International Growth: investor letter Q1 2025

Your capital is at risk. 

There has been a momentous feel to the last several weeks. Significant changes in the approach of the world’s dominant power to both trade and geopolitics caused a sharp mood swing in equity markets over the quarter. Globally, growth equities have performed poorly in the current environment, underperforming standard benchmarks. For International markets, this resulted in a continuation of the outperformance of value stocks during the quarter. 

We are following developments closely and are humble about what we can add to the many macro narratives. The Portfolio Construction Group has spent time discussing the changing risk backdrop and this is a live and ongoing conversation. As I write this letter, our response has been to continue to focus on what matters for the long term, company fundamentals and valuations, and to continue broadening the funnel of diversifying ideas and exposures in the portfolio.

Performance

In this context, the portfolio underperformed its benchmark during the quarter as a period of positive returns was brought to a sudden halt by the escalating political rhetoric. We witnessed a rotation away from high-growth stocks, along with a burst of strong performance from areas where we have little exposure. The portfolio’s exposure to technology-orientated companies, in particular those involved in the semiconductor value chain, and several software services companies contributed to the weak relative performance during the period.

Large tech holdings Wix.com, Advantest, and TSMC fell by between 10 and 20 per cent, and our healthcare holding Zealand Pharma also fell similarly. This happened at a time when International equity markets have been rising, helped by a renewed focus on the significant valuation gap between US stocks and those elsewhere. Good share price performance from several of the Emerging Market holdings including BYD, MercadoLibre, Sea and PDD were insufficient to prevent a negative overall short-term relative return.

At the company level, we have also experienced the inevitable stock-specific setbacks with some holdings. WiseTech Global detracted from the portfolio’s performance over the quarter. It delivered strong first-half results with total revenue up 17 per cent combined with impressive profitability. However, these positive financial results have been overshadowed by governance concerns, as founder Richard White, who stepped down as CEO in October last year following allegations of personal misconduct, has recently returned as Executive Chairman. While the recent news has called the appropriateness of WiseTech’s governance into question, we believe Richard White’s new role will enable a deliberate succession rather than an accelerated one, which is likely to be in shareholders’ interests. Other headwinds in the quarter included Johnson & Johnson not going ahead with its next Genmab collaboration, and the market reaction to Novo Nordisk’s next-generation obesity drug trial disappointment.

But the overall operational performance of holdings has been good. Spotify continues to be a shining example of strong business performance and has grown to be the largest holding in the portfolio. This has been driven by a remarkable improvement in profitability with a 14 percentage point uplift in its operating profit margin over the last two years. Another example is Adyen, which grew revenues 22 per cent during the second half of last year with margins expanding and operating income growing 36 per cent over the same period. Or TSMC growing revenue at 39 per cent and upgrading its medium term guidance. Building large positions in these winning companies and growing alongside them over many years is our bread and butter.

Portfolio activity

Our trading in recent weeks has been proceeding along its normal lines. We have not reacted immediately to the change in market dynamics, following our structural bias towards long term decision-making. During the quarter we added to DSV, Hermès, PDD and TSMC, and we reduced several holdings after good performance before the correction, including Ferrari and Spotify.

The broadening of our research funnel continues to manifest in new ideas being added to the portfolio. We added two new holdings during the quarter: Disco; and Games Workshop.

Companies that provide products and services where quality is critical are often highly appealing, given their inherent pricing power and the stickiness of their customer base. Disco, the Japanese manufacturer of equipment essential for semiconductor manufacturing, falls squarely into this category. Disco manufactures and sells precision cutting, grinding, and polishing tools used in the production of silicon wafers for computer chips. The company’s machines are remarkably precise, capable of cutting materials with micrometre accuracy (1/1000 of a millimetre) and grinding wafers to extremely thin dimensions.

With a dominant market share of approximately 85 per cent in their niche, Disco’s equipment plays a vital role in processing semiconductor wafers at a stage where they are already filled with integrated circuits and therefore highly valuable. Notably, while Disco’s manufacturing operations are entirely based in Japan, over 80 per cent of its revenue comes from outside the country, primarily from Asia where the majority of the world’s semiconductors are manufactured. Like other semiconductor businesses, Disco’s share price is particularly volatile, far more so than its underlying business. We are not trying to time the cycle but find the company’s long term prospects compelling, so we will take advantage of this share price volatility to build a holding over an extended period.

Games Workshop is a unique business, bringing further diversification to the portfolio. Founded in the UK some 50 years ago, it has grown to become a global manufacturer and retailer of miniature wargame figures, most well-known for the Warhammer brand. It also licenses its intellectual property to third parties, most recently Amazon, who make content based on the Sci-Fi or fantasy worlds and characters depicted in its games. Its two main wargaming franchises: Warhammer 40k and Warhammer Age of Sigmar, are set in the vast and complex fictional universes created by the company's publishing arm, the Black Library. Its loyal and growing fanbase collect, build and paint armies of intricate figurines, which they then use to play tabletop battle games. Hitherto the company has had mainly niche appeal, but we believe that this is now broadening and will be sufficiently large to result in significantly higher revenues and profits in five to ten years’ time. 

The addition of Games Workshop was partially funded by the sale of our holding in CyberAgent, due to persistent weakness in its gaming division, which has historically been a key growth driver for the company. While its media and advertising segments continue to show strength, we became increasingly concerned about the gaming division’s deteriorating performance despite new game releases, as well as management’s ambitious expansion plans, which carry significant execution risk in an increasingly competitive market.

Outlook

We have been working over the last two years to improve the portfolio risk framework. We have emphasised a broader funnel of ideas as one key area of focus and have brought through new high-quality holdings in Europe such as Hermès, DSV and Galderma as well as in Japan where we added Disco and Advantest. This has contributed to a reduction in the portfolio’s tracking error compared to a few years ago. We will continue to track both the inputs and outputs of our research process to ensure that we are striking an appropriate balance between risk-seeking behaviour and managing volatility, while recognising the inherent uncertainty in both.

We are also examining the portfolio in terms of growth and quality, which can be considered through different quantitative and qualitative lenses. For example, forecast sales and earnings growth and trailing free cashflow margin and balance sheet returns as well as the quality of management. We have maintained our high growth profile but have been steadily introducing a larger portion of high quality companies to the portfolio. We still have a little more to do here, but we are making good progress.

We believe that the balance of operational performance at portfolio companies is good and that recent share price moves have been indiscriminate. Our response will be considered and cognisant of the evolving macro picture and portfolio risk, but the long-term structural arguments for the companies we invest in are compelling; valuations seem to us acceptable given the good growth prospects and improved profitability of some of the faster-growing companies, and we are continuing to find a diverse range of exciting new international growth companies to add to the portfolio.

*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

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

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 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.

Important Information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

Financial Intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.

Europe

Baillie Gifford Investment Management (Europe) Ltd (BGE) is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. BGE also has regulatory permissions to perform Individual Portfolio Management activities. BGE provides investment management and advisory services to European (excluding UK) segregated clients. BGE has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. BGE is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

Japan

Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

Australia

Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”).  Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client.  In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.

This material contains general information only.  It does not take into account any person’s objectives, financial situation or needs.

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

Israel

Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.

Singapore

Baillie Gifford Asia (Singapore) Private Limited is wholly owned by Baillie Gifford Overseas Limited and is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence to conduct fund management activities for institutional investors and accredited investors in Singapore. Baillie Gifford Overseas Limited, as a foreign related corporation of Baillie Gifford Asia (Singapore) Private Limited, has entered into a cross-border business arrangement with Baillie Gifford Asia (Singapore) Private Limited, and shall be relying upon the exemption under regulation 4 of the Securities and Futures (Exemption for Cross-Border Arrangements) (Foreign Related Corporations) Regulations 2021 which enables both Baillie Gifford Overseas Limited and Baillie Gifford Asia (Singapore) Private Limited to market the full range of segregated mandate services to institutional investors and accredited investors in Singapore.

144821 10054071