Global Alpha insights: a time to trade?

As with any investment, your capital is at risk.

One way to evidence this is through low portfolio turnover. Since the strategy's inception in 2005, on average, we have turned over less than a fifth of the portfolio per year. This makes intuitive sense. If we do our job well we should find more of the exceptional companies than the average, holding them as they become more valuable and deliver returns for clients on the way.

However, though still glacial compared to many, this rate of churn increased to 25 per cent over the last year. So, is this a sign we’re drifting from our long-term DNA?

No. We believe that not only is it in keeping with our approach, but it is also a logical product of the changing environment, where valuation discrepancies are offering up opportunities for stock selection. It is also the result of a purposeful attempt to broaden the base of growth across the portfolio.  

When it pays to trade (slightly more) 

Global Alpha turnover

A look at the strategy’s historic turnover is instructive. On two occasions the portfolio turnover rate has been higher than today: the Global Financial Crisis starting in 2007 and the ensuing Eurozone debt crisis in 2010. Other spikes over 20 per cent follow the ‘Taper Tantrum’ in 2013 when the US Federal Reserve tried to stop quantitative easing, and the Covid-19 pandemic.

When volatility is high, as it was during these periods, share prices can disconnect from fundamentals, creating opportunities to upgrade the portfolio's return profile.  

These periods also brought about rapid changes to the operating environment that altered companies’ odds of success. This requires a reassessment of holdings and often portfolio change. In Global Alpha’s case, these intervals of increased turnover preceded strong performance over five years in all but one period, the pandemic. In that case, with hindsight, we should have repositioned the portfolio more rather than less.  

Today’s environment is different from those stated above, but it is uncertain in its own way. Questions persist about geopolitical and economic regime changes, not to mention the little-talked-about technology innovation, AI. The impacts of these changes are difficult to predict, but the fact that they will create winners and losers is not. It’s creative destruction in hyper speed.  

Opportunity knocks 

The MSCI All Cap World Index’s valuation has increased over the past two years, even after last month’s weakness. However, the aggregate picture misses the wood for the trees. While valuations have increased, the spread, or difference between the most expensive and the cheapest company, has opened further.

The chart below shows the price-to-earnings of the index split by valuation quintiles – telling us the price the market is willing to pay for the earnings a company delivers. The chart shows the gap between quintiles is very large relative to the last 10 years, excluding the pandemic.

Index quintile median price-to-earnings

Our return hurdle requires finding companies that can double over a five-year period, which means we would not look to simply arbitrage this valuation gap. However, this gap is allowing us to improve the relative growth and valuation profile of the portfolio.

Of the 19 profitable new holdings over the past year roughly half are currently trading at a below-market multiple and five are trading in the low teens or below.

We’ve been funding those by selling more expensive growth like chip maker Analog Devices or reducing high-quality companies trading at a premium like financial ratings business Moody’s and strong performing but highly rated companies like audio platform Spotify. 

By doing this we’re getting far more growth potential for our money across the portfolio.

Broadening the base of growth 

In addition to ‘taking what the market is giving us’, a purposeful attempt to bring new idiosyncratic companies into the portfolio has also driven turnover.

We don’t look to allocate to sectors or industries, instead, we build a strong pipeline of interesting and varied ideas found by our team and network across Baillie Gifford.

Only the best make the cut.

Our use of AI has incrementally enhanced our productivity and increased the pace of new ideas, but the high bar for entry, and decision-making rigour, remains the same. Our use of risk tools like correlation analysis and valuation heatmaps can help compare these new opportunities and optimise portfolio construction.  

In the last year, those that have made the cut have spanned aircraft engine maintenance, Brazilian digital banking, alternative asset managers, sales software, boat manufacturing, Chinese spirit makers, chip manufacturers, health insurers and drive-through coffee chains.

The result is a more resilient portfolio in changing times, and diversified growth engines that can fire in different environments. This is fundamental to our approach. 

As proponents of a long-term and patient approach, we understand that in our industry, a change in portfolio turnover can raise questions. Although Global Alpha’s turnover has ticked up by our own historic standards, it is more ‘Tachtely-ian’ in nature.

It is a byproduct of the changing environment.

The market is uncertain, but this uncertainty is offering a chance for us to upgrade the portfolio from the bottom up and exploit a market inefficiency. More growth at undemanding valuations and the added resilience of idiosyncratic growth drivers to boot.

Our views are evolving, as is the portfolio with it. We believe this adaptation can set the stage for outperformance for our clients in future.  

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 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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