Sustainable Growth: investor letter Q3 2025

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For much of history, surgery was a last resort. Operations were brutal, risky affairs, often carried out in crowded theatres with little chance of survival. Patients submitted only when there was no alternative, and even then, the knife rarely offered more than a temporary reprieve.

That began to change in the 1840s, when pioneers such as Robert Liston were willing to do things differently. Liston brought greater order to the operating theatre, revolutionised surgical techniques, and was among the first to adopt anaesthesia. For the first time, surgery became a genuine alternative: patients could survive complex procedures that had previously been unthinkable. These advances saved lives and, more importantly, revealed the potential of surgery as a discipline that could continue to advance.

However, it was two decades later that a discovery made these advances truly lasting. Building on the progress of pioneers like Liston, Joseph Lister introduced antiseptic practices such as sterilised instruments and carbolic acid. Infection and mortality rates fell dramatically. Where Liston had revealed what surgery could accomplish, Lister ensured those gains could endure. His contribution was less celebrated at first but ultimately saved more lives and embedded the principles of modern surgical practice.

This is not an isolated story. Early breakthroughs tend to capture most of the headlines, and rightly so, because they prove what is possible. But some of the more enduring progress, and we believe durable returns in markets, often emerge in the second stage, from the less-celebrated players who make advances scalable, reliable and widely applied. These are what we call the ‘unexpected engines of progress’.

Artificial intelligence (AI) is in that first stage today. Breakthroughs in large language models and the infrastructure that supports them have demonstrated extraordinary possibilities, reshaping how we think about work, creativity and even science. It is no surprise that the companies at the forefront have captured most of the headlines and market returns, and some of these pioneers, like the early surgical innovators, will remain important for decades to come. Yet history reminds us to look further. Just as Lister’s overlooked antiseptics turned possibility into permanence, we think the next phase of AI will rest with some of the currently less-celebrated players, those quietly capitalising on its foundations and allowing its adoption to spread. These companies may not dominate the headlines today, but we believe they are where the more durable growth will emerge. 

Performance and positioning

This quarter, the Sustainable Growth strategy delivered positive returns; however, despite robust operational progress across the majority of the portfolio, it underperformed relative to the index. Performance was weighed down by two main factors: our deliberate portfolio positioning — maintaining a reduced exposure to some of the most prominent AI players — and a handful of temporary stock-specific setbacks.

We believe AI will prove enormously powerful for businesses and individuals, with the benefits becoming clearer as companies find ways to make computing power go much further when the focus shifts from training to inference. Yet so far, only a handful of companies have attracted the bulk of investor enthusiasm and capital inflows, driving unusually concentrated market gains. Valuations for some of these businesses have risen to levels rarely seen in decades. Forward estimates now imply growth that, in many cases, goes beyond what we see as realistic. By some measures, today’s AI rally is already larger than the late-1990s dot-com boom, with the 12-month forward P/E for equities above the levels reached at that time and technology stocks especially stretched. In this environment, even modest disappointments in guidance have been enough to trigger sharp share-price corrections.

However, in some cases, it has also created opportunities. We took advantage of recent share price weakness to initiate positions in two companies we have monitored closely: Novo Nordisk and Snibe (Shenzhen New Industries Bioengineering). Despite its remarkable success in weight-loss therapies, Novo Nordisk saw its valuation reset significantly following competitive pressures and some self-inflicted commercial missteps. A comparable set of challenges in 2017 ultimately proved a compelling buying opportunity. We believe the company's leadership position and promising pipeline of next-generation treatments position it well in this rapidly expanding market. Snibe is a founder-run Chinese business that we believe will build a leading position in the global market for diagnostic equipment and reagents, initially focusing on immunoassay products. We have followed the company for some time. Recent challenges in the domestic Chinese market pressured its valuation, giving us an opportunity to invest in what we view as a long-term winner in the global diagnostics business. 

The intensity of capital spending is another area where we remain diligent. While the headlines are dominated by companies making ever more grandiose claims about data centres and GPU requirements, the risk of an overbuild is growing. AI firms are committing record sums to data centres, compute capacity and energy infrastructure, yet the long-term path of demand remains unclear as new models may improve efficiency and reduce the compute required per task. Adding to these concerns is the accelerated depreciation cycle of AI infrastructure: today's state-of-the-art chips and purpose-built systems may require replacement within a few years as technology advances. This combination of uncertain demand and fast-depreciating assets raises the risk that today’s investment boom does not translate into the durable returns the market is currently pricing.

This does not mean we believe the investment case for all of today’s AI leaders is unsustainable. Where we are invested, we favour those with very flexible infrastructure that can adapt to different environments, rather than those building capacity speculatively or semiconductor firms where demand expectations could shift abruptly. Alphabet, our top contributor this quarter, demonstrated in its latest results that its search and advertising business continues to perform strongly, while AI features are actually expanding query volumes rather than displacing them. This generates substantial cash flows that fund expansion into other areas like cloud infrastructure. Similarly, Microsoft's role as the backbone of enterprise IT creates natural advantages as AI becomes embedded in business workflows. We added to our position this quarter following strong results.

Just as surgery needed Lister’s overlooked sanitation methods to make Liston’s advances truly lasting, we believe significant growth in AI will also come from businesses that embed the technology in scalable and sustainable ways, helping customers apply it to their workflows in the real world. Our focus remains on identifying long-term opportunities across the entire ecosystem, backing businesses when we believe enduring growth can be delivered.

One example where we believe the balance of risk and reward is more favourable is in the design tool layer, where companies like Cadence and Synopsys provide software essential to every new generation of chips. Electronic design automation software serves as the foundation of today's semiconductor innovation; no advanced chip can be developed without these tools, making such companies critical enablers of the artificial intelligence ecosystem. We think there is scope for these companies to use AI to make their customers more productive, based on their unique knowledge of individual workflows. This quarter, Synopsys specifically faced some short-term execution challenges, yet we view its role in the AI ecosystem as structurally indispensable and improving and therefore have added to our position.

Shopify and Intuit also exemplify how AI is being applied to enhance workflows and deliver value to smaller customers. Both companies are executing well, and the road maps of what they aspire to do in the future are exciting. Shopify, a leading commerce platform for merchants, was a top contributor this quarter as strong AI-enhanced services drove performance across enterprise, international markets and payments. Intuit, which provides financial software through QuickBooks, TurboTax and Credit Karma, faced some weakness after management issued cautious guidance, but underlying results remained strong. We added to our position as its valuation does not reflect the strength of its franchises, nor the progress being made through ongoing AI-driven product enhancements. These companies may sit outside the immediate spotlight of the AI rally, but they exemplify the kind of unexpected engines that can compound value for many years.

Stock-specific factors contributed to the quarter’s underperformance. The Trade Desk was the largest single detractor, falling sharply after revenue growth slowed and a change in guidance disappointed investors. Competitive pressure from Amazon's demand-side platform, alongside renewed concerns about governance following the CFO’s departure, amplified investor concerns. However, with connected TV being the fastest-growing advertising channel and new deals with Disney, NBCUniversal and Netflix, The Trade Desk is well-placed to grow and deliver on its long-term ambitions. 

DSV, one of the world’s largest freight forwarders, was also among the top detractors. The company posted results which, for the first time, included the German logistics business DB Schenker. While this acquisition brings a strong position in European road and rail transport, the results reflected still-soft freight markets, particularly in road. However, our conviction about the long-term case for DSV was reinforced by management, who remain confident about the integration, highlighting the potential for long-term efficiency gains and stronger margins as the two businesses are brought together.

Periods like this test our long-term focus, but they also sharpen our discipline. Our task is not to predict which companies will dominate quarterly headlines, but to identify businesses that can deliver enduring growth, even when short-term market dynamics obscure their underlying potential. That can be painful at times, but it requires us to look beyond the obvious winners and focus on enduring value creation.

Sustainability Report

This discipline in identifying companies with enduring competitive advantages extends beyond financial metrics. Our philosophy has always centred on the belief that businesses creating genuine value for society are better positioned to sustain growth over the long term, benefiting from stronger talent acquisition, operational efficiency and reduced reputational risks.

We are pleased to release our third annual Sustainability Report this quarter, which explores these ‘Unexpected Engines of Progress’. Just as Lister's antiseptic methods proved more enduring than the surgical breakthroughs that preceded them, we continue to find that some of the most enduring progress in society often comes from companies whose contributions may be less celebrated but create the strongest foundations for change.

Rather than focusing solely on conventional ESG favourites, the report profiles companies quietly building these foundations. From The New York Times, whose digital transformation is strengthening democratic accountability, to Nintendo, which addresses the content crisis in gaming through family-friendly alternatives, and bioMérieux, which combats antimicrobial resistance through innovative diagnostics. These businesses demonstrate that sustainable competitive advantages and societal contributions are mutually reinforcing.

As with previous years, our report is structured around the pillars of people, planet and prosperity, with detailed case studies, alignment to the UN Sustainable Development Goals and updates on our progress towards net zero commitments. We hope it provides insight into how these unexpected engines are shaping both markets and society.

Outlook

The near-term backdrop has been challenging. Markets are expensive, leadership is narrow, and sentiment is fragile. History shows us that lasting progress emerges in stages. First come the pioneers who demonstrate what is possible, then the quieter innovations that make those breakthroughs enduring and scalable. We participate in both phases. We continue to hold companies like Microsoft and Alphabet precisely because their leadership in cloud computing and productivity software positions them favourably for the long term.

More importantly, we are building positions in the next generation of durable value creators. Companies such as Cadence and Synopsys are building the essential design tools that underpin every new generation of chips. Shopify demonstrates how technology enables new business models, powering e-commerce for millions of merchants. Intuit shows how these technological advances translate into enhanced customer experiences through AI-powered financial software.

This combination of proven leaders and emerging value creators positions us well to face the opportunities and uncertainties ahead. The companies that compound wealth over decades are rarely the most obvious choices in any given quarter. Rather, they are the businesses building quietly while others chase headlines. We recognise that recent performance has fallen short of expectations, and we understand the frustration this causes. Looking ahead, we are confident the portfolio is well-positioned to capture the next generation of growth opportunities and deliver the long-term results our clients expect.

Sustainable Growth

Annual past performance to 30 September each year (%)

Annualised returns to 30 September 2025 (%)

* 31 December 2022

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.

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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