International Growth: investor letter Q4 2025

As with any investment, your capital is at risk.

 

A brief note at the outset. This letter draws on a wide range of influences – meetings, research, and ideas encountered along the way – and it matters to be clear about what lies behind our thinking. Performance and attribution are discussed in the latter section.

 

A general-purpose technology that will change the world

A quarter-century ago Google proclaimed its ambition “to organise the world’s information”. Generative AI has the potential not merely to organise what is already there, but to use existing information to create new information, and to use that to create still more in a recursive loop. And we will be able to apply this for real practical benefit in both the digital and the physical worlds in ways we cannot dream of today.

That’s a simplistic framing, but I find it useful when trying to imagine what the impact of Generative AI could be, and how large companies that successfully drive its adoption could become. This is a general-purpose technology that will change the world, and which is only just getting started. The investment opportunity is many times larger than that facing Google in 2000.

For a historical perspective, I will borrow an observation from Brian Arthur, the economist and expert on technological change, who we have had the pleasure of meeting many times over the years. In our most recent discussion last month, he suggested that “Generative AI is bringing us the most important set of changes we’ve ever had in our world, and I don’t say that lightly. The biggest revolution previously was printing.”

International equity markets offer a rich source of competitively advantaged companies that will be critical to driving progress in Generative AI. Many of these are in the semiconductor industry, which, for reasons of capital or technology, often sees a single player dominate a particular part of the supply chain: think ASML in lithography or TSMC in advanced chips. Our understanding of this industry has been boosted over the years by our relationship with IMEC, the nanoelectronics research hub based in Belgium, which has been driven by my colleague Julia Angeles.

The portfolio has a large, and highly intentional, position in a series of market-leading semiconductor businesses. We believe these will be the picks and shovels of the AI revolution, building the infrastructure layer on which future applications are founded. These companies can be highly correlated, which is reflected in our position sizing and stock selection, but we expect them to be structural winners over the coming decade, doubtless with some short-cycle volatility along the way.

 

Investing through fundamental uncertainty

Brian Arthur offered another insight – and challenge – when we met, centred around the profound change that Generative AI will create: “One of the opportunities is to figure out how to approach a world of fundamental uncertainty. How do we conduct ourselves in a world that’s completely disruptive and completely uncertain?”  What he describes is Knightian uncertainty, named after Frank Knight, who distinguished between Risk and Uncertainty in his 1921 book. Risk, in a nutshell, is measurable. Uncertainty is not.

As growth investors, we suggest three ways of dealing with a world of profound uncertainty. The first is to identify structural growth companies in good industries. The second is to invest with management teams that we trust to intelligently seek opportunities, who can adapt, and with whom our clients are aligned. The third is to ensure that we construct a portfolio of companies with a diverse range of growth exposures and business models, while also being willing to concentrate in a deliberate manner when we believe the opportunity – as in the semiconductor industry today – is compelling.

I will explore each of these in turn.

 

1. Structural growth in good industries

Growth comes in many forms. At its simplest, it is about identifying businesses that are taking share in a growing industry. This can be Spotify continuing to grow its user base, or Ferrari gradually increasing its production volumes (while also raising prices). Winning new customers, and growing share of wallet with existing customers, is a powerful recipe for success. Beyond that, a handful of our most successful companies develop additional growth avenues that allow them to build large new pools of profit. Amazon Web Services is the paradigmatic example, and in the portfolio today we have seen similar success from Mercado Libre’s move into fintech (and now advertising).

To return to the two companies we mentioned above, while there is zero chance of Ferrari diversifying its product line-up in any material way, Spotify does have adjacent market opportunities. Spotify’s CEO Daniel Ek suggested to us a few months ago that they want to develop the social network aspect of their offering, which could materially boost the company’s long-term growth prospects.

We talked of ‘structural growth in good industries’. By ‘good industries’ we refer to the fact that these growth companies need to earn, today or in the future, attractive returns on capital. We look for barriers to entry, customer loyalty and ultimately pricing power. These are readily apparent in the semiconductor industry today, and are highly likely to develop in the application layer of Generative AI, though it is not yet clear which companies will benefit; they may not even have been founded yet. Growing, profitable companies that are on the right side of technological and societal change are the best long-term defence against an uncertain world – and the best way to invest in the opportunities it offers.

 

2. Management teams we trust

For some companies, this is about assessing the handful of people at the top of the enterprise; for others, it is about trying to understand the culture that runs through the entire organisation. But whether it stems from one individual or is embedded through the whole firm, we’re looking for companies that are aligned around a common aim and where that aim itself is aligned with our clients’ interests. Often not because of a narrow focus on shareholder value, but because the company delivers value to its customers in a sustainable way, which in turn allows it to generate returns for its shareholders.

Our colleague Will Dudley recently spent two days with L’Oréal learning about their US business, which accounts for c30 per cent of group sales. Over the past couple of decades, L’Oréal has greatly outcompeted its peers, both big and small. Its investment in R&D (at €1.5bn more than 4x its nearest competitor), its commitment to science, and its consistent marketing spend have been critical. But these are underpinned by a corporate culture that embodies a mantra espoused by former CEO François Dalle: “saisir ce qui commence”, or seize the thing that is starting. Dalle became CEO in 1957 on the death of L’Oréal’s founder Eugène Schueller. This is how a company that was founded in 1909 retains its sense of youthful ambition and remains relevant many generations later. It is impossible to measure the impact of this ethos, but we would contend that its ability to stay close to emerging trends has been a major factor in L’Oréal’s ability to outgrow and outcompete its peers over many years.  And it is why when the head of their US business says that they intend to grow their market share from c16 per cent to 30 per cent, we are inclined to believe him.

 

3. Building a portfolio of companies

We look for outlier growth companies. Equity markets are asymmetric, and over a long period, the investment returns we have delivered for clients have been dominated by a small number of big winners. Our winners have often clustered around a particular source of structural growth, whether it be China’s industrialisation, or e-commerce, or the ongoing digitisation of the economy.

We have become more deliberate in how we manage overall exposure to companies with a common growth driver, for example, by having no more than a 15 per cent overweight to a particular industry. We have trimmed our semiconductor weighting recently, reflecting this limit, and recycled the proceeds into other holdings.

But we have always had exposure to different sources of growth beyond these big areas of structural excitement – businesses like Atlas Copco and AIA. Over the last two years we have taken new holdings in a variety of businesses with idiosyncratic growth exposures, including DSV, Galderma, Hermès, Keyence, Belimo, and RELX. These businesses are built on a variety of growth drivers that should add to the portfolio’s resilience without compromising its Growth, while also improving its Quality, whether measured by return on capital, cash flow, or longevity of opportunity.

 

Investment returns, context and what we’re focusing on

2025 has been a disappointing year when measured by relative investment returns, which is, over time, the measure that matters both to our clients and us. Some of that reflects sharp rises in the share prices of companies we have not held, particularly in finance and defence: ‘banks and tanks’.

Not holding companies whose stocks rise significantly is a source of frustration – the sins of omission weigh heavily on us – but it is mitigated to some degree in this case by the lack of long-term growth prospects in most of these businesses. These are predominantly Value-type investments. We need to challenge our preconceptions, of course, and have tested whether there are structural growth arguments that we have missed. The closest we have come is the Defence sector, where the medium-term demand in Europe is clear. But on balance, we believe that marginal spending is likely to go on drones and software rather than the shells, missiles and tanks that are a large part of what the incumbent European defence companies provide. As a former US Army general we heard from recently noted, little innovation happens between conflicts, and then when conflict starts, it is rarely the incumbent companies who are at the forefront of innovation. So, we are not inclined to chase these recent winners.

But what we don’t own is less important than what we do. And – vitally – we are pleased by the operational performance of our holdings. Spotify performed strongly, generating over €800m of free cash flow in Q3, a record high, as operating discipline and scale have transformed cash generation over time, which is now being rewarded. Across the semiconductor ecosystem, Advantest, ASML, and TSMC made significant contributions as the year progressed. Advantest shares more than doubled, buoyed by the soaring test intensity of AI chips. Newer positions, including Swiss dermatology business Galderma and the world's leading battery manufacturer CATL, also contributed to returns. Galderma’s rollout of Nemluvio for eczema is gaining strong commercial traction, complemented by steady growth in its injectable-aesthetics franchise. CATL is delivering double-digit revenue growth, margin expansion, and robust energy-storage shipments. It is important to note that in all these, and other cases, we believe that strong share prices reflected excellent underlying operational progress.

In a portfolio of more than 50 investments, there will always be some that are performing less well, but they are mostly small, and in many cases, we believe their difficulties to be temporary. Markets remain uncertain about AI’s ultimate impact on some software companies' business models; as a result, Wix.com and Atlassian have been weak. Both continue to grow revenue at a double-digit pace, and we think will successfully adopt AI in their offerings, ultimately strengthening their positions as a result. WiseTech Global’s shares have been pressured by governance scrutiny regarding founder Richard White’s continuing role in the business. We expect him to phase out of his current responsibilities over the next few years.

More important is that large holdings like Adyen, ASML, Spotify, MercadoLibre, SEA, and TSMC are executing well on the opportunities before them. And in many cases, those opportunities are expanding. We are pleased to see that the gap between the expected growth of our portfolio and the benchmark is wide. Our experience is that over time, this is reflected in superior stock performance as share prices follow fundamentals.

We continue to travel widely to meet existing holdings and potential new ones. Over the last six weeks, members of our team have been in Singapore, Vietnam, Japan, the Netherlands, China, India and the USA. “Getting out more”, as we talked about a few years ago, remains important. As does seeking wisdom from beyond the financial world. We’ve noted above interactions with Brian Arthur, a former US general and IMEC, to which we’d add a fascinating conversation with historian Adam Tooze and discussions with a Dutch psychologist and expert in creative thinking who is visiting us next month.

We are disappointed that the relative performance of the portfolio has not met clients' – or our – expectations this year. And we are acutely aware that our five-year delivered returns are now poor, with the exceptionally strong 2020 rolling off. We take pride in what we do, and we know that future returns need to improve significantly. But we are confident in our team, in our process, and in the ability of the companies we hold to take advantage of the profound changes facing the world and, by doing so, generate strong growth and attractive investment returns. We believe the companies and the portfolio are well placed for the future.

 

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International Growth

Annual past performance to 31 December each year (%)

	2021	2022	2023	2024	2025
International Growth Composite (gross)	-9.6	-35.9	15.7	9.0	16.8
International Growth Composite (net)	-10.1	-36.3	15.0	8.4	16.1
MSCI ACWI ex US Index*	8.3	-15.6	16.2	6.1	33.1

 

Annualised returns to 31 December 2025 (%)

	1 year	5 years	10 years
International Growth Composite (gross)	16.8	-3.1	9.3
International Growth Composite (net)	16.1	-3.7	8.7
MSCI ACWI ex US Index*	33.1	8.5	8.6

*MSCI EAFE Index prior to 30 September 2018

Source: Revolution, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

Legal notice: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

 

Risk factors 

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in January 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss 

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. 

The images used in this communication are for illustrative purposes only.

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