Global Alpha: investor letter Q1 2025

Your capital is at risk. 

Frequency, unambiguity, novelty and negativity are the factors that drive headlines. Fast-developing events are more likely to be reported. Balance is unhelpful and boring, and nuance is complex, so news usually swings from one position to the other depending on where the weight of opinion lands in the moment. Bad news sells better than good news, and in a world of the 24-hour news cycle, speed matters. People are built to worry.

We’ve often been drawn to experiments that look at the effect of reducing the frequency of the news. A publication produced every twenty years would present a very different commentary on what had happened since the last edition. It would surely note China’s rise, perhaps pointing out that its share of global GDP has leapt from under 5% in 2005 to approximately 17% today.  It might point out that the USA has retained a similar share throughout, helped by continued technology innovation. It could note the proportion of the world’s population living in extreme poverty has fallen from 29% to 8% , or that CO2 emissions have fallen by 30% per person in the US and are broadly flat globally on the same measure.

Most of the individual headlines pointing one way or the other would have largely cancelled one another out, with a few trends emerging from the back and forth. This underpins our focus on identifying only the emerging important trends and filtering out the associated noise. We have constructed the Global Alpha portfolio so that it can prosper across a wide range of scenarios while positioning it for where we think the biggest shifts in society are likely to take us.

We agree that two of the most reported trends today, the emergence of AI and changing global politics, are among the most important considerations for investors in the years ahead. Our five-year time horizon provides a different perspective, and our stock-picking approach means that we express our views selectively and only where the returns look to be substantially skewed in our client’s favour. Our reward-seeking approach means that we will remain open-minded in casting our net widely in our hunt for companies with the potential to meet our ‘2x in five years’ return hurdle, but our Research Agenda will focus on these two topics and some of the most important strands that extend from them. We will publish it as a series of articles this year that chart our progress.

Responding to the environment

Performance finished behind the MSCI ACWI benchmark in a quarter that saw lots of price movement net out to a broadly neutral outcome in US dollars, and a fall in many other currencies. Increasing question marks about the impact of US economic policy, led to rising caution from investors in US markets in particular, with the S&P 500 falling by more than 5% over the quarter. Rather than focus on trying to divine the future through reading these macro tea leaves, we remain focussed on company fundamentals and taking advantage of the volatility for long-term benefit. We have added more new holdings than usual to the portfolio on the strength of ideas that we have found amidst a wide spread of valuations. Some link directly into these two large topics, while others are deliberately uncorrelated. In a time of relatively narrow stock market focus, we’re building a wide base for growth in your portfolio.

Dispersion in stock market valuations has given us the chance to take money out of successful technology businesses including Netflix, Shopify, The Trade Desk and Mercado Libre and redeploy that into different opportunities. We have moved on completely from two great businesses, Analog Devices and Schibsted, where the valuation more than reflected our enthusiasm. Finally, we sold two others that appeared to have been left behind by change. The Japanese cosmetics business Shiseido seems to be falling out of relevance with its customers, and the lithium producer Albemarle no longer has the hold on supply that we hoped it would retain.

Broadening Artificial Intelligence Beneficiaries

Turning to our first major structural trend, AI, we’re finding ideas at both ends of the AI value chain in our search for great return opportunities. Producing the chips that will power the next generation of computing is a complicated process that requires astonishing levels of precision. This has created a web of materials businesses, equipment manufacturers and fabricators that spans the globe. Looking beyond the headlines of a fragmenting global trade backdrop, we expect pockets of global expertise to persist in this highly specialist area. As a result, we have taken a new holding in the Japanese business, Disco, a manufacturer of dicing, grinding and polishing machines used in the manufacture of semiconductor chips. With a level of precision equivalent to being able to splice a human hair into more than 30 strands, Disco’s machines enable the intricate geometry essential for the manufacture of the most advanced, 3-dimensional, chip architectures.

At the opposite end of the spectrum, we’re finding more companies that are using AI in applications that materially improve their business. During the quarter we took new holdings in the payroll software business Paycom, the advertising platform AppLovin and the customer relationship software business Salesforce. Salesforce is using AI to develop digital assistants that promise to automate large parts of customer relationship roles. Its Agentforce offering is gaining traction and Salesforce can deploy it at a scale and pace that others will struggle to match.

These new holdings have extended our exposure to companies in the AI value chain, which accounts for over a quarter of the portfolio. These range from the technology giants NVIDIA, Microsoft and Amazon to more specialised operators of critical enabling technology and companies that deliver AI-enabled applications to end customers.

Long-term investing in a changing world

While continued advances in AI appear relatively predictable on a long-term time horizon, future geopolitical change seems less foreseeable. 

Understanding this important but unpredictable trend requires a multi-layered approach. We assess how different environments are likely to influence holdings, consider thematic concentrations in the portfolio and direct our research to where change looks most meaningful. We aim to construct a portfolio that is advantaged across a wide range of possible outcomes. We have the luxury of being able to view the world from several different vantage points. The world may look like it is deglobalizing from Washington or Berlin, but it doesn’t feel the same from Rio or Mumbai. Perspective matters. 

Only a quarter of the USA’s GDP relies on trade, making it far more inward-looking than the rest of the world (the global average is more like 60%). The apparent economic license to experiment with tariffs in the near term comes with trade-offs attached, including the impact of perceived instability. Much has been made of the US trade deficit in goods, but less of the trade surplus in services. The nuance matters. Companies and industries will face radically different dynamics. Some companies will carry on unaffected. New regional champions could spring up in freshly protected competitive environments. We are testing the portfolio against the following hypothesis:

Trade tariffs will be an enduring feature and trade friction with the US in both directions will increase on a timeline that stretches beyond Donald Trump’s time in office.

We have already made changes to the portfolio that reflect our developing thinking. Through our trading so far this year, we have selectively reduced the portfolios US exposure. US companies have benefited from a stable geopolitical and policy environment, but we have questioned the sustainability of a US valuation premium on this basis. We had previously sold holdings that depend on low friction in cross-border trade for profitable growth. Examples include Estee Lauder, Pernod Ricard and Adidas.

At the same time, we are finding individual opportunities that look well-set for growth, scoring well against the criteria below and helping position the portfolio for a changing world.

Insensitivity to the political backdrop 

An obvious way to control for political uncertainty is to seek out holdings that can make progress in most scenarios. We already own several great growth holdings that operate primarily in a single market in a single country or region, where the deciding factor will be their ability to attract substantial market share. As well as providing attractive individual return potential, these companies tend to dampen down political risk in the portfolio over a long-enough time frame.

Nubank, the Brazilian online bank and a new purchase during the quarter, will certainly be affected by the health of the Brazilian economy, and the other Latin American economies it operates in, but most of its growth depends on attracting customers to its network and expanding the range of financial services it provides. It has a huge cost advantage over the incumbents and we expect it to grow substantially in the coming years.

More broadly, reversing globalisation could create a larger population of regional businesses with winners in each area. Over the past couple of years, we have already carefully repositioned our Chinese holdings in the portfolio in this light. Our holdings in businesses such as the Latin American retail platform Mercado Libre, the Asian-based e-commerce businesses SEA and Coupang and UK housebuilder Bellway align well with long-term demand trends and a strong domestic or regional focus.

This feature is also evident in our US facing consumer holdings, which depend primarily on new and more efficient ways to reach the consumer (via technology infrastructure and advertising innovation) as well as improving customer experiences. Broader sentiment may at times speed or slow growth for these holdings, but our return potential from this important part of the portfolio depends mostly on where consumers are going, not how much they are spending overall. 

Adaptability

Another way to control for political change is to hold companies with fantastic management teams and inherently flexible businesses. The best companies have a wonderful knack for adjusting to the environment they operate in while maintaining ambition. Several positions in the portfolio have navigated generations of challenge, from the likes of Mastercard and S&P Global in the US to the Swedish industrial compressor business Atlas Copco.

Adaptability is expressed in business models, as well as management, as is the case with new holding in Uber. Having successfully navigated the birth of the ride-hailing industry and the development of regulatory frameworks around the world, Uber has now matured into the dominant player in the on-demand transportation market. Uber’s flywheel (where greater demand attracts more drivers, which increases coverage and leads to faster pick-ups and lower prices, which in turn attracts more demand to the platform) leaves it exceptionally well placed to navigate future transformations such as the deployment of autonomous vehicles. The company also continues to invest in newer areas such as freight, logistics, advertising and rentals, all while generating increasing amounts of free cash.

Leaning into uncertainty

Shaky sentiment towards durable trends can provide us with great opportunities to establish new positions. Our new holding in Enphase Energy, which makes equipment for residential solar energy systems, is one example. The political concerns are domestic rather than international in this instance. Enphase’s share price has tumbled on worries about the impact of changing government policy towards renewable energy generation. We think that economic arguments for solar electricity generation to roll out across the USA are strong and Enphase is poised to play a key role in this move.

More widely, we remain enthused about the prospects for profitable growth driven by a US infrastructure upgrade. The rate of decay of existing infrastructure means that Americans will demand improvement. Reshoring will require stronger infrastructure to support rising industrial activity. Technology leadership will depend on the buildout of new essentials attached to data storage, processing and transmission. This leads us to a more specific hypothesis within the US:

US infrastructure spending will survive amendments to the policies of previous administrations.

We have built up a cluster of holdings in companies with strong positions in supply-constrained industries. Utility poles and plastic pipes, already owned in the portfolio via Stella-Jones and Advanced Drainage Systems, might not usually set the pulses of growth investors racing. Our willingness to go looking in unfashionable places plays to our advantages.

These features are behind our new holding in WillScot, a provider of temporary site offices and storage facilities that has amassed a 50% share of modular space through repeated acquisitions. Commercial projects need site services and WillScot is the clear scale provider. A recent acquisition failure cast a cloud over the share price. We viewed this as a great entry point rather than something to worry about and have taken the chance to bring it into the portfolio.

The outcome

The portfolio remains well-balanced across the three growth profiles. We reduced positions where valuation rises have eaten into the upside from here. This has provided us with space to bring new thinking into the portfolio that plays into the most important investment trends of the next several years and provides you with more ways to win.

Source: Baillie Gifford & Co, Factset. Based on a representative portfolio. As at 31 March 2025. 

Overall, the portfolio trades at a modest premium to the index while delivering much more, and more varied, growth potential. We are willing to pay up where the scale of growth justifies it, primarily in our Disruptors holdings. Encouragingly we continue to unearth companies that trade at undemanding valuations where the longer-term implications of improving quality and demand growth appear to have been overlooked by the stock market.

We are challenging ourselves from the top down with thematic research and scenario testing and we will report on this in detail as 2025 unfolds. We expect these efforts to highlight yet more uncommon ideas for the portfolio. 

We cannot predict exactly when markets will wake up to the attractions of these businesses. Nobody can. But, underpinned by the evident quality of the businesses we own, we have put the portfolio in the best possible position to benefit as the fundamentals are reflected in share prices.

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.

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.

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