Pear Tree Polaris Small Cap Fund

For the Quarter ended December 31, 2024

The Pear Tree Polaris Small Cap Fund’s Ordinary Shares (the “Fund”) underperformed its benchmark, the Russell 2000 Total Return Index (the “Index”). The Fund had a return of (2.45%) at net asset value compared to 0.33% for the Index.

Market Conditions and Investment Strategies

Outperformance among Financials and Health Care provided ballast in an otherwise underwhelming quarter, where both the Fund and benchmark suffered declines in more than half of sectors. The Fund’s overweight in a lackluster Materials sector detracted most, with Lundin Mining Corp. and Cabot Corp. down more than 15% each. Shares of Lundin Mining fell amidst copper price volatility and global output. Aside from commodity fluctuations, the company’s efforts to improve shareholder capital were notable. Cabot reported impressive quarterly earnings, driven by growth in reinforcement materials and performance chemicals. However, the stock declined in December as there were longer year-end shutdowns at tire customers, as well as the unexpected closure of a tire plant in Buffalo.

Industrials had barbell returns, with strong returns from Allison Transmission Holdings, Barrett Business Services, Curtiss-Wright Corp. and Tecnoglass Inc. offset by t losses from Carlisle Cos., Maximus Inc. and Science Applications International (SAIC). Allison stock surged on strong earnings, while announcing plans to double its manufacturing footprint and expand market share via strategic partnerships. Conversely, Maximus announced shrinking backlog and muted 2025 guidance. Carlisle was in the same situation, pointing to lower topline growth on weaker non-residential weatherproofing.

Many Financials reported strong earnings for the quarter, exemplified by Cullen/Frost’s projections of 2-3% net interest income growth and double-digit average loan growth. Education loan provider SLM Corp. was boosted by the Trump administration possibly limiting various government student lending vehicles, leading to higher loan origination for SLM’s private student loans.

In Health Care, Exelixis Inc., Trubridge Inc. and Supernus Pharmaceuticals posted stellar double-digit gains. Exelixis won a court battle over a patent for cancer drug Cabometyx, ensuring that generic competitors can’t come to market until January 2030 Hospital/health facility computer programming company Trubridge executed its turnaround strategy, offering better products to its burgeoning client base. Injectables/inhalation manufacturer Amphastar Pharmaceuticals was purchased during the quarter, further diversifying anidiosyncratic biopharma portfolio.

Portfolio Changes

During the quarter, Janus International Group, Enghouse Systems and Innovex International were sold on forward fundamental concerns, as each faced challenging operating environments and/or weak demand. The Fund sold FNB Corp. at a profit, redeploying assets to two other Financials: Bermuda-based Bank of N.T. Butterfield and HomeTrust Bancshares. Other new buys included clothing retailer American Eagle, the aforementioned Amphastar Pharmaceuticals, and NETSTREIT Corp., a Texas-based real estate investment trust with an impressive lineup of investment-grade tenants.

Outlook

We remain cautiously optimistic about the prospects for U.S. small caps in 2025, while we expect some near-term volatility as the new administration takes office. The Fed has signaled that interest rate cuts may be few and far between in 2025 as economic policies (promises of higher tariffs, onshoring, tax cuts and immigration policies) may prove to be inflationary. We are carefully assessing our rate-sensitive holdings and repositioning toward some more defensive and underweight sectors like Consumer Staples and Health Care. Overall, we are proponents of a “higher-for-longer” rate strategy; such environment may favor value stocks with strong current earnings and cash flows vs. growth stocks with longer-dated earnings.