Global Alpha: investor letter Q2 2025

Your capital is at risk. 

As a pendulum in motion reaches the end of its arc, it appears to pause, momentarily frozen. In this fleeting instant, this pause could be mistaken for a permanent equilibrium. Perfectly balanced, at rest. This illusion is then shattered as gravity inevitably exerts its invisible influence and the pendulum starts to accelerate back along its return path.

Economic history is far more chaotic than the mathematically predictable movement of a pendulum, but we can still observe a similar phenomenon. There are periods of stability and relative calm, but these periods are transitory; latent forces build amid this apparent tranquillity, the pendulum starts to swing again, and a new era begins to emerge.

The end of the Long Decade

The period following the collapse of Communism and the end of the Cold War is one such era of calm. It seemed that the major questions in politics and economics had been settled. American political economist Francis Fukuyama even spoke of ‘The End of History’, capturing the sense of peace and stability which would cocoon us forever more.

Globalisation was established and expanding; neoliberalism was the dominant philosophy in the west; and the world was, broadly, governed by a rules-based order, atop of which sat the United States. In the aftermath of the Global Financial Crisis, access to cheap and hyperabundant capital was added to the prevailing world order. US companies were also awarded increasingly premium valuations, reflecting perceived structural advantages rooted in American exceptionalism. We might call this period from 2009 to 2021, the ‘Long Decade.’ 

We are now clearly living in a different era, and the conditions which predominated during the Long Decade have now moved into the rear-view mirror. History wasn’t so much dead as just sleeping. The pendulum merely seemed at rest. Money now has a cost. Tariffs are back in vogue. Nationalism and populism are rising, and America looks a little less exceptional than it once did.

President Trump’s ‘Liberation Day’ announcement of widespread import tariffs at the start of April and the geopolitical sparring which has marked the beginning of his second term have made the enduring nature of this rupture clear. Measures of economic uncertainty have spiked, and the range of potential macroeconomic scenarios we need to consider has widened. There is no putting the genie back in the bottle.

A longer-term perspective

As long-term stock pickers, we have been considering the consequences of these shifts in the macroeconomic landscape for some time. Clearly, the portfolio was not appropriately positioned for the market adjustments of the post-Covid period. Our actions following this experience have resulted in the substantial repositioning of the portfolio. It is now on a far firmer footing, but this work continues.

We continue to calibrate the potential for a significantly more challenging operating environment for companies over the next decade, for instance. Costs are rising, from materials to labour; global supply chains are now a vulnerability, not an asset; and available market opportunities, from a geographic perspective, are shifting. Rather than the rising tide lifting all boats, a retreating tide will help separate those management teams with their swimwear on from those whose blushes will no longer be spared. Culture and the quality of execution matter.

We have also been positioning the portfolio for the potential likelihood of a structurally higher cost of capital than that which existed during the Long Decade. Many of the trends we’re seeing, such as increasing tariffs, the re-orchestration of supply chains to be more local, and increasing labour shortages, are potentially inflationary. 

Not only does financing cost more in this world, but we must also consider the impact on the valuation of equities, with longer duration cash flows worth less in this scenario. Then there’s the broader impact on the consumer, with more limited access to credit and rising bills. The speed and abruptness of the rise in interest rates in 2022 clearly delivered a nasty shock to markets, and to the performance of the Global Alpha portfolio specifically. Still, there is no reason that a period of more normalised interest rates should represent a significant headwind going forward. A focus on adaptability, resilience and valuation discipline is key.

As active managers, we have been able to proactively adapt our portfolio to these challenges, primarily in three ways. First, we have built resilience against a broader range of scenarios by selling companies where the investment case could be made or broken by a specific set of economic assumptions prevailing. Second, we have added companies that have their fate in their own hands, propelled forward by self-help, differentiated business models or exceptional execution.

Finally, we have continued to lean into those areas where we can see long-term, structural growth regardless of what politicians or central bankers may choose to do. Macro ambiguity does not stop us from steering the portfolio into a stronger place, and we have positioned the portfolio to thrive in as many different outcomes as possible.

Reward-seeking resilience

On the first point, we have been continuing to increase our exposure to companies that can thrive in a broad range of geopolitical scenarios. In contrast, over the past eighteen months, we have been moving on from those reliant on external conditions. Adidas, for example, which we sold early last year, where the growth case rested on a largely cross-border opportunity for a Western brand selling into China.

During the quarter, we have also sold Yeti, the high-end drinkware and cooler company. There’s a lot to like about the way that company builds its brand. But fundamentally, it has a significantly globalised supply chain and is selling to a consumer set less willing than historically to swallow yet more price increases.

Importantly, we have been able to lean into this resilience while remaining growth-focused and reward-seeking. For every Yeti or Adidas, there’s another company able to sail serenely onwards regardless of the geopolitical weather. As we talked about last quarter, often these are national champions or idiosyncratic opportunities that combine resilience with new growth.

Take Cosmos, for example, a new holding over the quarter. Admittedly, this Japanese convenience pharmacy chain is seeking to expand overseas… but only to other islands in Japan from its home base on the southern island of Kyushu. It is much more aggressive on cost and execution than other store chains in Japan, and our investment case rests on the quality of the execution of this roll-out story, far more than any external variables.

We have also added a new holding in FTAI Aviation. The company has a unique business model, trading and leasing its pool of jet engines to commercial airlines to help them manage the lifespan of their engines. FTAI’s ability to move engines and constituent modules among its fleet, as well as having hard-won regulatory approval for its own-label engine parts, enables it to offer maintenance services and access to replacement engines at unmatched prices. FTAI has the existing capacity to handle over three times its current annual volumes of engine repairs.

Additionally, the company has already secured significant funding commitments from external investors to acquire on-lease aircraft, which will provide FTAI with exclusive contracts for the maintenance and repair of the engines involved. We expect that the structural advantages of FTAI’s business model will enable it to continue to grow its market share independent of the number of commercial aircraft in service or the broader funding environment.

Certainty in an uncertain world

We retain a deep conviction that many technological trends can be relied upon to continue apace, independent of the political environment or the specifics of economic policy. Moore’s Law is the long-standing canonical example of this, with the pace of advances in semiconductor manufacture having held remarkably steady for around a century: for far longer indeed than the name, which was only coined in the 1970s.

Moore’s Law may be changing, but not because it is slowing down; rather, the more recent and dramatic advances in artificial intelligence have served to accelerate and amplify it, pushing technological advancement to a new dimension. 

Many of you will have heard us say this before, but we believe that AI may well be the single most important growth engine for the portfolio over the next decade. More impactful even than the explosion in the consumer internet, which was the growth driver behind so many of the most successful companies during the Long Decade.

Why do we believe this? AI has such broad applicability that it has the potential to act as an accelerant to growth across almost every industry. The way that software code is written and developed has already been transformed. Our search for beneficiaries of this revolution has led us to a new holding over the quarter in EPAM Systems, a provider of software engineering services. The market clearly sees AI as a threat to EPAM’s business, but with the potential for an inflection in employee productivity, an increase in customer demand to help implement bespoke software and a significant increase in margins, we take a very different view.

AI tools are also helping improve the effective targeting of digital advertising. This is the thesis behind the recent addition to AppLovin. AppLovin buys ‘impressions’ (the number of times an advert is displayed) from sellers, primarily mobile app developers, and sells them to advertisers, who pay only for successful ads. With costs essentially fixed in advance, a small change in conversion success has a dramatic impact on returns. With superior targeting, a pool of 1.4 billion active gamers to target and the potential to expand into ecommerce, AppLovin has realistic ambitions to grow to many multiples of its current size.

AI is also accelerating the development of autonomous driving technology, which is part of our investment case for Uber, where we have made another addition during the quarter. 

Finally, we have also taken advantage of share price weakness in the immediate aftermath of the Liberation Day announcement to further build our position in NVIDIA, whose chips represent the infrastructure of the AI revolution. We will continue to scan the horizon for underappreciated beneficiaries as the AI revolution continues to broaden and deepen into other sectors such as healthcare, education, and finance.

Pulling it all together

A final aspect of resilience is a rigorous approach to considering valuations. We have mentioned before the enhanced portfolio risk control tools we have introduced over recent years to ensure we stay disciplined in this area. With certain sections of the market having staged a remarkable recovery since the initial shock of the ‘Liberation Day’ tariff announcements at the start of April, we have continued to be alert to the overall shape and characteristics of the portfolio, reducing exposure to businesses where recent share price performance has resulted in a significant increase in holding size. 

This process has led to reductions in a range of holdings, including Cloudflare (cloud network security software), DoorDash (local commerce platform), Shopify (ecommerce software provider) and Mercado Libre (South American ecommerce platform and FinTech).

We’ve long highlighted the advantages of a more diversified approach to growth investing. However, the benefits of this approach have been far from obvious over the last few years. Market returns have been concentrated in just a handful of very large companies, and increasing valuations have accounted for a greater share of returns than the growing earnings streams we seek. However, as we have also highlighted before, increasing average valuations have masked a huge dispersion, and we have been able to take advantage of this environment to upgrade the portfolio.

We’ve opportunistically trimmed companies that have performed well and redeployed into companies that we believe are being overlooked. As a result, you’ve seen the valuation premium of the portfolio relative to the broader market continue to decline. Importantly, we’ve been able to do this without compromising our growth ambition and the earnings growth we expect to see from the portfolio remains significantly ahead of the market. 

Quality metrics, such as Return on Equity or overall levels of indebtedness, also remain supportive and consistent with a portfolio of highly adaptable companies. In other words, this is a pure upgrade which leaves the portfolio exceptionally well-positioned to thrive across a variety of macroeconomic scenarios.

The recovery in short-term performance over the quarter is pleasing to see. We understand and appreciate that our clients have had to be very patient over recent years. The pendulum has started to swing, and we are absolutely focused on ensuring that this recent period continues to compound into a more meaningful, longer-term recovery.

And finally

The Global Alpha strategy has recently marked our 20-year anniversary. We’re pleased to share that a dedicated webpage celebrating the last two decades is now live on our website:

Global Alpha at 20: investing in a changing world | Baillie Gifford

This page brings together three new content pieces that reflect on the strategy’s evolution and future direction. It features:

• The hunt for ‘uncommon understanding’ – Constants and evolution in our investment edge.
• Uncorrelated bets and resilient returns – Uncovering long-term earnings growth – not just tech innovation – drives outperformance across diverse sectors.
• The next 20 years – A forward-looking piece exploring potential opportunities and themes shaping the future.

This is a Global Alpha commentary. Not all stocks may be held, but themes of this commentary are also representative of: Responsible Global Alpha, Global Alpha Paris Aligned and Responsible Global Alpha Paris Aligned.

Annual past performance to 30 June each year (%)

Annualised returns to 30 June 2025 (%)

Source: Baillie Gifford, 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.

*Including Global Alpha, Responsible Global Alpha, Global Alpha Paris Aligned and Responsible Global Alpha Paris Aligned strategies

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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