Global Income Growth: investor letter Q4 2025

As with any investment, your or your clients’ capital is at risk. Any income is not guaranteed and can fall as well as rise.

 

It was Jean-Jaques Rousseau, the Enlightenment philosopher, who penned the famous maxim: “La patience est amère, mais son fruit est doux”. The English translation is not quite as lyrical, but it captures the meaning just as well: “Patience is bitter, but its fruit is sweet”. 

We have been ruminating on this expression while reviewing the performance of the portfolio over the course of 2025. It has, frankly, been a disappointing year. The companies you own delivered good growth in earnings: about 10 per cent over the year. This, in turn, drove good growth in dividends and shareholder income. Regular readers will recall this level of growth is squarely in line with our philosophical north star, which is to invest in companies we believe will deliver 10 per cent compound growth for long periods of time, with resilient dividends along the way. 

However, this growth was simply not rewarded by share price growth in the stock market. Pulling apart the numbers, we find that as the earnings of the portfolio’s companies went up, but their Price/Earnings multiples came down by roughly an equal amount. The net result was the capital value of the portfolio was essentially flat over the course of the year, with the total return being only +2 per cent in sterling terms.

 This left rather a bitter taste. Particularly when compared with global equities which, as measured by the MSCI ACWI index, delivered a much stronger total return during the same period of +14 per cent. While we do not expect to keep pace with the market during periods of exuberance, we had hoped to deliver a stronger absolute return for our clients.

In this letter we will shed light on why the share prices of the companies in the portfolio did not follow their earnings upwards, or keep pace with the wider stock market. We’ll explain how we have re-visited all of the holdings to investigate if we are missing something. We’ll then detail some new investments we made to ensure the portfolio is positioned for continued growth in the years ahead. 

Alas, we cannot hope to write as eloquently as M. Rousseau, but after a frustrating year we can at least try to deliver some measure of enlightenment as to why the portfolio’s return last year was so lacklustre. We are convinced that the companies remain on track to continue delivering solid growth in the years ahead, and we remain optimistic that the bitter taste of patience will ultimately bear fruit in terms of stronger absolute and relative returns.

 

Quality’s loss of momentum

One of the distinguishing features of the portfolio is its emphasis on “Quality”. This term is often bandied about with little explanation, but it denotes something important. Essentially, it refers to companies which make attractive profits as a ratio of their invested capital. Many companies do not achieve this: as examples, most carmakers and airlines earn profits little better than 5 per cent annually on the billions of capital they have invested in factories and aircraft. This is similar to the return that investors can earn risk-free on cash in a bank account. Not an attractive equation in terms of risk and reward! 

Conversely, companies which earn above-average returns, let’s say 10 or 15 per cent a year, are called “high-quality”. Such returns indicate these companies must be doing something which their customers value deeply and which competitors find difficult to replicate. If these companies can re-invest earnings at these high returns, they should grow faster than low quality companies, in turn delivering superior returns to shareholders over the long-term.

Evidence is in favour of high-quality companies being the best investments to own in the long-run. For example in the quarter-century to 2025, the MSCI World Quality Index produced a total return of close to 3,000 per cent, compared to a return of just over 600 per cent for the broader MSCI World Index. 

The portfolio’s companies earn an average return on invested capital of around 15 per cent, almost two thirds higher than the stock market average. It is clearly a high quality portfolio. But in 2025, these types of companies saw limited share price appreciation. 

A typical example is the portfolio’s holding in Schneider Electric. The company is a dominant provider of power boards and other electrical equipment, fundamental to operating buildings. As the world generates and consumes ever more electricity, from solar panels to datacentres, Schneider’s sales and profits are growing. In 2025, it earned profits of about 4.5 billion euros, a high quality 15 per cent return on shareholders’ equity. Its earnings grew by 10 per cent over the prior year, and the dividend was raised by 10 per cent. But the share price? Flat during the year. 

With Schneider’s earnings up 10 per cent and share price flat, its Price/Earnings (P/E) multiple fell by 10 per cent. This picture of rising earnings offset by falling P/E multiples was repeated across the portfolio. At the start of the year the portfolio traded on a slight premium to the broader market, but by the end of the year it de-rated to a multiple in-line with the index. 

Quality compounders typically trade at a premium valuation to the market. The reason for this is that these companies typically generate strong, sustainable profit growth, which is often the product of well-established competitive advantages and proven capital allocation track records. This resilience and reliability produce an asymmetric risk profile. During periods of exuberance, quality compounders often do well during periods of exuberance but might lag a strongly rising market. However, in periods of weakness or pessimism, quality pays off, typically outperforming as investors place a greater value on established resilience and reliability. Right now, it looks like investors aren’t placing much value on those traits. During 2025 the portfolio de-rated, ending at about 22 times trailing, or 19 times forward earnings. This is well below the portfolio’s historic premium of 3 to 4 points above the index. Indeed, it has never been so “cheap”, relative to the broader stock market.

Drilling down into the data from last year, what we see is that two stories really drove all of the stock market’s returns in 2025. One was AI, where some investors are betting that numerous companies will see a boom in profits, across industries as diverse as semiconductors and utilities. Many of these companies saw their PE multiples go up last year. The portfolio has several AI-related investments, the likes of Microsoft and TSMC, but it is not as concentrated an exposure as the benchmark, which we view as rather risky. It is difficult to forecast where the long-term AI winners will emerge, and we don’t intend to gamble clients’ money unless we have high conviction in long-term success. 

The second big story of last year was the ‘value’ style’s significant outperformance outside of the US. Defence companies and those in infrastructure related areas, like telecoms, benefited from fiscal expansion’s return to the policy conversation in Europe and elsewhere, while bank shares continued to perform well as interest rate expectations steepened in some markets.

Momentum in these two parts of the market was very strong. Money flowed hot and fast into names linked to these themes, and their valuations rose. 

Meanwhile, more traditional industries, such as consumer goods, healthcare and professional services, which tend to be higher quality, more resilient, and in the long-term, stronger growing parts of the stock market, suffered from declining valuations as investors shifted money away from them.

In the long term, this is unlikely to continue. Ultimately, share prices follow earnings growth. The continued growth in the earnings of the portfolio companies should, with patience, be rewarded in capital growth. But there are periods where the two become disconnected, and 2025 has frustratingly been one of them. As managers, we invest our own savings alongside clients’, and patience has a bitter taste to it: we are disappointed by the sluggish performance of the portfolio last year.

 

What have we been doing in response?

First, we’ve reviewed every investment case in the portfolio to ensure they remain on track. Where we believe the competitive advantage and long-term growth runway remain intact, we’re swallowing the bitter taste and staying patient. This even applies to the portfolio’s two weakest performers last year, Novo Nordisk and Edenred, which faced real, well-publicised headwinds. After in-depth review and engagement, we maintained or even increased these positions, because of the strength of the underlying growth opportunity, combined with even more attractive valuations.

Second, we weeded out any names where our analysis showed the investment case had fundamentally weakened. Over the year we divested from a holding in UPS, the delivery company, where new competition has raised serious challenges to future growth. Likewise TCI and Man Wah, two manufacturers where, despite real strengths, we have seen brutal competition in China, diminishing our confidence in future growth. And in the final quarter of the year we divested from Cognex, where we have observed signs of share loss in some key markets, and our ongoing research has raised questions about the company’s growth strategy.

Third, these holdings have been replaced by new investments. These are names that, over the past couple of years, have fallen out of favour in the stock market, but we see delivering strong long-term growth. Accenture and Jack Henry are names we talked about earlier in the year, and likewise MSCI. In the fourth quarter, following the sale of Cognex, we made new investments in Alphabet, MediaTek and Zoetis.

 

Strengthening the portfolio

Alphabet is a company which, until recently, was a poor fit for our strategy and we judged too risky to invest in. The company refused to pay dividends, and until only a few months ago it faced a case from the US Department of Justice calling for it to be broken up. However, the company has at last initiated a dividend, and in September the judge ruling on the legal case ruled that a break-up was unnecessary. This will transform the company's future. What we foresee happening from here is years of strong growth ahead. We believe AI is likely to be a significant growth driver for the company in its core search business. It is unique in owning leading AI technology developed in-house; an advertising business which allows it to monetise this profitably; prodigious cash-flow to invest in this area; and numerous re-enforcing advantages such as its Cloud business, YouTube platform, and more besides. The shares have bounced from their trough, but we believe the company is still significantly undervalued.

MediaTek is a Taiwan-based digital chip designer with excellent engineering capabilities. We are particularly excited by the potential of its ‘ASIC’ chips as AI continues to evolve. Our view, based on experience of technology developments historically, is that in the next few years we will see AI move from an “investment at all costs” mentality, to a more cost-aware approach. We also expect to see dual sourcing away from Nvidia, which currently dominates the market. When this happens, we expect to see strong growth at Mediatek, whose cost-efficient chips are an excellent alternative. Picking AI winners is not easy, but in this case we have high conviction that growth will follow.

Finally, we invested in Zoetis, the leading provider of pharmaceuticals for pets. The company has impressive R&D capabilities, a capable management team, and an exciting pipeline full of future launches of new products. Following the exuberance of the Covid period, when its shares became very expensive, Zoetis has suffered a big de-rating in the past couple of years. Investors have switched their prior euphoria for anything pet-related, for fear that weakening consumer affordability will reduce spending on their pets. We are looking through this short-term fear and taking it as an opportunity to invest in a good long-term compounder, at a reasonable valuation.

 

Context 

Stepping back, the common thread in our holdings is the ability we see for companies to reinvest at attractive returns for a long time. That is what ultimately drives durable earnings and dividend growth. The companies you own in this portfolio are consistently reinvesting to strengthen their competitive advantages — whether that’s L’Oréal pushing innovation in beauty, or Atlas Copco advancing critical technologies in industrial applications.

Looking ahead, 2026 may yet prove a choppy environment for markets, which are pricing in continued good growth. If that’s the case, we expect the portfolio to demonstrate much greater resilience than the broader market, given the high quality of the businesses you own. Quality compounders can lag during periods of exuberance — but they tend to prove their worth when conditions get tougher.

After the de-rating we’ve seen in the past year, valuations across the portfolio are even more compelling. And the underlying fundamentals remain strong. Our focus is consistent: owning good businesses, with high potential for 10 per cent compound earnings growth for years to come, while paying resilient dividends along the way. We hope you agree that’s a compelling formula for long-term investment success. 

We remain optimistic that we’ll see improved fortunes for the portfolio in the months and years ahead.

 

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Annual past performance to 31 December each year (%)

	2021	2022	2023	2024	2025
Global Income Growth Composite (gross)	19.9	-16.7	20.6	3.8	9.5
Global Income Growth Composite (net)	19.2	-17.1	20.0	3.3	8.9
Responsible Global Equity Income Composite (gross)	21.4	-16.9	23.2	4.5	9.5
Responsible Global Equity Income Composite (net)	20.7	-17.4	22.5	3.9	8.9
MSCI ACWI Index	19.0	-18.0	22.8	18.0	22.9

 

Annualised returns to 31 December 2025 (%)

	1 year	5 years	10 years	Since inception*
Global Income Growth Composite (gross)	9.5	6.5	9.9	-
Global Income Growth Composite (net)	8.9	5.9	9.3	-
Responsible Global Equity Income Composite (gross)	9.5	7.3	-	11.8
Responsible Global Equity Income Composite (net)	8.9	6.7	-	11.2
MSCI ACWI Index	22.9	11.7	-	14.5

*Inception date for Responsible Global Equity Income: 31 December 2018.
Source: Revolution, MSCI. US Dollar. 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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