Active Recycling - news of the month

Active Recycling ended December with a performance of -7.0%, bringing the fund's 2024 return to -3.5%

December performance

The downturn in December was driven by two main factors:

• The overall market's poor performance, with the S&P 500 falling by -2.7%.
• Challenges in the Steel industry: A UBS report revised expectations for a rebound in steel prices and volumes to a slower pace, with most of the recovery now projected for the second half of 2025. This update significantly affected steel manufacturers, which represent a substantial allocation in the fund.

Graph 1: illustrates the performance of key steel companies and indices in December:

• Yellow: Steel Dynamics – A company focused on steel recycling and a fund holding.
• Purple: Commercial Metals – A company focused on steel recycling and a fund holding.
• Green: VanEck Steel ETF – Representing the overall steel market.
• Blue: Cleveland-Cliffs – A large U.S. steel manufacturer.
• Orange: U.S. Steel Corp – A large U.S. steel manufacturer (recently in the news due to the blocked acquisition by the Biden administration).

2024 in review

In addition to the challenges faced in December, two significant factors influenced the fund’s 2024 performance:

• Japanese Recycling Companies: These firms were adversely affected during the unwinding of the JPY carry trade, which brought down the Nikkei (-12% in a single day). Despite this set back, the companies’ fundamentals remain strong, and we maintain confidence in these holdings.
• Battery Recycling Companies: Slower-than-expected growth in electric vehicle (EV) demand affected this sector and the broader battery manufacturing value chain. As a result, the fund has divested from battery related holdings.

Putting Active Recycling’s 2024 performance in perspective

While the fund’s 2024 performance fell short of expectations, it is essential to view the results in context:

• Market indices: The S&P 500 returned 23%; however, 50% of this return came from the "Magnificent 7"— Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — which together account for 35% of the index. In contrast, the Euro Stoxx 50 gained 8%, with France ending the year at -2%.
• Relevant comparisons: Given Active Recycling’s focus on a niche market, direct comparisons with global indices are less relevant. More meaningful comparatives include:

Historical performance also provides perspective. From 2021 to 2023, the cumulative returns of the S&P 500 and Active Recycling deviated by only 2% (+27% vs. +25% respectively). However, the paths to these results differed:

• The S&P 500 experienced larger swings: +27% (2021), -20% (2022), and +25% (2023).
• Active Recycling followed a steadier trajectory: +26% (2021), -5% (2022), and +5% (2023).

(see Graph 2)

This highlights Active Recycling’s consistency during periods of market volatility and its limited exposure to the tech industry.

Graph 2:

• Orange: S&P 500 performance since January 2021 (IVV).
• Green: Active Recycling performance since January 2021.

Outlook for Recycling in 2025 and beyond

The recycling megatrend continues to create opportunities across industries:

• Steel Industry: Companies using recycled steel significantly outperform those relying on traditional inputs (see Graph 1).
• Paper Packaging: Firms like Smurfit Westrock, DS Smith, and International Paper, which utilise recycled materials, saw strong returns in 2024 (+32%, +85%, +50%), compared to timber-focused companies like UPM-Kymmene, Billerud, and SIG Group (-21%, +1%, -6%).

US Political Landscape: A potential Trump presidency introduces uncertainty but also opportunities:

• Market Volatility: Increased volatility often benefits defensive sectors like recycling.
• Import Tariffs: Policies favoring domestic industries could support recycling companies, which are primarily local.

Evolving Market Dynamics: If the dominance of large tech companies eases, investments flows may shift toward other sectors, positioning Active Recycling as an attractive opportunity.