CME Group Inc - Class A

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.

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 increased trading activity, particularly in derivatives. This trend is expected to continue, providing CME with resilient and counter-cyclical revenue streams. The company's ability to capitalize on market volatility positions it favorably for sustained growth.

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, as CME's established futures contracts remain highly predictable and liquid, making them preferable for institutional clients. With 85-90% of CME's volumes coming from these clients, the underlying business is not overly threatened. The manager draws parallels to past competition, noting that similar fears did not materialize when BGC Group launched its FMX Futures Exchange, which now handles less than 1% of CME's total volume. This illustrates the strong barriers to entry and the ingrained market standards that protect CME's 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 '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.

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.

CME Group was a notable detractor as investors questioned the sustainability of elevated trading volumes following an unusually volatile start to the year. We believe the market reaction was more reflective of near-term earnings expectations than a deterioration in the company’s long-term competitive position.

CME Group Inc. is the world’s leading and most diverse derivatives marketplace, providing a platform for market participants to manage risk and capture opportunities across virtually every major asset class. This is a near monopoly and one of the few ways to play hedging volatility in an uncertain world. We’ve owned it off and on for years. It has a place in our long term portfolio as well as our trading account. Continued tensions and a specific 'Iran-Strait of Hormuz deadline' have kept energy and metals markets in a state of high activity, suggesting a significant revenue beat is possible.

CME Group operates exchanges that trade futures contracts and options on rates, foreign exchange, equities, and commodities. The firm has shown a solid performance with an 8.2% increase in Q1 2026 and a 17.6% increase over the past year, alongside a dividend yield of 3.75% and a growth rate of 13.5% per year. The manager believes that CME Group occupies an important position in its market and has a resilient business model supported by strong capital structures, indicating good value for investors.