default title

The third quarter of 2025 brought an intriguing dynamic to non-US developed markets, revealing a striking underperformance among companies traditionally recognized for their superior quality. In contrast, businesses with lower quality metrics, particularly within the robust Financials sector, demonstrated unexpected resilience and strong performance. This period has prompted a re-evaluation of investment paradigms, reinforcing our conviction in a disciplined, quality-focused approach amidst evolving market conditions.

Insightful Market Trends in Developed Economies

A notable trend emerged during the third quarter of 2025 across international developed markets: a significant disparity in the performance of high-quality companies compared to their lower-quality counterparts. Companies ranked in the top third by our proprietary quality assessment, which typically exhibit stable earnings, strong balance sheets, and sustainable competitive advantages, delivered a modest 14% return. This figure stands in stark contrast to the stronger gains observed among businesses with less robust fundamental characteristics. This divergence signals a potential shift in market sentiment, where investors temporarily favor cyclical or distressed assets over established leaders.

A primary driver behind the outperformance of lower-quality firms was the rehabilitation of profits within the Financials sector. Following periods of economic uncertainty, a rebound in financial institutions often indicates broader economic stabilization or recovery. This sector's renewed vigor injected substantial momentum into the indices, disproportionately benefiting companies previously undervalued or facing headwinds. Such a phenomenon underscores the cyclical nature of market leadership and the potential for sector-specific recoveries to influence overall market dynamics.

Despite these short-term fluctuations, our core investment philosophy, centered on identifying and holding high-quality businesses, remains steadfast. We believe that over the long term, companies with strong fundamentals, superior management, and sustainable growth drivers are best positioned to deliver compounding returns. The recent market movements, while noteworthy, do not diminish our confidence in this enduring principle. Instead, they serve as a reminder of the importance of vigilance and adaptability in portfolio construction.

In response to the shifting landscape and in alignment with our long-term objectives, we strategically augmented our portfolio this quarter. We incorporated a rapidly expanding enterprise whose shares had previously reached peak valuations in 2021. At that time, we considered its market price to have exceeded its intrinsic business value. The current acquisition reflects a more favorable entry point, aligning with our stringent valuation criteria while offering robust growth potential. These judicious adjustments aim to enhance the portfolio's growth profile, ensuring it maintains a reasonable valuation premium relative to the broader market index.

Reflections on Investment Strategy in Volatile Markets

The recent market dynamics serve as a powerful reminder that investment success is not merely about chasing short-term gains but about adhering to a well-reasoned, long-term strategy. While the allure of quick returns from speculative or recovering assets can be strong, a disciplined focus on quality and intrinsic value remains paramount. This quarter’s experience highlights the constant tension between value and growth, and the importance of understanding the underlying economic and sectoral forces at play. It reinforces the notion that true investment mastery lies in discerning sustainable competitive advantages and patiently waiting for opportune moments to invest, rather than being swayed by transient market fads. The ability to adapt and refine one's approach while staying true to fundamental principles is crucial for navigating the complexities of global financial markets.