It is impossible to ignore the seismic events that rattled global markets just after the end of the quarter as President Trump hiked up the average effective tariff rate imposed by the US on its trading partners to the highest level in a hundred years.

According to the Yale Budget Lab, consumers in the US face an overall average effective tariff rate of 28%, the highest since 1901. While there is a lot to unpack in terms of possible implications including second-order effects that will ripple across businesses, economies and societies, as impact investors one overarching concern is that the move will almost certainly exacerbate inequality in the US as tariffs are a regressive tax, at least in the short-term, with low-income households and small businesses being hit the hardest.

Given risks around trade policy are likely to remain high for the remainder of this Trump administration, we thought it would be helpful to share a summary of a portfolio review exercise we undertook to identify where the biggest sensitivities in the portfolio are likely to be. Although there are potential indirect benefits and opportunities for some of our investments (for example higher input costs due to tariffs may increase the value of circular economy and resource efficiency solutions), for the purpose of this exercise we have focused primarily on downside risks.

Because of the portfolio's diversification across asset classes, geographies and impact investment strategies, we anticipate that the direct exposure to damage from tariffs and a trade war is less than many "traditional" non-impact portfolios with large weightings to US stock markets and large global exporting businesses. However, the largest risk for the Snowball Fund portfolio is perhaps the effects of macro uncertainty on fund-raising, exits and valuations for private equity-backed companies and Small and Mid-cap public companies. Currency movements could also cause quarter-to-quarter volatility in Snowball Fund returns.

Fixed income, credit and diversifiers (26% of portfolio): expected impact Low

• We have increased exposure from 22% to 26% over the last two years as higher yields have offered attractive returns with low volatility and the opportunity set in impact private credit has deepened.

• The majority of our underlying exposures are either (a) UK and Europe focused (e.g., bonds issued by UK housing associations and utilities or social outcomes contracts where revenue streams flow from local government) or (b) financing to financial institutions and fintechs in Emerging Markets who are in turn lending to domestic micro, small and medium enterprises.

• In the case of emerging markets funds, hard currency loans made in USD could become harder to service in cases of severe currency volatility or where there is large exposure to exporters; however, where the borrowers are higher risk, we are protected to a significant extent by “first-loss layers” of capital that are subordinated to us.

• Our largest US exposure in this asset class is an open-ended credit fund lending to fintechs targeting financial inclusion (c.6% of Snowball Fund), which should not be directly impacted by tariffs (indeed it may see greater demand for its capital) but which could see negative second-order effects in a US recession. We will be monitoring this closely in the coming months.

• We have limited duration exposure within the fixed income asset class and none directly in US bond markets.

Private equity (27% of portfolio): expected impact Low-Medium

• Many of the underlying companies in which we are invested sell software and services (which are exempt from tariffs) and/or sell largely within Europe & the UK. There are a couple of examples of European growth businesses with hardware solutions under the “resource efficiency” theme that previously appeared to have strong US growth prospects but where the outlook is now more uncertain.

• Two US focused private equity funds make up 8% of the Snowball Fund. One is an EdTech-focused fund (not directly impacted by tariffs); and the other is a Secondaries fund investing mainly in climate tech/clean tech, sectors which are in Trump’s crosshairs, but as the manager points out, its investments tend to be in more mature companies whose solutions are generally cost-competitive and not particularly reliant on government support or intervention. However, both these funds could be impacted by second-order effects in the case of a US recession.

• The overarching risk to the Snowball private equity portfolio is that macro uncertainty is likely to lead to a further slowdown in private markets activity and mergers and acquisitions, making it more difficult for early-stage ventures and capital-intensive businesses to fundraise for their next phase of growth and potentially pushing out the timing of exits – all of which could have a negative impact on returns. We will be engaging further with our managers to get a clearer picture of this risk in the coming months.
  

Public equities (22% of portfolio): expected impact Medium

• Our current exposure is predominantly to Small and Mid-cap growth companies which tend to underperform their Larger-cap peers in periods of macroeconomic uncertainty and restrictive monetary conditions. In terms of the outlook for monetary policy, if tariffs are not negotiated down, a stagflationary scenario in the US is likely, which will put the Fed in a difficult position, and it is unclear whether it would loosen policy to try to offset the economic impact of a US recession or tighten in order to try to prevent inflation from becoming embedded.

• Global Small-cap stocks are already trading at their largest price to earnings ratio discount vs Large-cap stocks in 20+ years, so companies that can deliver strong growth in this environment could turn out to have been real bargains.

• Four out of our five funds are underweight the US when compared to the MSCI All Country World Index, which could mitigate downside somewhat (although it also reduces the potential for a bounceback if Trump softens on tariffs). However, non-US companies with a significant share of revenues in the US are at risk of direct effects from tariffs.
  Volatility in stock markets may create opportunities for active managers to add to positions in high quality companies at attractive valuations if "babies are thrown out with bathwater".

• Most of our underlying public companies tend to have highly differentiated product/service offerings which is likely to give them some pricing power to pass the cost of tariffs on to customers. Having learnt some hard lessons through the Covid-19 pandemic and Trump 1.0, companies are also more aware of supply chain disruption risk, and many had taken some action to have local manufacturing capabilities and diversified and flexible supply chains.

• Education, cybersecurity, water treatment, waste management, energy management and resource efficiency are some of the impact themes within our funds which address critical global needs and should see resilient demand. Xylem, a leader in water tech, offers filtration systems capable of removing Perfluoroalkyl and Polyfluoroalkyl Substances from drinking water. Its technology is being implemented in municipal water systems around the world to meet stricter quality standards and protect public health. Schneider Electric (which was highlighted in this recent study looking at impact materiality as a source of alpha in public equities) is a leader in digital solutions enabling businesses to optimise energy efficiency and reduce emissions.

Real assets (24% of portfolio): expected impact Low

• Within “renewable energy infrastructure”, about half our exposure is in fully built and operational assets in UK and Europe selling electricity into domestic markets – we anticipate little direct effect here. However, with the potential for macro uncertainty to slow down transactions and new investor allocations to infrastructure investments, the listed UK investment trusts which have been trying to mitigate share price discounts by selling some assets and returning cash to shareholders may face delays in negotiating and completing asset sales. However, we believe discounts already in the range of 25-30% limit the scope for further downside from here.

• We have no exposure to US renewable energy infrastructure projects within our real assets portfolio, which are likely to be severely impacted with disruptions to supply chains in China along with other policy headwinds like this shock cancellation of a fully permitted offshore wind project in New York.

• Within “Social/supported housing and green buildings” all our exposure is in the UK. Approximately half of our exposure is in UK social and supported housing which should be less sensitive to economic downturns as revenue is largely linked to Local Housing Allowances.

Currency risk: expected impact Medium in short-term

• The Fund’s exposure to USD-denominated funds is 27% across all asset classes. This could cause some short-term volatility in Snowball returns if, for example, the USD depreciates vs GBP (as it did in Q1). But as a long-term investor we are comfortable maintaining a degree of USD exposure in the fund and would expect such effects from currency volatility to smoothen out over time. Based on current priorities, we are not expecting to make any additional USD denominated investments over the next 12 months.