding for 30% growth in the coming year based on near-term order visibility rather than extrapolation of hyperscaler capex. |
Data Centers Photonics Hyperscalers Infrastructure |
QualityThe fund's investment philosophy centers on finding businesses with demonstrable track records of earning outsized returns on capital with characteristics allowing these returns to persist. The portfolio seeks high quality growth companies, stable compounders, and special situations while avoiding cyclical businesses and interest rate sensitive sectors. Academic research cited shows companies in the bottom decile of asset growth delivered 18% annual returns versus 5% for fastest growers. |
Returns on Capital Compounders Capital Discipline | |
Capital DisciplineThe letter extensively discusses how rapid asset growth negatively correlates with stock returns, citing academic research showing an 8-20% annual performance gap favoring slow growers. Halma is highlighted as exemplifying proper capital allocation by directing photonics windfall cash flows into R&D and acquisitions in out-of-favor sectors with reasonable valuations, maintaining strict returns on capital hurdles, and refusing to extrapolate cyclical growth as the new normal. |
Asset Growth M&A Returns Valuation Discipline | |
| 2026 Q1 |
QualityFairlight focuses on high quality businesses with demonstrable track records of earning outsized returns on capital. The portfolio comprises attractively valued businesses with long track records of performing well even across turbulent economic times and periods of technological change. The investment approach is grounded in fundamental research with a strong focus on quality businesses purchased with valuation discipline. |
Quality Returns Capital Fundamentals Valuation |
Industrial DistributionMultiple holdings operate in industrial distribution including Diploma which distributes seals for industrial machinery, wires and cables for specialised applications, and medical consumables. Ferguson is the leading distributor of plumbing and related products in the US. These businesses benefit from mission-critical and repeat nature of purchases with resilient sales even during weak economic periods. |
Distribution Industrial Mission-critical Resilient Repeat | |
Data CentersBoth Diploma and Halma are now being seen as AI winners thanks to some of their businesses participating in the data centre capex super cycle. This has contributed to positive share price reactions with both companies' share prices increasing by more than 50% over the past year. |
Data Centers AI Capex Infrastructure Technology | |
| 2025 Q4 |
Healthcare ITCareCloud helps smaller U.S. health practices manage data and collect payments. These practices have thin margins and high switching costs, creating defensive moats. The RCM consolidation opportunity allows CareCloud to acquire distressed competitors cheaply and improve margins through cost cuts. |
RCM EHR Healthcare Consolidation Switching Costs |
CementICG owns cement plants in Kazakhstan and Tajikistan with significant cost advantages through newer dry process technology and superior locations. Energy and transport cost advantages create sustainable competitive moats in a commodity business with high barriers to entry. |
Cement Energy Transport Kazakhstan Competitive Advantage | |
ConstructionCTR Holdings builds structural frames and handles finishing work in Singapore. Most projects are public with stable government payments, providing guaranteed cash flow. The company traded at attractive valuations with strong balance sheet metrics. |
Construction Singapore Government Cash Flow Public Projects |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Jul 15, 2026 | Fund Letters | Fairlight Global Small & Mid Cap Fund | HLMA.L | Halma | Conglomerates | Industrial Machinery & Supplies & Components | Bull | London Stock Exchange | capital discipline, compounder, Data center infrastructure, environmental monitoring, Equity, Europe, Healthcare Technology, high-ROIC, Industrials, M&A strategy, Optical Switches, Photonics, Safety Equipment, UK | Login |
| Jan 20, 2026 | Fund Letters | Nicholas Cregan | IT | Gartner, Inc. | Information Technology | IT Consulting & Other Services | Bull | New York Stock Exchange | Advisory, AI, buybacks, Insiders, research | Login |
| TICKER | COMMENTARY |
|---|---|
| HLMA.L | Halma owns over 50 specialised manufacturers operating in global niches within the safety, environmental and healthcare sectors. The group has compounded EPS at 15% annually for over four decades with low variability due to three key elements: 1. Exposure to structurally growing markets combined with a relentless focus on only differentiated products; 2. A repeatable low-risk M&A strategy guided by strict returns on capital hurdles; and 3. A sustainable approach to financing growth, with minimal debt and no reliance on new equity. One of Halma's many businesses is Avo Photonics, which contributes to the great majority of the group's photonics revenues. Avo has built a relationship of more than a decade with a large hyperscale technology customer, co-designing and manufacturing optical switches critical to data centre infrastructure. In the financial year ended March 2026, Halma's photonics business grew 52%, contributing half of the group's exceptional 16% organic revenue growth. The photonics business now accounts for 20% of group sales, up from 15% last year and 12% the year before. CEO Marc Ronchetti made it clear that Halma is not treating the photonics windfall as a signal to accelerate expansion within this fast-growing but narrow market. Instead, the cash flows are being used to strengthen the whole group. Management has been candid about the limits of this growth. They've been explicit that photonics' growth profile differs from that of the wider group in pace, scale, and longevity, and may cause group-level growth to become more front-end loaded. The premium cash flows from photonics are being directed primarily into R&D and acquisitions in sectors that are currently out of the spotlight, where valuations remain reasonable. Halma has been appropriately cautious about guiding for 30% photonics growth in the coming year, well below the 52% delivered in 2026, and consciously based on near-term order visibility rather than extrapolation of hyperscaler capex announcements. On the central question of whether management is behaving in the way that the evidence suggests preserves long-run value, resisting the empire-building temptation, maintaining capital discipline, and refusing to mistake a cyclical tailwind for a structural shift in the group's ambitions, our judgement is that they are passing the test, and the company remains a key holding in the Fund. |
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