SAINTS spotlight: compounders weathering change

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

Despite a sharp decline in early April, global equity markets rebounded strongly over the second quarter, driven again by US technology giants. Investors appear largely unfazed by executive orders from President Trump, behaving as though little can disrupt the real economy or corporate performance. This may prove true, but the dissonance between heightened economic uncertainty and equity markets hovering near record highs is unsettling. It reinforces our conviction in the importance of maintaining a well-diversified portfolio of resilient businesses.

Did somebody say TACO?

In a fast-moving environment, global financial markets tumbled, and volatility spiked in the opening days of the quarter, only to recover quickly over the following weeks as a temporary pause was announced. By quarter’s end, equity markets had rebounded, and volatility had returned to average levels. This was not so much the doing of ‘equity vigilantes’ as it was a striking confirmation of the acronym coined by a Financial Times journalist: TACO – Trump Always Chickens Out – a reference to President Trump’s tendency to reverse course when markets respond too negatively.

Has anything changed over the past three months? We believe that the equity markets’ round-trip is misleading. Some things have changed. For example, amid all the noise, the ‘universal’ 10 per cent tariff imposed on every country remains in place, as have those on steel, aluminium and the special rate applied to China. The average effective tariffs of approximately 15 per cent applied by the US is now at its highest since 1937.

Another change is the prospect of worse US budget deficits in the future as the ‘One Big Beautiful Bill Act’ is projected to add over $3tn to the US Government debt over the next decade. The tax cuts may help in the short term, but the bond vigilantes will be back.

How about the US dollar? It has weakened by circa 10 per cent so far this year (on a trade-weighted basis) despite rising bond yields, a very unusual combination.

Like Schrödinger’s cat, investors seem to embrace two conflicting ideas at once: companies’ prospects, as reflected in their share price, are unchanged from the start of the year. At the same time, concerns about the future impact of US deficits and tariffs are rising. Optimism is priced in as unease is quietly building.

Researching intangibles

Our ‘investigative researcher’ Hatty Oliver has a special role in our team: she researches intangibles. Guided by the managers, she focuses on topics like a company’s culture or the long-term trends in a particular industry. Hatty prefers interviews, trade shows or niche conferences to spreadsheets, broker conferences and annual reports.

This year’s projects have taken her to a Payroll congress in Florida, a food safety conference in Manchester and, much more frequently, to Zoom for in-depth interviews. Topics she wrote on range from food safety (Eurofins) to the recipe for success at Procter and Gamble via the IT services industry (Accenture).

Her report on Procter and Gamble was illuminating. She found a remarkably strong internal culture defined by perfectionism and a 'healthy paranoia' that guards against complacency. This mindset fosters agility and inspires confidence in P&G’s ability to evolve. Its reputation for excellence attracts top-tier talent and results in low employee turnover, always a reassuring signal for long-term investors. Hatty also drew compelling parallels with L’Oréal, which shares P&G’s ethos of innovation-led growth and relentless self-improvement.

Hatty’s attendance at trade shows and conferences offers a rare window into the world of end users – actual customers of our holdings’ products and services. This contrasts sharply with the traditional broker-led conferences where managements deliver carefully honed messages with little insight to be gleaned.

At the food safety conference, she spoke directly with Eurofins users and uncovered that speed is a crucial differentiator in the industry. Eurofins' extensive lab network, built up over decades, gives it a real edge. Her cultural assessment found the company to be unusually nimble and customer-focused,  a rare and valuable combination of marrying the scale of a multinational with the responsiveness of a startup – a rare and valuable combination.

In another project, Hatty turned her attention to the IT services sector, supporting a new investment idea being explored by a colleague. Her analysis often complements others’, either validating or challenging an emerging thesis. In this case, she highlighted the rising strategic role of consulting firms as businesses explore AI, contributing meaningfully to the team’s conviction around Accenture, which was subsequently added to the portfolio in June.

Most importantly, Hatty’s research is differentiated, drawing on direct, unfiltered information from employees, customers or distributors about a particular topic. No AI hallucinations nor polished narrative spun by companies’ PR offices, this is raw data. Hatty excels at extracting information from it, transforming the dots she collects into a pointillist painting for a company or theme.

What do these reports tell us about growth or profit margins next year? Not much at all. But they tell us quite a lot about a company’s potential to keep compounding for the next decade. A change in a company’s culture won’t have much impact in the short term but may influence durable compounding meaningfully.

This unusual and differentiated research is only worth doing if you invest for the long term, as we do. It is time-consuming and focuses on slow-moving factors such as culture, whose impact will be seen over years, not quarters. We call it Augmented Research.

Conclusion

Equity markets have risen above their pre-Liberation Day levels, offsetting the first quarter’s decline and giving the appearance of renewed calm. This apparent stability is like a thin layer of new ice forming over a river. It may look reassuring, but it's far less resilient than it appears as underlying pressure on the real economy builds up and valuations in some areas reach high levels again.

Three things are clear in our mind: 1) the US administration’s scattered actions will impact the real world; 2) companies with resilient cash flows and multi-cycles experience are best placed to cope with that impact and 3) diversification remains essential to blunt some of the sharpest impacts of market turbulence.

SAINTS portfolio is a well-diversified collection of resilient, high-quality compounders. As the ripple effects of US executive orders spread through the real economy, we believe those qualities will matter more than ever in the coming months.

Past performance is not a guide to future returns.

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This communication was produced and approved in September 2025 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.

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