International Growth: investor letter Q1 2026

As with any investment, your capital is at risk.

 

In the short term, markets can be unsettled, noisy and prone to latching onto the dominant narrative of the moment. Over the long term, returns tend to be driven by something more enduring: ownership of exceptional businesses, held with patience as they compound in value. The gap between the two is unusually wide at the moment, and the portfolio has had a difficult quarter.

However, while the recent period has been frustrating, we are excited about the portfolio we hold on our clients' behalf and its future potential. We believe it consists of companies exposed to structural growth that are competitively advantaged and stewarded by people committed to the long-term creation of shareholder value. They are, in many cases, now cheaper than they have been for some time.

Conflict in the Gulf has understandably unsettled markets and revived concerns that higher energy prices could feed through into inflation. While this has influenced the backdrop, it has not been the principal driver of the portfolio’s performance this quarter. Rather, the dominant force has been a sharp sell-off in businesses the market believes may be exposed to AI-driven disruption. We are typically enthusiastic about disruption and often able to tilt the portfolio towards the disrupters and away from the likely victims; this time, however, we have found ourselves on the wrong side of that divide, at least for now. Market participants have aggressively repriced perceived business model vulnerability, particularly across software and adjacent growth companies. The question markets have been grappling with is a simple one, even if the answer is not: Will AI compress economics in some software and services categories by automating workflows or shifting value away from certain application layers? That question has been treated as urgent, and in some areas, prices have moved as though conclusions are already known.

Some businesses, particularly those with narrow differentiation and low switching costs, will face a more challenging competitive landscape. Others look more durable, even as they evolve. Systems of record that sit at the heart of an organisation’s data and processes may prove more durable. The same is true of critical trust and security infrastructure, where reliability, resilience, compliance and fraud prevention matter most.

It has never been the case that your software-native businesses thrive solely on their ability to write code. We should assume that coding is a commodity, that intelligence (of a certain variety) is effectively free and limitless, and then ask, “How do those conditions change the competitive position of this business?” The market’s response this quarter has been to price in the downside risk. But for some software companies, the outlook will actually have improved. Generative AI will likely mean fatter tails: some businesses will accelerate growth and deepen their moat, while others will face rapid decline. We believe we hold a set of high-quality, adaptable companies that are deeply embedded in their customers’ workflows. But we can’t be complacent, and our task is to work out at which end of the fat-tail distribution they sit.

Let’s think through this lens about payments and money transfer. These are not optional layers, they are trust-critical infrastructure. Holdings such as Adyen, a recent detractor to performance, and Wise, which has fared better, are good examples. These businesses will evolve as AI changes interfaces, automation and fraud dynamics, but the need for robust, secure rails persists. In fact, firms that adopt AI more effectively than peers may strengthen risk controls, reduce costs and improve customer outcomes, potentially consolidating their market position rather than seeing it eroded.

Spotify, another of this quarter’s detractors, is a useful example of how technological change can reinforce, rather than erode, the position of a well-adapted platform. Under Daniel Ek’s leadership, it has grown from a music streaming service into a global discovery and distribution platform that sits at the intersection of listeners and creators. As Ek put it in his final earnings call as CEO in February, Spotify is “first and foremost a technology company”. That mindset has helped it lead the shift from downloads to streaming, build powerful discovery tools such as Wrapped and Discovery Weekly, and create an open ecosystem that works across thousands of devices. Spotify is likely to evolve further beyond music into a broader media and creator platform, using AI, new interfaces, wearables and deeper personalisation to reshape how audiences engage with audio, video and other forms of content. That future is likely to be built on the same foundation that made Spotify what it is today: solving important problems for both consumers and creators at global scale.

While a number of the holdings detracted this quarter as markets reassessed business models perceived to be more exposed to AI-driven disruption, it is important to note that this was not a uniform ‘growth sell-off’ across the portfolio. Several of the digital infrastructure holdings performed strongly, reflecting their role as the enabling layer for the build-out now underway. TSMC, ASML, SK Hynix, Advantest and Disco sit at the heart of the semiconductor manufacturing and testing ecosystem, the ‘picks and shovels’ required to turn AI demand into real-world compute capacity. This is the largest exposure in the portfolio and a highly intentional one, built to benefit from the sustained capital intensity of the AI cycle rather than from any single application winner. As investors have focused on the scale and urgency of AI investment, these businesses have been beneficiaries, and their contribution helped offset some of the weakness elsewhere in the portfolio.

 

Portfolio construction

“You can’t predict, but you can prepare” (Howard Marks)

In moments like this, it can be helpful to step back and think not only about what we own on our clients' behalf, but how we choose to shape the portfolio. One useful reference point is the portfolio of ten years ago, not because we are trying to recreate it, but because it reminds us of an important truth about growth investing: successful portfolios are not static. They adapt as the world changes.

When we wrote to clients in 2016, we made the point that the sources of growth in the portfolio were shifting. What had once been influenced more by post-GFC and eurozone debt crisis recovery, and by ‘old world’ industries such as materials and traditional banking, was making way to increased exposure to technological change in its many forms. Looking back, one of the strengths of the portfolio in that period was the breadth of its underlying growth drivers. Alongside long-duration technology holdings, there was greater exposure to industrial productivity, consumer brands, financial infrastructure and selective cyclical recovery opportunities. Breadth matters because it reduces the extent to which portfolio outcomes are tied to any one narrative, market regime or cluster of correlated themes.

The same principle applies today. The backdrop in which we invest is becoming increasingly volatile. War and geopolitical fragmentation are raising uncertainty; inflation remains a live risk as energy markets and supply chains are disrupted; and AI is reshaping competitive boundaries at speed. In this environment, we expect the management teams of the companies we own on our clients' behalf to adapt, allocating capital well, investing for resilience and responding intelligently to change. In an unusually uncertain environment, we recognise the need to hold a reasonably diversified set of exposures and not over-bet on our strongest areas of conviction.

Over the last 18 months, and continuing this quarter, we have been shaping the portfolio with a clear purpose: to broaden the range of underlying growth drivers, flatten exposures where position sizes had become too dominant relative to the strength of our conviction, and reduce clustering so that the portfolio is less dependent on a narrow set of market narratives.

In doing this, we follow a mental model that emphasises growth and quality, as before, but puts more weight on additionality, or what a particular business brings to the portfolio. This has long been embedded in our 10 Question framework, but we have split it out to put more weight on this aspect and have purposefully emphasised it in our portfolio discussions.

It is critical that we keep backing transformative growth companies with high, and highly uncertain, potential. This has been core to our success over the years. But we have also done well for clients by owning high-quality companies with a more diverse range of growth drivers and lower absolute growth rates. We expect these to contribute to portfolio returns in their own right, but also to be additive: to dampen portfolio volatility and help ensure we still have the licence to hold transformative growth companies with the confidence and patience they require. The strong rally in value-type stocks over the recent past means that many of the ‘quality growth’ companies we are analysing have been heavily sold down. Time will tell of course, but we believe we are broadening and strengthening the portfolio by buying them at compelling valuations.

Our destination remains the same. Strong long-term compounding for clients. But we also want our clients' journey to be smoother. That means shaping a portfolio that remains genuinely differentiated yet is better balanced across a wider range of possible futures.

 

Transactions

During the quarter, we continued the repositioning work we have been undertaking. While each decision is specific to the individual company, the overall direction is consistent: broadening exposures, re-underwriting our highest-conviction holdings against a more volatile external backdrop, and seeking a better balance between growth and resilience.

That thinking lay behind three new holdings in Air Liquide, Lonza and Sika. They operate in very different parts of the economy, but each adds something important to the portfolio: exposure to attractive long-term growth, backed by resilient business models and differentiated drivers of return. Air Liquide broadens the exposure through a business with deeply embedded customer relationships and participation in industrial production, healthcare, electronics and energy. Lonza strengthens the portfolio’s healthcare exposure through biologics manufacturing and the long-term outsourcing of complex drug production, providing access to an attractive area of structural growth without dependence on the success of any single medicine. Sika adds a different set of demand drivers again, with specialist products tied to construction and infrastructure, where technical know-how, customer trust and product performance can support enduring returns.

Taken together, these purchases reflect the points made above: broadening the portfolio means expressing growth through a wider range of businesses, end markets and economic drivers. We believe each of these companies can contribute to returns in its own right, while also strengthening the overall portfolio by reducing clustering and making outcomes less dependent on a narrow set of market narratives.

We also added to the holding in L’Oréal following recent share price weakness. We continue to regard L’Oréal as an exceptional company, with powerful brands, global reach and a long runway for growth, and the recent weakness allowed us to add to the position at a more attractive valuation.

Set against this, we reduced the overall weighting to semiconductor capital spending. This remains a very important and intentional exposure in the portfolio, and our long-term enthusiasm for the businesses enabling leading-edge chip manufacturing is undiminished. However, strong share price performance had increased the size of several holdings, including Disco and Advantest, and we felt it prudent to trim them. We also initiated a position in Lasertec, which gives the portfolio exposure to an increasingly important part of advanced semiconductor manufacturing: inspection, where the cost of defects is rising as EUV adoption increases and chip geometries shrink. ASML was also reduced as part of this broader reshaping. The result was a lower overall weighting to this theme, while remaining deliberate about where within the value chain we want that exposure to sit.

We are also reviewing a number of smaller holdings where we have been patient over time, but where we no longer believe the shares provide the attributes we require in the portfolio. In some cases, execution or adoption has been slower and less convincing than we had hoped; in others, the opportunity remains interesting in isolation, but the holding no longer contributes enough in the context of the portfolio as a whole, whether because similar exposure is already well represented elsewhere or because our confidence in the path to value creation has diminished. This work is ongoing, and we expect it to lead to further changes to the portfolio over the coming quarter.

 

Outlook

“The future is already here. It’s just not evenly distributed.” (William Gibson)

Periods like this can make it easy to lose sight of what ultimately matters: the quality of the businesses we own on our clients' behalf and the size of the opportunities in front of them. The portfolio is anchored in a collection of exceptional companies with strong competitive positions, long reinvestment runways, and management teams able to adapt and invest through uncertainty. In several cases, the debate that has driven share prices this quarter is focused on how these businesses will change in an AI-shaped world, rather than whether they remain relevant. Where we see durable roles, clear advantages and credible paths to long-term value creation, we are comfortable underwriting that evolution.

We take encouragement from the fact that some of the portfolio’s strongest contributors this quarter have been the ‘picks and shovels’ of the AI build-out, businesses at the heart of semiconductor manufacturing and test, because they are benefiting from a sustained, capital-intensive investment cycle rather than any single application winner. Taken together, this reinforces our conviction that the portfolio is positioned for the next phase of long-term growth, even if markets remain unsettled in the near term.

The next decade will not look like the last one, and it would be a mistake to invest as though it will. But the ingredients of successful compounding remain consistent: exceptional businesses, long reinvestment runways, thoughtful sizing, and the willingness to adapt as the world changes. We are not trying to rebuild the portfolio we had ten years ago. We are applying the lesson behind our thinking then, and which still matters now, that sources of growth evolve, and good long-term investors evolve with them. 

 

---

International Growth

Annual past performance to 31 March each year (%)

	2022	2023	2024	2025	2026
International Growth Composite (gross)	-26.7	-7.2	6.3	2.5	7.7
International Growth Composite (net)	-27.2	-7.8	5.7	1.9	7.1
MSCI ACWI ex US Index	-1.0	-4.6	13.8	6.6	25.6

 

Annualised returns to 31 December 2025 (%)

	1 year	5 years	10 years
International Growth Composite (gross)	7.7	-4.4	8.6
International Growth Composite (net)	7.1	-5.0	7.9
MSCI ACWI ex US Index*	25.6	7.6	8.8

*MSCI EAFE Index prior to 30 September 2018

Source: Revolution, 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.

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.

 

Risk factors 

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in April 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss 

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. 

The images used in this communication are for illustrative purposes only.

192403  10061939