International Growth Q4 investment update

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Katie Muir (KM): Hello and welcome to this fourth quarter update for the International Growth Strategy. I'm Katie Muir and I'm an investment specialist for the Strategy, and I'm joined today by Robert Wilson, who is an investment manager and member of the Portfolio Construction Group for the Strategy.

Today we'll provide an update on performance, touch on some of the recent portfolio activity and hear what Robert got up to on his recent trip to Asia. But first, as a quick reminder, the International Growth Strategy aims to identify 50 or so of the best or most exceptional international growth companies we can find and own them in size for five, ten years or even longer. We're really focused on two types of growth companies: those that can grow very rapidly and those that can compound their growth at exceptional rates of return over long periods. In both cases, we're looking for a holding to provide substantial upside over the long term.

So, welcome Robert. Happy New Year.

Robert Wilson (RW): Happy New Year.

KM: So, despite an eventful year for politics and certainly geopolitics, the strategy delivered good absolute investment returns in 2024 and outperformed its benchmark for most client portfolios. Then if we look at the final quarter of the year, the Strategy also outperformed the benchmark but that was in a declining market where we saw quite a divergence between US and international equities following the US election in particular. But at the stock level, Spotify was a standout contributor for both the year and the quarter in terms of the strategy's performance. What's been behind that continued strong run for Spotify?

RW: Sure, happy to talk about it. I mean, obviously, just to say that the quarter is a short time to measure for us. When we're thinking about Spotify, we are thinking about it over that longer period of time. We've held Spotify since its direct listing 2018, some clients even before the listing. Over that period, I think we've seen very strong returns. The last year in particular has been strong because of increasing cost management. That's something that Spotify has not historically been that good at. They've been a bit ‘growth at all costs’. We've seen them inflect, and they've inflected very successfully in that respect in terms of improving the margin. We've been impressed by that. Clearly, the market has also been impressed by that, and the shares are very strong as a result.

We do think – we have been trimming a little bit. That's partly to reflect that this is a self-help measure. You can only repeat cost-cutting a couple of times. It's not something you can do indefinitely. We're trying to optimise for, obviously, that top-line growth as a leading indicator of bottom-line growth. And so, for that reason, I've taken a little bit of money away. But the opportunity remains big. It's a $100bn company now, but we still see a big opportunity from here. It's one of those important platforms in the world.

KM: Great. I'm a happy Spotify user, so continue to agree with that. What about some of the other positive contributors to recent performance?

RW: I think two that I would call out are Sea Limited, the emerging markets, ecommerce, digital financial services and gaming business, and Advantest is probably also a notable one.

With Sea, that's actually quite a lot like Spotify in the sense that it had been through a period of exceptional strength, then exceptional weakness, and now has kind of found a situation where the strength flex more fundamentals in a kind of aligned way, which we feel obviously very positive about. That's largely because fundamentals have been very good there across all three businesses. Gaming has recovered really nicely. Ecommerce fended off a lot of competition very successfully, and digital financial services is a whole new area for them that has seemed to have incredibly strong results there.

In Advantest, that's a little different. That's more to do with its strength in AI. The broader semiconductor market has been a little bit weak, but the AI exposure within that industry has been really strong. Advantest is quite deeply plugged into NVIDIA and TSMC at the kind of leading AI edge. Memory testing is also a very important part of that AI market growth. And Advantest has been very strong as a consequence. So again, I feel very good about both those names.

KM: Great, thanks Robert. Maybe turning to some areas of share price weakness, Vestas, the wind turbine maker, that features both for the quarter and the full year as a detractor. Why has that one been weak?

RW: I think a big reason with Vestas, which makes wind turbines, is politics. The political landscape has obviously quite meaningfully changed over the past year. The will towards transition technologies is weaker than it has been, I think, over the past couple of years. That is bad for the demand environment. I think that does overlook that there's a massive opportunity for the company that relates not really just to politics, but to the technology. Wind and solar are both really improving as economies of scale get realized, as the technology improves in terms of their efficiency profiles. And for that reason, we expect them to become a bigger part of the mix. We still remain very optimistic about that happening as a growth driver. I think the issue has been business quality has been worse than we've expected to some extent. Free cash flow generation isn't what we would like it to be so we haven't really used the weakness as an opportunity to add or anything in that way yet.

KM: Okay. And SolarEdge was in that camp as well?

RW: Right. So, SolarEdge is a lot like Vestas, except worse. I mean, you know, the compounding issue, all of the same stuff applies, but the compounding issue has been the culture has been probably fairly weak there. Management decisions have been empirically the wrong decisions to have made. Vertical integration of batteries is a bit of a disaster. Liquidity is strained. We've moved on altogether as a result.

KM: Okay, so SolarEdge was one of our sales during the quarter and I think that sort of leads us into talking about transactions, maybe focusing on the portfolio now and what the team has been up to more recently.

Portfolio turnover was slightly higher in 2024 as we've moved on from some holdings like SolarEdge and initiated new positions, but we'd expect that to settle back into our sort of 10 per cent to 20 per cent corridor. But maybe if you could talk about some of the more recent transactions?

RW: Sure. Well, I mean, just on the turnover briefly, it's higher because we see a lot of opportunity. We're excited about a lot of things. We have an opportunity to do a bit of portfolio renewal, taking out some of the names that haven't really worked as well and concentrating or buying new positions and things that we're excited about. We don't expect that to be this level of turnover forever, I think that 10 per cent to 20 per cent range remains something that we would think is a long-term indicator.

In the more recent period, [we] moved on from Nidec, the Japanese motors company, altogether. We've also moved on from Kering altogether in the more recent period. That follows quite a long period of weakness in Kering, which has been a disappointment. I think there's been some lessons learned. We've sort of in particular learned within the luxury market that you really have to be at the absolute top end of the market in order to really succeed, to be resilient through different cycles and to realize excess returns. For that reason, we've also bought Brunello Cucinelli over the recent period in a relatively small position size. And we've continued to add to Hermès, which we think is probably one of the most exceptional businesses in the world in terms of quality. So those have been some of the more recent transactions.

KM: Brilliant, thanks Robert. And maybe to finish on, I know you were back in Asia towards the end of the year. Is there anything you'd like to highlight in particular from that trip?

RW: Yeah, it's been a very big year for travel. I've spent probably over a month on the road. I was in China, Korea, Taiwan, and Singapore in the end of November, early December. I think one of the big areas for me was looking at Asian electric vehicles in particular, especially Chinese, meeting BYD and the like. I'm incredibly impressed by the technology there. I mean, really test-driving some of these vehicles. They are incredibly impressive in terms of the metrics, the results, and certainly the cost structure with which they're made.

I really think at two to three times the price that some of these cars are made for in China, they would be very competitive within the, at least the UK market, a particularly poorly-served market, I should say. So very optimistic about that, certainly, within China.

Beyond China, I think it does get into a more thorny geopolitical situation. I was talking to the companies a lot about their potential for export and how they would navigate that, and I think the approach is actually very thoughtful. So, that's something that we will continue to monitor. I think that will have a lot of ramifications across the equity market and [is] something that we should continue to follow and be excited about.

KM: Great. Thanks, Robert. I'm certainly starting to see more BYDs on the road in the UK and was in Brazil towards the end of last year and counted multiple BYDs in dealerships everywhere so I think there's a long growth runway there.

Thanks for joining me today and thanks for those of you watching. It's been great to see our patient approach to growth equity investing paying off with the likes of Spotify and Sea as we spoke about earlier. We hope that you found this update helpful, and we look forward to updating you again soon.

International Growth

Annual past performance to 31 December each year (net%)

Annualised returns to 31 December 2024 (net%)

*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.

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