Global Alpha: investor letter Q3 2025

Your capital is at risk.

Consider the banana – humble, yellow, and delicious. But if yellow isn’t your colour, how about blue? Nature has you covered. Contrary to the visual evidence when visiting the supermarket, there are over a thousand different types of bananas, with complexions ranging all the way from milky white, to deep purple. But, for most of us in the West, a banana means the ubiquitous yellow Cavendish. 

It wasn’t always so. Up until the 1950s, the banana trade was dominated by a different variety, the Gros Michel. For decades it shipped beautifully and tasted great, so the industry planted Gros Michel everywhere. Then, a soil-borne fungus, Panama disease, turned those neat plantations into worthless compost. One fungus, and breakfast was cancelled. Producers that had come to rely on one species discovered that monocultures are brittle. They lack resilience.

Re-engaging founder mode

We have talked at length in recent quarters about the importance of resilience as it relates to the Global Alpha portfolio. This focus has often highlighted financial aspects of this resilience. It remains the case that the portfolio has markedly superior quality characteristics than the broader index - more profitable, with higher returns on capital and far lower levels of indebtedness.

These characteristics serve as an insurance policy against the emergence of future financial fungi. Companies with low leverage, strong free cash flow, and high margins have the flexibility to keep investing when competitors retreat. They can fund their own growth, pursue acquisitions, or expand capacity, not just surviving, but thriving as competitors are forced to retrench. But if these quantitative characteristics serve as an insurance policy, it is the more subtle, qualitative aspects of cultural resilience and flexibility that give us confidence that any such insurance payouts will be well spent. Balance sheets alone do not build great businesses. It is culture that shapes the decisions that sustain leadership over decades.

To give an example of this adaptability in action, during the quarter one of our Trusted Advisors met with senior management at Brazilian challenger bank, Nu Holdings. Having been concerned that Nu might be starting to morph into a more traditional bank, we are highly encouraged by the willingness of management to embrace a cultural reset, after founder and CEO David Vélez judged the organisation was in danger of becoming “slow, bureaucratic and risk-averse”. This process has revitalised the senior leadership team and sharpened the focus on entrepreneurial dynamism across the organisation. With a deepening competitive edge and a superbly profitable operating model, Nu Bank remains exceptionally well placed to continue winning share across Latin America.

Another illustration of bold decision-making is provided by Shopify, where our colleagues again had the pleasure of spending several hours with founder Tobi Lütke earlier this summer. Shopify's re-embracing of 'founder mode' centres on Mr Lütke's intensely hands-on leadership approach. Having previously felt the company had matured to a point where he was able to delegate more, he has decisively leant back in. This has ensured the company can execute on strategic decisions quickly, such as when deciding to exit their logistics business in 2023 to refocus on their ‘main quest’ of making commerce easier for all. The rewards for this clarity of vision have been evident in results with Shopify maintaining exceptional year-on-year sales growth of over 20 per cent for the last twelve quarters. Particularly noteworthy given the company's size. This ability to pivot as necessary will remain a vital competitive advantage as AI continues to rapidly reshape the ecommerce landscape.

While both Nu and Shopify are decisively top-down, The Ensign Group, the operator of skilled nursing and assisted living facilities and a new purchase over the quarter, is, in contrast, very much bottom-up. A decentralised, delegated operating model empowers local leaders to run clusters of homes, adapt to the local competitive environment, and share best practice. Widespread share ownership has created hundreds of employee-owners and as a result, staff turnover – a bane of the broader industry – is vastly lower than competitors, resulting in a significant operational advantage.

Roll-up roll-up

Ensign also provides an additional point of contrast to the examples above. Nu and Shopify are both very much digital-native companies. They have enormous ambition and seek to redefine their industries, delighting their customers with new tools and capabilities. In the language of our Growth Profiles, they are classic Disruptors. Ensign offers something completely different. The industry is highly fragmented, and despite having a market share of less than five per cent, Ensign is the largest player. Our investment case rests on the potential for Ensign to lead significant market consolidation, underpinned by a track record of disciplined capital allocation and a proven ability to identify, acquire and turn around floundering competitors. As the industry struggles with financial pressures and labour shortages, the list of acquisition opportunities is almost limitless. 

The healthcare evolution

Medpace, a company which designs and conducts clinical trials on behalf of smaller biotechnology companies, was another purchase during the quarter. As the funding environment for biotechs has become more challenged over recent years, the number of active clinical trials has fallen, causing Medpace’s growth to slow. Behind this lull, however, the pace of radical innovation in drug discovery has continued, creating a pent-up demand for Medpace’s services. Hints that this recovery is starting to come through saw the shares move sharply higher over the quarter. Our thesis is that this is just the start of a multi-year recovery.
We preferred these characteristics – the potential for durable growth, without any drug-specific risk – to those offered by Genmab, the Danish biosciences company with a focus on antibody therapeutics, which exited the portfolio as Medpace entered. Genmab’s blockbuster blood cancer drug Darzalex accounts for over 70 per cent of total revenues. After its partner Janssen decided not to license the next-generation version of the drug, those revenues will disappear by 2031. While Genmab has three late-stage assets with blockbuster potential, its ability to commercialise those drugs is unproven, particularly as it shifts its model from working with partners and earning a royalties-based revenue stream, to building an in-house sales force. Despite its leading scientific expertise, we considered the execution risk attached to this new strategy, and the future Darzalex-sized hole in their revenue, too high to justify maintaining our holding.

Riding S-curves

Another new purchase this quarter highlights the diversity of growth opportunities across the portfolio. Coinbase is the leading US-based digital asset platform, serving over 100 million users across more than 100 countries and safeguarding approximately US$400 billion in assets. While the market views Coinbase primarily as a volatile trading exchange tied to crypto price cycles, its earnings profile is evolving into something far more resilient than the market appreciates. The company is maturing into a diversified financial infrastructure company, spanning a stablecoin payments network, institutional custody services, and subscription services like Coinbase One. Coinbase provides exposure to the digital asset economy through a trusted platform whose regulatory alignment, scale, and credibility, position it to capture value from increasing institutional adoption, stablecoin proliferation, and trading activity.

The addition of Coinbase, and the example of Shopify above, highlight an interesting feature of the ongoing nature of disruption. Industries such as ecommerce, advertising and payments were some of the first to experience dramatic upheaval as a result of the digital revolution. Consumers delighted in lower prices, exploding choice and greater convenience. Dollars followed these incentives, incumbents floundered and companies such as Meta, Amazon and Mastercard grew into giants. These companies are now the incumbents. But rather than sink into comfortable middle age, having ridden the s-curve of this growth opportunity to its plateau, the curve is steepening once again as AI unleashes a new wave of change. While it may be that the resulting possibilities sustain many of the incumbents, rather than foretelling the rise of new challengers, any reversion to the mean feels further away than ever.

Alongside financial and cultural resilience, these examples showcase a second aspect of the Global Alpha portfolio, that of strength in diversity. The portfolio offers exposure to a wide range of companies with different types of growth characteristics. These range from the explosive growth of Shopify to the sure-footed deployment of capital by Ensign to the nimble navigation of cyclical headwinds by Medpace. This breadth also ensures the portfolio is not reliant on one theme or geography and means we are likely to find long-term growth in Brazilian banking, European healthcare, or American coffee chains as we are in Silicon Valley.

Feeling our way across the ice

A third key focus for us is to ensure we are not overpaying for this growth. Questions about valuations normally focus on the US. The outperformance of US markets versus the rest of the world has now been entrenched for so long - over fifteen years – that it’s started to feel like a law of nature. However, much market commentary is focused on asking whether this divergence may be about to reverse. We would like to reframe the question. What matters to us is not the aggregate level of valuations in any individual market, but the qualities and characteristics of the companies available to us on a global basis, wherever they happen to be listed. The question we’re asking, therefore, is which few companies do we believe justify their current valuations thanks to the strength of their long-term fundamentals? Selectivity matters.

The growth of many US companies is, at least in part, the result of deeply entrenched advantages - well-established clusters of expertise humming with innovation, unrivalled capital markets and a cultural willingness to embrace risk-taking. These ingredients create uniquely fertile conditions for exceptional growth businesses to emerge and flourish.

It is no surprise, therefore, that our restlessly ambitious hunt for growth leads us towards holding many US businesses. The most dramatic upward share price move in the portfolio over the quarter was AppLovin, the US-based advertising platform for mobile apps. AppLovin’s proprietary AI-powered recommendation engine, AXON, is turbo-charging annual sales growth of over 70 per cent, alongside exceptional levels of profitability. With the shares having doubled over the quarter, the company has raced from founding only thirteen years ago, to one of the sixty largest listed companies in the world today. We first took a holding in AppLovin at the start of the year and, following this recent run-up, the focus is very much on ensuring that our insight, and our view of the potential upside from here, remains sufficiently differentiated.

As markets have recovered from their Covid hangover, with the MSCI ACWI rising by almost 90 per cent in dollar terms over the last three years, this approach is mirrored in holdings across the portfolio. This is akin to feeling our way across the ice, testing the upside and the sustainability of growth rates to ensure that they can bear the weight of the valuations attached. Swedish industrial champion Atlas Copco failed this test. Despite a long record of operational excellence which underpinned the investment case over our twenty-year holding period, we sold as we considered these qualities were fully reflected in the valuation of 26 times forward earnings.

In summary

The last few years have represented a sustained period where the superior growth of the portfolio has been outpaced by an index driven overwhelmingly by rising valuations. As this headwind has blown itself out, performance over the last six months remains robustly ahead of the index while the relative valuation premium of the portfolio remains at historic lows.

These superior levels of growth are also supported by both breadth and durability, while the aggregate financial characteristics reflect the high-quality nature of the select group of companies we choose to hold. Not a single variety of banana, however delicious, but a veritable rainbow of growth opportunities. These are the conditions in which long-term compounding can flourish.

Annual past performance to 30 September each year (%)

Annualised returns to 30 September 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.

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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