International Alpha: investor letter Q3 2025

Your capital is at risk. 

All setbacks are a test of conviction. Some require action; others compel us to stand our ground. This quarter’s performance, disappointing as it is, falls into the latter camp. Periods of underperformance are part of long-term investing, but they are not necessarily a symptom of a deeper malaise. If poor performance had come alongside slowing sales, reduced investment, or deteriorating profitability for your portfolio, there would be cause for concern. That is not what we have seen. Underperformance has been largely driven by market dynamics, not operational performance. The vast majority of your portfolio holdings are meeting or exceeding our expectations, yet some have derated sharply. As long-term patient investors, we can use this to our advantage.

The dominant force in international markets this quarter was a sharp rotation into value and away from growth and quality, particularly in Europe and Developed Asia. Growth stocks have materially lagged the broader market as capital has continued to be directed to lower-quality cyclical companies. In Japan, corporate reform and monetary tightening led to a value rally, and in Europe, short-duration stocks and banks have benefited from the ECB pausing rate cuts.

While a narrow set of growth names performed well, leadership has been clustered around the AI theme. A swathe of Emerging Markets semiconductor names and Chinese technology platforms rose indiscriminately. Our approach has never been to own broad baskets, which meant we did not capture the full breadth of the recent AI rally. That discipline can feel uncomfortable in momentum driven markets, but it is central to long-term value creation. Your portfolio has exposure to some of the key players in the AI supply chain, from the leading global chip manufacturer TSMC, to memory specialist Samsung, to the world’s largest manufacturer of lithography machines, ASML. Over the long term, it is not simply exposure to a theme that will forge the stock market winners, but it is about competitive advantage and scale, which these companies have in spades.

It is also worth noting that most of the AI enthusiasm has centred on infrastructure – chips, hardware, and platforms – rather than on the applications that sit above them. Companies such as Spotify and Shopify, which should ultimately benefit from more powerful and cheaper compute, did not share in the rally. This is puzzling, but not unheard of. Past technological revolutions, from railways to shipping containers, saw waves of investment in infrastructure before the businesses built on top of it captured more of the long-term value. We believe that your portfolio is well positioned to benefit from both sides of this trend: the infrastructure that enables AI and the applications that will harness it.

As other parts of the market rallied, quality stocks suffered, largely owing to concerns about the impact of US import tariffs. Strong first quarter results seemed to support the view that the effects of trade levies would be limited, but as we highlighted in previous letters, we believed this optimism would prove misplaced. The strain took time to appear – first in softer orders and weaker investment, then in more cautious guidance. This quarter, those pressures became unavoidable, and the market’s reaction was sharp.

This environment hurt many of our core quality holdings. Export oriented companies such as Dutch specialty chemicals distributor IMCD, Danish logistics giant DSV, and Japanese equipment exporters like MonotaRO and Shimano have all felt the impact of tariffs – as have their competitors. Although tariffs will clearly affect profitability in the short term, we have a more optimistic view. These are high quality businesses with the resilience to manage disruption better than peers, and we believe they will emerge stronger through the cycle.

Thematic swings aside, our confidence rests on the sustained operational performance of your portfolio companies. We are trialling more sophisticated tools to track performance against our investment hypotheses and to separate signal from noise in quarterly results. These tools strengthen our discipline: they help us hold steady when the investment case remains intact and redirect attention to where price moves uncover opportunities or expose weaknesses. So far, the vast majority of holdings are performing as well as, or better than, expected.

So, where are we holding steady, and where are we taking action?

MercadoLibre, Monday.com, and Adyen are among the holdings that have suffered recent share price weakness and where our conviction remains strong. MercadoLibre, the Latin American e-commerce and fintech leader, was the largest detractor this quarter, despite revenues rising more than 30 per cent year on year and operating income reaching a record high. Yet the market punished its decision to reinvest in logistics and marketing, as the company has done periodically and successfully. Enterprise software business Monday.com and digital payments processor Adyen told a similar story: strong double digit growth, but weaker sentiment after management struck a cautious tone in the near term.

Other companies that have detracted from performance required a different response. Pharma company Novo Nordisk faced operational setbacks and revised guidance, but we believe the share price reaction was far too severe for a company with its track record in metabolic disease and continued investment in the next generation of GLP-1S. We added to our position, seeing long-term value where the market has overreacted.

By contrast, Japanese automation businesses Fanuc and Nidec underdelivered against our expectations, and we exited both positions. At the same time, the rise of domestic champions in China has created new opportunities, leading us to add to the online community buying platform PDD and to Midea Group, a leading white goods business, for those clients who have exposure to China. Both businesses are benefiting from growing scale and supportive policy trends.

Market volatility has created opportunities beyond the portfolio, too – competition for capital is more dynamic than ever. Recent research has explored ideas spanning different and exciting themes, from electrification and automation to consumption and technology in China, to financial inclusion and digitalisation in emerging markets. One outcome of that work was a new holding in B3, the Brazilian stock exchange, which we see as a clear beneficiary of deepening capital markets in the region.

We have also reassessed sectors where we have historically had less exposure, including banks, staples, energy, materials, and aerospace & defence, in an effort to find quality and growth in areas where we had not previously been looking. Although most of the companies we analysed failed to meet the high bar we have set for your portfolio, this exercise has produced results. We have taken new positions in two banks: SEB in Sweden and UOB in Singapore. SEB is positioned to benefit from a more capital intensive phase of European growth, while UOB is a natural beneficiary of rising intra Asian trade and capital flows. Both are differentiated franchises with distinct growth runways and the potential to compound value over time.

This quarter’s performance may be disappointing, but the direction of travel has been positive. The clearest diagnostic for our process is the shape of your portfolio – explained by its growth, profitability, and resilience characteristics – and it is looking healthier than ever. Over time, your portfolio has delivered consistently faster earnings growth, higher margins, and better capital returns than the index, and the gap has been widening. As your holdings continue to deliver on their earnings growth and we continue to add “overlooked” growth to the portfolio, the valuation premium is narrowing, too.

For long-term investors, the measure of a setback is not the drawdown it produces but the portfolio it leaves behind. By that measure, this quarter has strengthened rather than weakened our conviction.

International Alpha

Annual past performance to 30 September each year (%)

Annualised returns to 30 September 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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