Responsible Global Equity Income: investor letter Q2 2025

As with any investment, your capital is at risk and any income is not guaranteed.

Despite a sharp decline in early April, global equity markets rebounded strongly over the second quarter, driven once again by US technology giants. Investors appear largely unfazed by executive orders from President Trump, behaving as though little can disrupt the real economy or corporate performance. This may prove true, but the dissonance between heightened economic uncertainty and equity markets hovering near record highs is unsettling. It reinforces our conviction in the importance of maintaining a well-diversified portfolio of resilient businesses.

Deal or no deal

Although traces of organic molecules recently detected on distant exoplanet K2-18b hint at alien life, it did not feature on the “Liberation Day” poster early April. What began as isolated tariff announcements has become a more assertive doctrine, and financial markets must now come to terms with a global trading environment that is increasingly shaped by the US President’s political impulse.

For investors, the challenge lies in separating the signal from the noise in the relentless flow of news. This task becomes particularly daunting when the companies themselves don’t seem to have clarity. At quarterly earnings announcements, many firms, when not withdrawing guidance altogether, heavily caveated their outlooks with tariffs.

At the macroeconomic level, it remains too early to measure the full impact of the disruptions triggered by these executive orders. Companies around the world scrambled to ship goods to the US in the weeks leading up to “Liberation Day”, only to halt abruptly on April 2nd, and resume once more after a 90-day postponement of promised tariffs. These erratic developments have made economic data difficult to interpret.

What really matters, however, is how this uncertainty affects corporate decision-making. As ambiguity intensifies, so does the difficulty of planning. This drag on confidence is not always immediately visible, but the corrosive effects on investment and momentum are real.

China, squarely in the Trump administration’s crosshairs, has retaliatory options of its own. This dynamic has driven the two powers to negotiate a truce – not once, but twice in a single month. Yet again, it is not just tariffs but the climate of persistent unpredictability that is hampering business and economic performance. Chinese firms will naturally seek other markets, but replacing a large, affluent customer such as the United States is no simple feat.

European companies, too, are caught in the fray. However, the region’s largest economy, Germany, is at least initiating a new era of investment, with rising expenditure on defence and infrastructure projected over the next decade.

In Dino Buzzati’s novel, The Desert of the Tartars, an officer spends his career waiting for a decisive moment that never materializes. This is the situation many company managements find themselves in: a state of perpetual vigilance which is likely to weigh on business sentiment.

Did somebody say TACO?

In a fast-moving environment, global financial markets tumbled, and volatility spiked in the opening days of the quarter, only to recover quickly over the following weeks as a temporary pause was announced. By quarter’s end, equity markets had rebounded, and volatility returned to average levels. This was not so much the doing of ‘equity vigilantes’ as it was a striking confirmation of the acronym coined by a Financial Times journalist:

TACO – Trump Always Chickens Out – a reference to President Trump’s tendency to reverse course when markets respond too negatively.

Has anything changed over the past three months? We believe that the equity markets’ round trip is misleading and some things have changed. For example, amid all the noise, the ‘universal’ 10 per cent tariff imposed on every country remains in place, together with those on steel, aluminium and the special rate applied to China, the average effective tariffs of around 15 per cent applied by the US is now the highest since 1937.

Another change is the prospect of worse US budget deficits in the future as the “One Big Beautiful Bill Act” is projected to add more than $3trn to the US Government debt over the next decade. The tax cuts may help in the short term, but the bond vigilantes will be back.

How about the US dollar, which has weakened by around 10 per cent so far this year (on a trade-weighted basis) despite rising bond yields, a very unusual combination?

Like Schrödinger’s cat, investors seem to embrace two conflicting ideas at once: companies’ prospects, as reflected in their share price, are unchanged from the start of the year. At the same time, concerns are rising about the future impact of US deficits and tariffs. Optimism is priced in as unease is quietly building.

Portfolio performance

Global equity markets finished the quarter up around 5 per cent in GBP. The portfolio returns were positive but lagged global equity markets, as the DeepSeek moment fades from memory and NVIDIA talks up ever larger datacentres in the desert.

At a high level, the underweight exposure to technology and banks, together with the overweight exposure to staples companies, was a headwind.

Some holdings give our clients’ exposure to AI and are amongst the top contributors to performance this quarter. Taiwanese company TSMC is the primary supplier of NVIDIA chips, a fast-growing part of its business.

First quarter earnings announced in April showed growth of 60 per cent year-on-year, and subsequent monthly sales growth confirmed the strong momentum. TSMC is a longstanding holding that has built a formidable position in advanced chip manufacturing. While benefiting from the AI spending boom, we value its diversification, which will make it more resilient when the cycle slows down.

Another strong performer was UK insurer Admiral Group, whose shares rose around 20 per cent during the quarter. The rally followed improved regulatory clarity in the UK insurance market and the announcement of its exit from the US market. While the inability to establish a foothold in the US is disappointing, investors clearly rewarded the capital discipline shown by management.

Chinese gaming company NetEase also made a meaningful contribution, with its shares gaining around 25 per cent over the quarter. First quarter results released in May showed strong growth, powered by self-developed game titles. Management’s tight cost control transformed a modest 7 per cent revenue growth into a 32 per cent rise in earnings per share year-on-year – a signal of operating leverage that was well received by investors.

On the other side of the ledger, the main headwind to performance was the lack of exposure to NVIDIA. Among stocks held, Watsco, PepsiCo and Procter and Gamble (P&G) were the top detractors.

Air conditioning equipment distributor Watsco published disappointing earnings for Q1 which, together with the tariff noise and a relatively rich valuation, led investors to sell shares that are still up around 80 per cent over the past three years.

As markets bounced back, the less cyclical companies like PepsiCo and P&G were shunned by investors and so, a drag on performance. PepsiCo’s operational performance has been underwhelming for a few months, with a slowing snack business and some market share loss in its beverage business. We are monitoring both and believe that the current valuation discount to market – at a level not seen in 20 years – assumes no improvement in a business with solid fundamentals, and which has weathered many cycles.

P&G’s quarterly results were disappointing, with destocking affecting revenue growth and leading the company to lower its fiscal year earnings guidance. Here again, we are trying to differentiate short-term noise from long-term signal and a report by our investigative researcher (see section below) was very reassuring on the fundamental strengths of the business, so we have maintained our position.

Looking back, the first half of 2025 was, in fact, two halves: strong outperformance in Q1 as the portfolio’s resilience shone in declining markets, followed by a reversal in Q2 as technology and cyclical stocks were back in vogue. Over the six months, both the portfolio and global equity markets delivered broadly flat returns. However, the journey was far smoother for the portfolio, with noticeably lower volatility compared to the more turbulent path taken by global indices.

To echo TS Eliot’s words: “This is the way the first half ends. Not with a bang, but a whimper”.

Transactions

This quarter, we sold out of Taiwanese “nutraceutical” company TCI and bought two new holdings in the US: Accenture and Jack Henry. We see this as an upgrade made possible by market short-termism, which created the opportunity to invest in two high-quality, durable compounders we have long admired at valuations offering a margin of safety.

We first invested in TCI in 2021. Our investment case foresaw a continuation of the company’s impressive growth trajectory over the previous decade: it was a clear leader in the development and manufacturing of 'nutraceuticals', typically organic products with health benefits, such as protein and collagen drinks. Its science-based innovation, in a market full of dubious claims, combined with best-in-class manufacturing quality, and opportunities to expand beyond Asian markets, held the potential for many years of solid earnings and dividend growth.

However, a Chinese government crackdown on the online marketing of these products in 2022 caused a significant shrinkage of the sector, from which TCI was not spared. This headwind proved very difficult for TCI to overcome, and the dividend was cut.

Overseas expansion was successful, however, and we remained invested in the expectation that international growth could overcome the challenges in the Chinese market. Ultimately, new customers in the US and Europe simply did not prove sufficient to overcome continued challenges in China, particularly with consumers tightening their belts.

Our analysis of trade tensions globally also highlighted TCI as particularly vulnerable to a potential escalation. With the growth case impaired and the dividend reduced, the risk-reward no longer looked attractive, and we divested the holding.

We reinvested some of the proceeds in the US consulting and technology outsourcing company Accenture, a firm renowned for helping large, complex organisations improve their operational efficiency through technology. The company has a reputation for excellence and deep industry knowledge, which has led to above-industry EPS growth of around 12 per cent per annum over the past ten years.

We believe it is a long-term winner in the structurally growing IT services industry, with exceptional capabilities and a strong culture. In a world full of consultancy firms, Accenture’s focus on technology change and its expertise in digital transformation means it is particularly well-placed to capitalise on the accelerating demand for AI integration across industries.

Our thesis is that Accenture will continue to deliver double-digit earnings growth for many years to come, while its resilient balance sheet and reliable dividend further underpin its appeal. Accenture’s share price declined sharply in the first half of the year as investors worried about the impact of Elon Musk’s Department of Government Efficiency on consultancy businesses, combined with a potential cyclical downturn in corporate spending. Our belief is that this is more likely to be short-term noise than a structural issue, and we took the opportunity offered by the market to buy into an industry leader at an attractive valuation multiple (Forward P/E ~22x).

US-listed banking software company Jack Henry is another new purchase. Over more than 50 years, it has built a strong reputation for innovation and high-quality customer service. Its position providing core software at the heart of banking infrastructure – serving institutions that are naturally cautious about switching providers – creates significant barriers to entry, leading to an almost 100 per cent retention rate and 90 per cent of revenues being recurring.

Earnings have grown at around 10 per cent per annum over the past 15 years, driven by selling additional functionalities to the core platform and taking market share from larger, but distracted competitors in a large and still fragmented market. The business requires little capital to grow, and the high share of recurring revenue has made its earnings and dividends extremely resilient across cycles: Jack Henry has raised its dividend every year for more than 20 years. We anticipate many years of attractive earnings growth and cash returns to shareholders.

This is a company we have researched and admired for a long time, but whose rich valuation was a hurdle. The most recent quarterly results showed a deceleration in growth, which investors extrapolated for the years ahead, pushing the share price down and with it, the valuation. This was an opportunity for us to refresh our analysis, and as for Accenture, we concluded that the market was offering us a rare opportunity to buy into a great durable compounder at an attractive valuation.

In the period, we also trimmed holdings that had performed strongly, boosting their valuation and position size. They include US distributor Fastenal, Deutsche Boerse, software company SAP and professional services company Wolters Kluwer. We remain confident in their long-term prospects but saw an opportunity to take some profit and rebalance the portfolio.

The proceeds funded additions to holdings whose share prices had declined despite no meaningful change to their long-term prospects: airline software company Amadeus and US payroll software company Paychex.

Making Governance Great Again

The second quarter of each year sees Annual General Meeting (AGM) season spring into life.  This represents a critical period when we exercise our ownership rights, often engaging directly with portfolio companies on matters of strategic importance. During this intensive period, we scrutinise management proposals, executive compensation packages, board compositions, and shareholder resolutions that may materially impact long-term value creation.

This season presents invaluable opportunities to influence corporate governance practices, advocate for sustainable business strategies, and ensure that companies remain aligned with us, and therefore you – our clients.

Our approach is ably supported by Baillie Gifford’s in-house voting team, which provides essential insight for our voting decisions. Unlike typical industry practices, we don’t outsource our voting activities. Each decision is made on a case-by-case basis, leveraging the expertise of our investment team, ESG analysts, and the voting team. This integrated approach ensures that our voting decisions reflect both our deep understanding of individual companies and our broader responsible investment philosophy.

 By maintaining this capability internally, we can respond more nimbly to emerging governance issues, engage in meaningful dialogue with management teams, and ensure that our proxy voting aligns with our ongoing stewardship activities throughout the year.

A notable vote was, for the second year in a row, our choosing to support a shareholder proposal at PepsiCo requesting a biodiversity and nature-loss risk assessment. In our view, comprehensive environmental risk disclosure is important for long-term value preservation, particularly given the company’s extensive agricultural supply chain and potential exposure to ecosystem degradation that could threaten both operational and financial resilience.

Researching intangibles

Our investigative researcher Hatty Oliver has a special role in our team: she researches intangibles. Guided by the managers, she focuses on topics like a company’s culture or the long-term trends in a particular industry. Hatty prefers interviews, trade shows or niche conferences to spreadsheets, broker conferences and annual reports.

This year’s projects have taken her to a payroll congress in Florida, a food safety conference in Manchester and, much more frequently, to Zoom for in-depth interviews. Topics she wrote about range from food safety (Eurofins) to the recipe for success at P&G via the IT services industry (Accenture).

Her report on P&G was illuminating: she found a company with a remarkably strong internal culture – one defined by perfectionism and a ‘healthy paranoia’ that guards against complacency. This mindset fosters agility and inspires confidence in P&G’s ability to evolve. Its reputation for excellence attracts top-tier talent and results in low employee turnover – always a reassuring signal for long-term investors. Hatty also drew compelling parallels with L’Oréal, which shares P&G’s ethos of innovation-led growth and relentless self-improvement.

Hatty’s attendance at trade shows and conferences offers a rare window into the world of end users – actual customers of the products and services our holdings provide. This stands in sharp contrast to the traditional broker-led conferences where managements deliver carefully honed messages with little insight to be gleaned.

At the food safety conference, she spoke directly with Eurofins users and uncovered that speed is a crucial differentiator in the industry. Eurofins' extensive lab network, built up over decades, gives it a real edge. Her cultural assessment found the company to be unusually nimble and customer-focused, managing to marry the scale of a multinational with the responsiveness of a startup – a rare and valuable combination.

In another project, Hatty turned her attention to the IT services sector, supporting a new investment idea being explored by a colleague. Her analysis often complements others’, offering either validation or challenge to an emerging thesis. In this case, she highlighted the rising strategic role of consulting firms as businesses explore AI, contributing meaningfully to the team’s conviction around Accenture, which was subsequently added to the portfolio in June.

Most importantly, Hatty’s research is differentiated, drawing on direct, unfiltered information from employees, customers or distributors about a particular topic. No AI hallucinations nor polished narrative spun by companies’ PR office: this is raw data, and Hatty excels at extracting information from it, transforming the dots she collects into a pointillist painting for a company or theme.

What do these reports tell us about growth or profit margins next year? Not much at all. But they do tell us quite a lot about a company’s potential to keep compounding for the next decade. A change in a company’s culture won’t have much impact in the short-term but may influence durable compounding meaningfully.

This unusual and differentiated research is only worth doing if you invest for the long term, as we do. It is time-consuming and focuses on slow-moving factors like culture, whose impact will be seen over years, not quarters.  We call it Augmented Research.

Conclusion

Equity markets have risen above their pre-Liberation Day levels, offsetting the decline of the first quarter and giving the appearance of renewed calm. This apparent stability is like a thin layer of new ice forming over a river. It may look reassuring, but it’s far less resilient than it appears as underlying pressure on the real economy builds up and valuations in some areas reach high levels again.

Three things are clear in our mind: 1) the US administration’s scattered actions will impact the real world; 2) companies with resilient cash-flows and multi-cycles experience are best placed to cope with that impact and 3) diversification remains essential to blunt some of the sharpest impacts of market turbulence.

The portfolio is a well-diversified collection of resilient, high-quality compounders. As the ripple effects of US executive orders spread through the real economy, we believe those qualities will matter more than ever in the coming months.

Responsible Global Equity Income

Annual past performance to 30 June each year (%)

Annualised returns to 30 June 2025 (%)

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.

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This communication was produced and approved in July 2025 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

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