Pear Tree Polaris Small Cap Fund

For the Quarter ended March 31, 2024

The Pear Tree Polaris Small Cap Fund’s Ordinary Shares (the “Fund”) outperformed its benchmark, the Russell 2000 Total Return Index (the “Index”). The Fund had a return of 7.06% at net asset value compared to 5.18% for the Index.

Market Conditions and Investment Strategies

Industrials drove outperformance for the quarter, led by gains at Allison Transmission. Strength in North American on-highway and defense divisions, coupled with price increases, drove Allison’s net sales higher, which more than offset elevated material and manufacturing costs. DNOW Inc. posted record performance in 2023, with its U.S. Process Solutions delivering double-digit revenue growth in each of its four core businesses. Air Lease Corp. cited strong demand for aircraft leases as the shortage of airplanes persists due to Boeing’s manufacturing problems.

Material holdings added to gains, with Eagle Materials reporting record quarterly revenues and net earnings. The company cited positive industry supply-demand imbalances and continued infrastructure and housing development. Graphic Packaging unveiled their growth targets for the coming year, while discussing product innovation and value-add pricing, as opposed to building another greenfield facility. These strategic decisions were lauded by the market. The “electrification of everything”
and a resurgent Chinese economy drove copper demand, but supply side constraints were an equally, if not more important, determinant of pricing. The copper market should remain tight for the next decade benefitting the likes of pure copper player, Lundin Mining.

Footwear manufacturer Crocs, Inc. was up more than 50% on strong earnings and upbeat guidance. The market sees significant upside to Crocs’ story as the Hey Dude acquisition gains traction, international expansion continues, and demand remains strong
for the Crocs brand.

Among the small handful of detractors was Kimball Electronics, which reported a sales decline and walked back guidance for the year. Medical division results were adversely impacted by a major customer who is remediating an FDA recall unrelated to Kimball’s work. Standard Motor Products had flat annual results, reporting lower sales in the aftermarket business offset by solid performance in engineered solutions. In particular, vehicle control sales declined due to customer point-of-sale weakness.  Among small-cap banks, South Plains Financial reported fourth quarter results, with lower net income and EPS; however full year numbers beat 2022 results, while the bank completed an aggressive stock repurchase program. Colony Bancorp reported lackluster earnings, citing softer net interest margins.

Portfolio Changes

During the quarter, Berry Global Group was sold due to a shift in fundamentals. Berry may face future cash flow impingement following its health/hygiene division spin-off and combination with Glatfelter Corp. via a Reverse Morris Trust transaction.  Cambridge Bancorp is being acquired by Eastern Bankshares in an all-stock deal with a 24% premium; we took the opportunity to sell. There were no new buys.

Outlook

The portfolio’s balanced mix of defensive and cyclical holdings helped performance, offering strong downside risk protection during periods of macro-economic volatility, while capitalizing on market upswings. The strategy proved fruitful this quarter, as the Fund outperformed by nearly 200 basis points. Short-term volatility may persist as the Fed navigates elevated inflation metrics with timing of rate cuts. When rates do start to come down, Cyclicals will likely benefit. As such, we are looking for opportunities in stocks that have been hit particularly hard over the past year.