AEC Commentary (Q2 2025)
July 2025
We’re pleased to report that the AEC Fund returned 18.07% in the second quarter and 8% through the first half of the year. Year-to-date, emerging markets have shown notable strength, outperforming the S&P by a wide margin. This outperformance by emerging markets is a significant change – EM Small Cap ETF (EEMS) has underperformed the S&P 18 of the 30 quarters since the inception of our fund. While the split doesn't appear overly dramatic, the impact adds up over time, with the S&P returning 163% vs 47% for EEMS since January 2018. These asymmetrical results have led to a wide valuation gap and a skewed EM underweighting within many institutional portfolios. That backdrop sets the stage for a potentially durable run in our asset class. Combined with a weaker US dollar and accelerating EM fund flows, we believe we are in the early phases of institutional rebalancing toward emerging markets.
The chart below displays our track record over short- and long-term periods:
| Periods ended 6/30/2025 | AEC | MSCI EM Small Cap
ETF (EEMS) |
|---|---|---|
| Quarter | 18.07% | 17.39% | 1 Year | 7.93% | 9.09% | 3 Years Annualized | 11.22% | 13.05% | 5 Years Annualized | 13.27% | 13.38% | ITD Annualized | 9.72% | 5.24% |
Source: Bloomberg
Data shows past, net of fees performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted.
US policy shifts during the first half of the year and the subsequent weakening of the dollar have been supportive triggers to EM performance and diversification outside of the US. With an administration that’s been vocal about their rate cut desire and the potential of a Federal Reserve Chairman transition, we expect the dollar weakness to be enduring. The last period of sustained dollar weakness was between ‘02 and ‘08, and over that period, emerging markets outperformed the US by 124.25% (13% per year). EM flows have also signaled change, with $30B flowing into EM’s since the April lows, versus an $85B outflow over the 12 months prior. While the US markets have also held up, the volatility and unknown impacts of Liberation Day and the Big Beautiful Bill seem to have exposed cracks in the logic of overconcentration in US equities.
Although emerging market equities have rallied broadly this year, we expect that disciplined, fundamentals-driven stock selection will matter more as the cycle matures. In recent years, returns in our asset class have been dictated by bursts of thematic enthusiasm or abrupt geopolitical shifts rather than by bottom-up value creation. We saw this in last year’s IPO frenzy in India, the 2023 AI rerating that propelled Taiwan, in Brazil and Korea’s value bounce year-to-date, and now in investors’ revived confidence in a China rebound. On a recent technology screen, there were nearly 900 Chinese tech companies ($20MM to $3B market cap) that showed an average one-year return of 62%, with nearly half gaining over 50%—regardless of quality. Fewer than 7% posted negative returns. In a market like that, broad exposure, not selectivity, was rewarded; a chimp with a dartboard would have outpaced the S&P. If the EM rotation sustains, themes and macro-rotations will be eclipsed by fundamental investing.
Amid a period where themes have overshadowed fundamentals, Poland has been a clear exception, with quality, value, and fundamentals subtly propelling the market higher and higher. Our longstanding overweight reflects this underappreciation and we have been rewarded for our off-bench exposure. The fund’s outperformance this quarter was led by Poland, where our holdings contributed 4.74 percentage points to performance, compared to just 37 basis points from the benchmark. Last month we traveled to Poland, and the trip reaffirmed why the country remains a core position: Poland shares all of Europe’s institutional strengths—open markets, skilled labor, and policy stability—but combines them with leaner operations, lower labor costs, and a visibly more ambitious business culture. We believe that Polish companies will continue to gain share globally and become more relevant as the country and world evolve.
Two of the companies we visited—Sygnity and Digitanet—captured this dynamic well. Sygnity is a vertical software consolidator that is majority-owned by Constellation Software (CSU CN), arguably the most effective global software consolidator over the past 25 years. The stock was the second-largest contributor to fund performance this quarter, gaining nearly 64%. Their debt free balance sheet, and 60MM PLN in current annual free cash flow, and 150MM PLN cash stockpile lead us to believe that they may double earnings over the coming three years, yet we trimmed the position slightly on valuation following our visit. While their high 38x TTM earnings multiple allows for strong accretion from any acquisition they make, the rerating puts the valuation out of our comfort zone considering the inherent risks of an aggressive M&A strategy. Digitanet, Poland’s leading Digital Out-of-Home advertiser, offered a similarly strong showing, returning 54% through the quarter. We added to the position following our meeting in Warsaw, as we considered the operational visibility stemming from fixed asset utilization, balance sheet flexibility (ability to acquire), and scale advantages that support mid-teens earnings growth. With the stock trading at 12.5x earnings, yielding 9%, and providing non-cash ROA’s north of 35% (and an expectation to increase further as they greater utilize existing assets), we find the setup very attractive.
We also visited Turkey—a market absent from the portfolio in recent quarters. That may begin to shift. Political risks are still present following recent detentions of opposition officials, but investors seem more comfortable accepting an authoritarian regime. While driving between visits, one broker, reacting to a comment about how turbulent the environment seemed, offered a pointed observation: “People here used to say Turkey was a small US, now they say the US is a big Turkey.” The comment, though tongue-in-cheek, reflected a deeper reality: what may appear unstable to outside observers now feels normalized domestically, i.e., Turkey increasingly sees political dysfunction as a shared global feature, not a local anomaly. Beneath that surface though, the more relevant story may be one of policy normalization and economic resilience. Despite political risk dominating headlines, the tone in many meetings was cautiously optimistic, with inflation softening, rates poised to come down, and a newer market-trusted economic team showing signs of monetary discipline. Many of the most compelling businesses—particularly exporters and asset-light platforms—are now more insulated from domestic shocks, with earnings denominated in more stable foreign currencies like the US dollar or euro. Valuations for several of these names remain below historical averages, and a few have quietly started to reappear on our radar. Turkey remains a very compelling market given the proximity to Europe and the much lower cost of labor.
PERFORMANCE
The quarter produced very strong results, returning over 18% in the three-month period. The performance was broad, with 75% of our positions moving higher. Qualitau (QLTU IT) was a standout contributor to quarterly performance, rising over 90%. Israeli listed, but generating >75% of revenues from EM’s, the company designs and manufactures reliability testing systems for semiconductor and EV technology. Nearly every major semiconductor designer and manufacturer uses their machines to ensure long-term performance of their next-generation products. As computing complexity grows—driven by AI, advanced packaging, and high-voltage applications like EVs—demand for their specialized systems will only increase. Despite the company’s small size, it is the global leader in its niche, and is rapidly gaining share from its one true competitor in Japan. We first initiated our position in March 2024 when the stock traded at just 8x trailing earnings. While the multiple has since expanded and we trimmed modestly on the re-rating, the business remains strong, with visibility supported by a record backlog spanning China, Taiwan, and India. Given its leadership position, secular tailwinds, and alignment with critical global supply chains, we believe Qualitau’s long-term runway is significant—even if near-term gains merit a more measured pace.
Another standout this quarter was S&S Tech (101490 KS), which rose over 39% and also represented our largest-weight addition during the period. The company is a global supplier of mask blanks—an essential material in the semiconductor lithography process. Currently 100% of sales come from DUV mask blanks, but the company is on the cusp of entering the EUV market—a higher-margin, higher-ASP segment currently dominated by Hoya of Japan. S&S has spent six years and nearly $100 million developing its EUV capability and is now poised to benefit from customer localization pressures, especially from Samsung Electronics, which owns 8% of the company and is expected to shift volume away from Hoya starting in FY26. In the meantime, growth is being driven by mix improvements and surging Chinese demand, with customers stretching their DUV capabilities to keep pace with high-performance needs. Since March 2022, the company has improved ROA to 12% and ROE to 14%—both more than double their previous levels—while boosting ROIC from 10% to 19%. We believe the EUV opportunity is real and transformative, with the potential to contribute an incremental 20-30% to EBITDA annually starting in FY26. We added meaningfully early in the quarter following a call with management that increased our conviction.
Our two largest positions—3B Black Bio (3BBLACKB IN) and Genomma Lab (LABB MM)—were the fund's top detractors to performance this quarter, declining 10% and 11% respectively. While disappointing in the short term, recent conversations with management renewed our confidence in both companies. At Genomma, softer consumer demand weighed on results, but profitability remains strong, with EBITDA margins holding near target and EPS up nearly 18%. The company continues to generate robust free cash flow, reinvest in high-return projects, and selectively repurchase shares while trading on 9x trailing earnings and paying a 3.8% dividend yield. Although the 2025 revenue cadence may be choppy, we believe margin resilience, asset monetization optionality, and a low valuation offer an attractive setup into easier comps and renewed growth at a double-digit pace through the coming five years. 3B, meanwhile, is executing on a steady growth plan and continues to gain share domestically and abroad. The stock was weak after reporting a subdued Q4, but, after speaking with management, we understand that the shortfall was related to order timing and that expected growth targets remain intact. Additionally, with their cash-heavy balance sheet and M&A a top priority, we expect inorganic growth in the near-term. The company is also working to improve corporate governance and plans to begin hosting public quarterly earnings calls upon their next release – a welcome step toward broader engagement with investors. While both names have come under pressure, we continue to view them as high-conviction holdings with underappreciated earnings power. 3B trades on 27x trailing earnings, yet operates on 50% EBIT margins and generates ROA’s over 50% excluding cash from assets. We also foresee an organic growth rate near 20%, but with M&A this number can leap higher. Since purchasing 3B in August 2021, the stock has returned 220% in USD. Since repurchasing LABB MM in July 2024, it has moved 25% higher. Even with solid returns thus far, we believe there is a lot more firepower in both.
OUTLOOK
Emerging markets remain one of the few areas in global equities where inefficiency is still the norm. Despite early signs of institutional reengagement, capital remains scarce, valuations remain attractive, and company fundamentals are steadily improving. From Poland’s underappreciated tech sector, to Korea’s emerging role in semiconductor materials, we continue to find businesses delivering real progress in markets that many investors overlook.
This quarter’s results reflect that disconnect. Our process hasn’t changed: invest in high-quality growth businesses with aligned management teams and valuations that protect downside and offer room for upside. The opportunity set is still compelling, not because the world is getting easier to understand, but because price continues to diverge from value in ways that reward bottom-up work. We welcome the skepticism that keeps valuations attractive.
Thank you for your continued partnership.
DEFINITIONS
*MSCI EM Small Cap ETF (EEMS): iShares MSCI Emerging Markets Small Cap ETF The fund generally invests at least 80% of its assets in the component securities of the underlying index and in investments that have economic characteristics substantially identical to the component securities of the underlying index. The index is designed to measure the performance of equity securities of small-capitalization companies in emerging market countries.
EBITDA: Earnings before interest, tax, depreciation, and amortization is a measure of a company's operating performance.
ROA: Return on assets is a ratio used in financial analysis that demonstrates how efficiently a company uses its assets to generate profits.
ROE: Return on equity measures performance by dividing net income by shareholders' equity.
ROIC: Return on invested capital is a metric that measures the profitability a company earns from its total capital base, encompassing both debt and equity.
This report was prepared by Seven Canyons Advisors, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio adviser.
The information herein was obtained from various sources. Seven Canyons does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Seven Canyons assumes no obligation to update this information, or to advise on further developments relating to it.
All investing involves risk. Investments in securities of foreign companies involve additional risks, including less liquidity, currency-rate fluctuations, political and economic instability, and differences in financial reporting standards and securities market regulation. Investing in small and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.