Otso Monthly – September 2025
How we performed
September was a strong month for markets and for the Otso US Opportunity fund. In USD terms, we delivered 4.84% (vs benchmark of 3.56%). However, the USD declined during September relative to the AUD. Thus, in AUD terms, we delivered 3.83% (vs benchmark of 2.27%). This was a strong month. Our returns were mostly attributable to our derivative overlays performing best (in relative terms) in a flatish-to-positive market.
The September performance continues a track record of stolid historical performance. However, we note that our strong performance occurred during a period of strong market performance. As you can tell from the below table, there has been volatility. While we outperformed the broad market, past performance is not necessarily an indicator of future performance. Our goal is to reduce the volatility as funds under management increase, enabling us to incorporate more of best ideas into the portfolio.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | - | - | - | - | - | - | - | - | - | - | 4.5% | 2.3% |
| 2025 | 10.4% | -2.6% | -4.0% | -0.8% | 7.4% | 4.0% | 3.6% | 1.0% | 3.8% | - | - | - |
What moved markets
The S&P 500 rose about 3.5% and the Nasdaq Composite gained roughly 5.6%. This was the best September performance since 2010. The key drivers were relatively dovish tones from the federal reserve, consistent macroeconomic data, and continued strength in AI-linked earnings and capex.
Dovish fed: On 17 September, the FOMC delivered a 25 bp cut. This was the first cut since late 2024, potentially signaling a cutting cycle. The cut was relatively dovish, with one dissenting vote favoring a 50bp cut (rather than a 25bp cut). The FOMC’s statement noted that the employment market is moderating. The market interpreted the FOMC’s move as consistent with additional rate cuts.
Solid data: The macroeconomic data mostly supported a dovish fed. However, inflation remains resilient, which could underscore the moderate market pullback in late September. The August CPI report (released 11 September) showed headline CPI up 0.4% m/m and 2.9% y/y, with core up 0.3% m/m and 3.1% y/y. The data was close to expectations. It suggested that inflation is slowly moving towards target. While the market did interpret the data is sufficient for rate cuts, it still remains well above the Federal Reserve’s target level.
Geopolitical considerations: The market largely shook-off tariff related concerns. These included the threat of sectoral tariffs in areas such as furniture, pharmaceuticals and movies. Furthermore, the looming government shutdown did not derail the strong market. This likely reflects historical precedent: government shutdowns have rarely lasted long. Furthermore, from a matter of political strategy, the market might see the Democrats as having an unusually weak hand in the shutdown, with many policy demands being politically unpopular. This includes the Democrats’ push for healthcare for illegal immigrants. This could underscore why the market was relatively unperturbed by the possibility of a shutdown.
Rates-sensitive pockets stabilized. Real estate and longer-duration growth names benefited from the softer yield backdrop. Financials were mixed as net-interest-margin pressure from cuts was offset by improved credit sentiment tied to a softer-landing narrative. Lower long rates and optimism on AI demand supported large-cap tech.
Looking forward
We remain ‘constructive’ on stock markets throughout 2025. However, we will continually adjust our outlook as information arises.
Analyst expectations remain positive. Analysts are not always correct. Indeed, during April 2025, the market deviated significantly from prior analyst expectations (i.e., due to Liberation day). However, analyst expectations can be partly self-fulfilling; and thus, give an idea of potential future movements.
In October the top three factors we are focusing on are:
1. Macro data and the Fed. Markets are pricing additional interest rate cuts. We will watch for inflation data and employment data. Inflation remains above the Fed’s target level, and an upward surprise could reduce rate cut expectations. We do not expect the government shutdown to significantly influence markets. However, it will delay some data releases.
2. Earnings: Some earnings will continue, with guidance on capex and pricing power being especially important. This will be more of a theme throughout Q4.
3. Geopolitical issues: We do not expect the situation in the middle east to dramatically move markets. However, continued stability is a positive. For example, easing in Israel-Gaza tensions incrementally reduces risks in the shipping and oil sectors. However, the market has already adjusted to uncertainty in the region and we do not expect that a Israel-Gaza peace plan will be a dominant market river.
How then are we positioning for this? Well, we are constructive on equities markets. We do not presently anticipate a significant pull back. However, adverse data could trigger one. But, we also do not anticipate an extreme increase. Therefore, we continue to maintain our positive exposure to the market – broadly speaking – primarily benefiting from derivative overlays.