Positive Change: investor letter Q1 2025

Your capital is at risk.  

Political interventions have been at the heart of the headlines of the first quarter of 2025. A new administration in the USA has brought with it policy shifts across a number of areas which have sparked uncertainty, fears of recession and volatility in equity markets. This negative market sentiment has weighed on both the returns of Positive Change and the benchmark over the quarter.

In this quarter’s letter, we address the potential impact of political change on the investment environment and share our view of what it means for the Positive Change strategy’s ability to rise to the challenge of contributing to a more sustainable and inclusive world while delivering attractive long-term returns.

The established world order has been shaken up

It is rare for the Positive Change team to comment on the political backdrop. This shouldn’t be misunderstood as a lack of interest in or consideration of the impact politics can have. We deliberately avoid such commentary because our investment and impact time horizon typically extends beyond terms in office. We consciously try to avoid political ‘noise’ that is of little relevance in the face of the forces driving the success of the companies in which we are most interested.  

However, the situation feels different today. That the renowned British journalist, John Simpson, who has five decades of experience reporting on world affairs spanning 120 counties and 30 war zones, has called this out as out as extraordinary times and that ‘2025 could be a year for the history books as Trump shreds global norms’, provides validation to concerns that this is big. John Simpson has suggested 2025 could be akin to pertinent historical events that have challenged norms such as the 1968 Soviet invasion of Czechoslovakia, the 1989 Tiananmen massacre, the fall of the Berlin Wall in 1989 and the implosion of the Soviet empire.

At the end of March, the European Union urged its member states to begin stockpiling essentials in anticipation of emergencies such as natural disasters, cyber attacks and geopolitical crises. A stark indication of sentiment and the seriousness of the situation we risk finding ourselves in.

The Positive Change team’s assessment

There are three interlinked areas of relevance: the economic backdrop, geopolitical fragility, and the pursuit of a healthier, more inclusive and more sustainable world. 

While these areas are interlinked, for simplicity, here we provide some commentary on them in isolation and their relevance to our investment philosophy and the portfolio.

Economic backdrop

While we can pontificate about what the US president might decide to do or say, what might change his mind, and what the first and second-order effects might be of his decisions, to try to predict with any degree of certainty would be foolhardy and time-ill-spent. Even economists are admitting that it’s more difficult to forecast against this backdrop. If we take tariffs as an example, the rhetoric can change even in the course of a day depending on the reaction of counterparties and negotiations made between leaders (“trade-war whiplash” at the beginning of the year). Politicians, economists, business leaders, investors and individuals are all trying to fathom the implications of ‘Liberation Day’ on April 2nd. We don’t know how long-lasting tariffs will be nor their implications for growth, inflation and monetary policy.  

What do we as long-term investors do in an environment where uncertainty prevails?  

The same as we have always done: remaining true to our philosophy, determined in our idea generation and portfolio management and alert to the opportunities, risks and financial resilience of the companies we invest in – their pricing power, their cost structures, their cash characteristics and the nature of their balance sheets. The portfolio as a whole has a net debt to equity of 0.0 compared to 0.5 for the index. 95% of the portfolio is invested in businesses that are profitable. 5% of the portfolio is invested in five companies that are free cash flow and earnings negative, however, we are comfortable that they have good cash positions and access to finance which means they are well placed to continue to fund their growth. Economic fluctuations could have a short-term impact on some portfolio holdings, but we believe that, on the whole, it is a portfolio that is resilient to potential shocks.

Political backdrop

There is uncertainty both within political systems and between them, and politics and economics are deeply intertwined. After a period of globalisation, we are now challenged with navigating de-globalisation and its implications. Commentary on the political situation and de-globalisation could be far-ranging. However, there has been a shift towards de-globalisation for some time. Some of the topics the team has been discussing include the implications of the US restricting China’s access to leading-edge technology and the irony of this resulting in China using its significant internal resources to overcome such challenges and, in doing so, leapfrogging the West with DeepSeek, an efficient AI model with cost-effective, open-source architecture. We have long considered the geopolitical tightrope and competitive landscape for the Taiwanese semiconductor manufacturer, TSMC and the Dutch manufacturer of critical equipment used to make semiconductors, ASML.  

De-globalisation and re-shoring may not be new, but indications are that deteriorating relationships even between longstanding partners in the West could see this trend accelerate in the coming years. Within the Positive Change portfolio, there are companies that could be beneficiaries of accelerated re-shoring to the US, for example, an uptick in construction activity in the US could benefit Ashtead, a company recently added to the portfolio, that provides equipment rental services to industries exposed to construction.

Pursuit of a better world

Rather than predict or comment on economics and politics, the most pertinent question about the Trump administration is how it might impact the Positive Change team’s philosophy and whether it calls into question our belief in our dual objectives.  

The short answer is no: we continue to believe that companies whose products and services provide solutions to global challenges will be the growth businesses of the future, and the data consistently tells us that companies with superior earnings growth deliver the greatest outperformance.  

But with Donald Trump’s vow to ‘drill, baby, drill’ as he promotes the use of fossil fuels over renewable energy sources in a bid to prioritise what he believes is a ‘national energy emergency’ over the global climate crisis; with his executive order to halt development aid which is having terrifying health implications for those in developing countries no longer able to access medicines; and with his views and actions on immigration, it is important to further explain why we remain committed to our philosophy.

Why we remain determined optimists.

Many of the new administration’s positions are perplexing and a source of frustration. However, despite this, we believe there are reasons for determined optimism.

The administration’s stance and actions could provide a speed bump in the deployment of solutions to the climate challenge, but we don’t think it will stop the energy transition: the global nature of the challenge and the economic and technological forces that are already well in motion will be too convincing for a single country or political leader to stop the transition in its tracks.

Rolling back from commitments, such as the Paris climate agreement (again!) and of regulations, the elimination of subsidies and cancellation of funding could well provide a headwind in the US to the construction of wind farms, the adoption of electric vehicles and levels of investment in domestic solar manufacturing capacity. But, to repeal funding agreed by his predecessor under the Inflation Reduction Act will be challenging, and with many Republican states benefitting from IRA funding, it might not be straightforward – in the two years since the IRA’s passage in August 2022, nearly $17 billion in clean energy investments and more than 24,100 new jobs have been announced in Texas. Furthermore, the President’s encouragement for investment in fossil fuels will require a willingness on the part of the industry to invest and it takes years to design, permit and construct gas-fired power plants, for example.  

These will be hindrances to the US administration’s attempts to stall the energy transition but technological breakthroughs and economics – market forces – are the key reasons for optimism.

“We will make electricity so cheap that only the rich will burn candles.” Thomas A. Edison, Menlo Park, 1879 

We have often been drawn to learning from history. In this light, another reason for optimism was hearing from Professor Johan Schot, an expert in global history and sustainability transitions from the University of Utrecht. His studies have identified that transitions (such as the Industrial Revolution) are often met with resistance or ‘speed bumps’ along the way. It is part of the journey.

It is a race against time between climate tipping points and economic tipping points. Clean solutions are scaling far more quickly than thought possible thanks to technological developments and falling costs: in 2024, global solar module prices fell by 35%; battery cathode costs fell by 30-50% depending on the technology; and battery costs are down by 20%. We believe economics will trump politics in the long term: for example, market forces will lead utilities and the installers and operators of energy-intensive data centres to choose the cheaper, cleaner option. 

And if the current US administration chooses to ignore the economic rewards of leadership in manufacturing green solutions, there will be plenty of appetite elsewhere. Chinese manufacturers of solar panels, electric vehicles and batteries will pounce on the lack of manufacturing appetite in the US and use it as an opportunity to grow their market share. This, in turn, will drive prices down further, making the economic draw to adopt clean solutions even more appealing.  

From a portfolio-specific perspective, Positive Change invests in a broad range of companies and industries. The companies in the Environment and Resource Needs theme are not dependent on subsidies or particularly exposed to US government policy on renewables and green technologies. Rather, the companies in this theme are drivers of efficiency, for example, water and hygiene solutions provider, Ecolab, software developer for architecture and construction industries, Autodesk, and semiconductor materials developer, Soitec. These companies all offer products that help their customers cut waste and become more energy and resource-efficient. Other holdings such as water solutions provider Xylem, French multinational energy management company, Schneider Electric and equipment hire company, Ashtead are exposed to infrastructure and are not dependent on the whims of the government of the day for their long-term success.

A portfolio focused on progress towards a more sustainable and inclusive world

Despite the challenges coming from political activity in the US this quarter, the Positive Change team has remained focused on global, long-term opportunities and ensuring companies have the potential to meet our dual objectives. 

There have been a number of attractively valued and exciting growth opportunities beyond the US. Indeed, six new companies from outside the US entered the portfolio in 2024. 

This theme continued in the first quarter of 2025.

Kaspi is an exciting super app headquartered in Kazakhstan. The company has evolved from a traditional bank to become the dominant e-commerce and payments app, with 70 per cent of the Kazakh population engaged with, and 80 per cent of digital payments processed through its platform. We believe Kaspi has a substantial opportunity to expand its marketplace and advertising platform. Penetration of e-commerce remains low at just 12 per cent in Kazakhstan international expansion also holds promise, with its business in nascent markets, such as Turkey, Azerbaijan and Uzbekistan offering exciting opportunities. 

A second addition to the portfolio this quarter is Prudential, a leading insurer with 18 million customers largely based in Asia and Africa. Prudential is positioned to benefit from fast-growing middle-class populations in regions where there are little or no social safety nets and low insurance and protection product penetration. The company is well placed to capitalise on this opportunity due to its scale and reputation in an industry with high barriers to entry.

In January, we took the decision to sell Tesla, following eight years in the portfolio during which it went from delivering 100,000 to 1.8 million electric vehicles a year and made a share price return of over 2,500%. Not only has Tesla created great value for shareholders, but it has also played a critical role in the electrification of the transportation sector. However, following significant expansion in its share price at the end of last year following the results of the US election, our view is that the share price was detached from the fundamentals of the investment case with a more challenging environment for its EV business and the high degree of uncertainty in its exciting but early stage ventures into autonomous driving and robotics. Tesla’s increasingly demanding valuation has seen the position reduced several times over recent years. The large increase in valuation linked to the US election result in November last year was a catalyst for a review that led to its departure from the portfolio.

Opportunities for those with broad horizons and cool heads

Given the severity of the challenges we face as a society and the power of human ingenuity driving technological developments and economic attractions, we continue to believe in our philosophy, acknowledging there might be speed bumps along the way.  

We believe the opportunities span beyond addressing the climate crisis: digitalisation is improving access to important financial services (MercadoLibre, Remitly, SEA, Grab, Nu) and education (Duolingo, Coursera, New York Times) while also reshaping the market structure of traditional industries, creating a ‘winner takes most’ dynamic. Advances in our understanding of biology through next-generation sequencing (Illumina), combined with the power of AI (TSMC, ASML, Microsoft), are accelerating the pace of drug development (Moderna, Alnylam) and helping us advance towards personalised medicine. This is to say that the search for companies that are addressing global challenges can lead us to a wide range of sectors, industries and businesses.  

We will add the most value by keeping cool heads and long-term time horizons against uncertain and volatile backdrops, an approach that has been instilled at Baillie Gifford and passed on through the generations over our 117 years of existence.  

We remain concerned about the challenges our world is facing, determined to play a role in resolving these challenges, and optimistic that doing so will lead to attractive returns for savers.

*Inception date: 31 January 2017

Source: Revolution, MSCI. US dollar. 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.

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