International Alpha: investor letter Q2 2025

Your capital is at risk.

The wartime British motto, "Keep Calm and Carry On," was a call to remain steady amidst a turbulent world. As we begin the second half of 2025, adhering to this advice feels remarkably straightforward. Despite extreme market uncertainty, we have good reasons to be optimistic. The portfolio’s quality and resilience have translated into strong performance, the enhancements we have made to our investment approach are yielding promising results, and the case for investing in international equities feels stronger than ever. 

Geopolitics and global trade tensions once again drove market volatility this quarter. The narrative around tariffs shifted repeatedly from April onwards, causing confusion and swings in sentiment, which are slowly translating into delayed investment and slower economic activity. Tensions in the Middle East triggered a sharp, temporary spike in oil prices, adding to market jitters. International equities are emerging as early winners in such a challenging environment, supported by a weakening dollar.

Amid both heightened volatility and a rising benchmark, the portfolio delivered a strong return and outperformed over the quarter. More importantly, performance continues to improve over longer, more meaningful time periods. This positive outcome has been justified by continued strong execution from the portfolio holdings across a range of different sectors, countries and growth types. 

Swedish audio streaming business, Spotify, continues to deliver double digit growth in its monthly average users and premium subscribers, at the same time as delivering margin expansion. A recent meeting with the founder in Stockholm provided rational optimism that rising income levels in the Emerging Markets, increased user engagement, and higher advertising spend will drive further topline growth from here. 

Operational momentum also remains strong for Latin American ecommerce platform, MercadoLibre (Meli). During the first quarter of this year unique buyers on its ecommerce platform were 25 per cent higher than the previous year, whilst the number of items sold grew by 28 per cent. The company’s payment app, Mercado Pago, is enjoying similar success. It reached 65 million users recently, a 31 per cent increase from a year earlier. Like Spotify, Meli expects advertising revenues to become an increasingly meaningful growth driver.
 
It is not just rapid growth names that are delivering. Several of the portfolio’s compounders continue to meet or exceed our expectations. It has been pleasing to see how well these holdings have held up during the various bouts of market volatility, providing an important ballast to the portfolio. As we have explained in previous investment letters, we have been adding to this area, with the aim of reducing volatility and delivering more consistent performance outcomes. 

Deutsche Boerse, which has featured among the top performers over the last year, is a case in point. As well as benefiting from capital flowing out of the US dollar into the Euro, it is also a beneficiary of market volatility, increased hedging activity and German fiscal stimulus. Deutsche Boerse has featured in the portfolio for a long time and delivered consistent returns for our clients, but it is times like these that its uncorrelated performance drivers contribute most meaningfully to performance. 

We are pleased with the current shape of the portfolio, having made considerable progress broadening the range of growth companies we look at, more carefully considering the portfolio context before taking a new holding, and being more disciplined around valuation. These improvements feel solidly embedded within our everyday thinking and have underpinned much of the trading activity this quarter. 

We have taken two new holdings during the quarter for most of our clients: a Swiss leader in biogenerics and a Japanese specialist in personal care products. For our clients that are eligible, we have also purchased a Chinese ecommerce platform pioneering group-buying and online retail gamification.

Sandoz, the Swiss biogenerics business, is positioned to grow strongly as a wave of biologic drugs lose exclusivity. We expect the company’s robust generics portfolio to act as a steady source of stable revenue, while potential upside comes from the opportunity to capture the fast-growing GLP-1s weight-loss generics market. We have funded this new holding by selling other health care-related names which have seen their profitability come under pressure and suffer from a weaker balance sheet. 

We also purchased Unicharm, the Japanese manufacturer of feminine and elderly care products and nappies, deploying funds from the sale of longstanding holding Nestle, the Swiss consumer goods business. Unicharm’s more attractive growth opportunity and valuation motivated the switch. A quality compounder exposed to structural growth in developing ASEAN markets, Unicharm is positioned well for improved profitability through premiumisation and the emphasis on higher-margin feminine care and adult incontinence products.  

We have also made some reductions to existing holdings during the quarter on valuation grounds. In each case we retain our enthusiasm for the stocks’ long-term growth prospects, but our view has become less differentiated from the market – where sentiment has turned perhaps excessively optimistic. Being too slow to acknowledge this in past periods has been an important learning for us. Aided by newly bolstered capabilities, such as deeper and broader valuation analyses provided by our independent risk team, we are aiming to be more proactive in our decision-making. For example, we have taken money off the table from Canadian serial acquirer, Constellation Software, which has delivered roughly tenfold returns for our clients since its initial purchase in 2015. Although growth has slowed, it remains in the top market quintile for valuation.
 
We continue to leverage our firmwide network of growth investors to identify the most attractive companies in our universe. Alongside this, we carried out targeted sector and industry reviews during the quarter to reduce any potential blind spots. One area where we have been most keenly challenging ourselves is Banks – an industry where our notable underexposure has weighed on performance in recent years. Following a top-down review of the banking industry, we have carried out thorough bottom-up research on the most promising candidates for consideration. There is further work to do before taking action, but a couple of names have piqued our interest. 

Throughout the quarter, our research effort and investment process has been increasingly enhanced by the application of artificial intelligence (AI). In June, we conducted a half-day workshop to explore use cases across the investment floor that can measurably add value for our clients. It was a highly productive session, and we agreed on a few tangible actions.
 
We plan to use AI tools to track progress of the holdings against our investment hypotheses on a quarterly basis.  We will experiment with segmenting all the stocks in our available universe into quintiles of growth and valuation, to help reduce the risk of missing opportunities. Leveraging our in-house technical expertise and repository of investment knowledge, we have developed a tool that can highlight persistently unanswered questions in proprietary investment reports and company meetings, allowing us to hone our research focus to key insights. We will of course retain our qualitative and bottom-up approach to investing, deploying innovative tools to make us ever more effective and differentiated in our thinking.
 
Looking ahead, we are mindful that some of the holdings are likely to report a slowdown in earnings growth when announcing their second quarter results, as the impact of tariff-related uncertainty materialises. We must also prepare for the possibility of further policy headwinds. Nonetheless, we are optimistic about the portfolio and the asset class. The portfolio has fared well through the volatility of the last six months and is well positioned to navigate choppier water. On top of that, the case for investing in international equities is as compelling as ever. Across our investment universe, exceptional companies are quietly shaping tomorrow — whether by digitising the developed world, manufacturing the building blocks of AI, or finding cures for unmet medical needs. By keeping a long-term perspective and looking beyond the index, we aim to identify and own these opportunities.

International Alpha

Annual past performance to 30 June each year (%)

Annualised returns to 30 June 2025 (%)

Source: Revolution, MSCI. US dollars. Net 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.

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