CME has demonstrated exceptional performance, with the first half of 2026 being the strongest in its history, driven by record trading volumes. The macroeconomic environment, characterized by uncertainty and changing interest-rate expectations, has led to elevated financial market volatility, which in turn has increased trading activity. This trend is expected to continue, positioning CME favorably to capitalize on the demand for derivatives and hedging products. The strong performance reflects the resilience and counter-cyclical nature of CME's revenue generation during periods of market stress.

We added a small position in CME Group, the monopoly derivatives exchange for interest rate products and equity index derivatives in the U.S., which had sold off on what we believe are misplaced fears of competition from perpetual futures products. While much of the market has been spooked by the threat posed by AI, we take comfort that our portfolio companies, including CME Group, are actively using AI to drive revenue growth via new products and more valuable, higher-priced offerings, while also driving margin expansion by better leveraging their existing headcount.

CME Group Inc is positioned strongly despite recent competitive pressures. The firm has taken proactive legal action against the CFTC regarding new products that threaten its market share, demonstrating its commitment to protecting its business model. The manager believes that CME's established position in the derivatives market provides a significant competitive moat, which will help it navigate these challenges effectively. The ongoing legal proceedings highlight the company's strategic approach to maintaining its market dominance and capital allocation.

CME has shown strong performance, contributing positively to the Fund with a return of +6.6%. This reflects the company's robust position within the financial sector, which has been a key driver of growth. The Fund's decision to increase its position in CME indicates confidence in its continued performance and potential for future gains.

CME was the Fund's weakest performer during the quarter despite reporting strong results in April and solid volume growth in May. We believe the market reaction has been overdone, for three reasons. First, CME is playing ‘offence’ rather than ‘defence’: it had already launched 24/7 crypto futures trading ahead of the Kalshi approval, and volumes there continue to grow strongly. Second, the CEO transition has been well planned and telegraphed in advance. Third, even if the war draws to a close, CME's product breadth still leaves it well placed to capture hedging demand across markets unrelated to the conflict. It also continues to innovate: in May, it partnered with Silicon Data to launch the world's first futures market for computing power.

CME Group's stock price has faced pressure due to fears of competition from new products like perpetual futures. However, the manager argues that these concerns are overstated. The traditional futures market, which CME dominates, is characterized by high liquidity and established standards that are difficult for new entrants to disrupt. The manager notes that 'I do not see a world in which perpetual futures are favored over highly predictable, established, and liquid futures contracts for institutions and commercial users.' Furthermore, historical comparisons show that new competitors have struggled to gain significant market share, reinforcing CME's strong position.

CME Group's stock price has faced pressure due to fears of competition from new products like perpetual futures. However, the manager argues that these concerns are overstated. The traditional futures market, which CME dominates, is characterized by high liquidity and established standards that are difficult for new entrants to disrupt. The manager notes that 85-90% of CME's volumes come from institutional clients, indicating a strong and stable customer base. Historical comparisons show that similar competitive threats have not significantly impacted CME's market position, reinforcing the belief in its enduring moat.

CME Group is currently undervalued, with its share price declines leading to valuations not seen since the Great Financial Crisis. The company boasts superior profit margins and long-term per-share earnings growth compared to the broader stock market, which trades at 26x consensus earnings estimates for 2026. The manager highlights that CME Group is objectively cheaper than its typical valuations, making it an attractive investment opportunity. The ongoing geopolitical disruptions are expected to increase demand for new futures contracts, further enhancing CME's growth prospects.

We remain confident in our thesis given CME’s institutional dominance. CME Group shares came under pressure after U.S. regulators eased restrictions on perpetual futures—derivative contracts that let investors speculate on an asset’s price movements without owning the asset, with no expiration date—which could present competitive challenges to established exchanges. However, we believe that CME's strong position in the market will allow it to navigate these challenges effectively.

We believe CME Group operates futures and options exchanges that enable customers to trade and manage risk across various asset classes. With CME serving as a market leader for futures trading, we saw this as a good opportunity to capitalize on record trading activity and international growth potential. The company's position in the market and its ability to benefit from increased trading activity make it an attractive investment in the current environment.