As we replicate on 2025, it’s exhausting to disregard the fixed drumbeat of adverse headlines: elevated geopolitical tensions, ongoing conflicts, commerce frictions, and a broader shift towards de-globalisation. But, regardless of this backdrop of uncertainty, world fairness markets as soon as once more delivered robust returns—one other reminder that markets usually advance not within the absence of threat, however regardless of it.
Market backdrop and efficiency
Because the previous Wall Road adage goes, the market climbs a wall of fear. In 2025, buyers had no scarcity of causes to fret—wars, tariffs, interest-rate considerations, and an unsure macro outlook—but markets moved larger as companies continued to develop revenues, earnings, and money flows.
China, focus, and the place the true alternative was
In final 12 months’s annual letter, we laid out a transparent, contrarian thesis. We tilted our allocation decisively towards China at a time when the consensus was broadly seen as unattractive by the market. In 2024, we positioned roughly 86.0% of the portfolio in Chinese language equities. That positioning proved properly justified in 2025, because the MSCI China Index delivered a complete return of 31.4%—its strongest 12 months in practically a decade—and considerably outperformed the S&P 500 whole return of 17.9%.
In the meantime, the S&P 500 itself turned much more concentrated. Index ranges of focus reached extremes not seen for the reason that 2000 web bubble and the roaring Twenties, with the so-called “Magnificent Seven” accounting for roughly 34.0% of the index and contributing about 42.0% of whole returns, pushed largely by robust investor enthusiasm and momentum round AI-related themes. Excluding the Magazine 7, the S&P 500 would have delivered a return nearer to 10.0%, roughly in keeping with the S&P 500 Equal-Weighted Index at 11.0% and Vanguard’s Complete US Inventory Market Index at round 11.0%.
In a 12 months when many energetic US-focused managers struggled to beat a Magazine-7-driven benchmark, we delivered a gross return of about 26.3% whereas intentionally avoiding the US AI bubble and lofty valuations. We stayed anchored to our ideas: shopping for high-quality corporations at nice valuations. Because of this, we outperformed the S&P 500’s 17.9% and the MSCI ACWI Index’s 22.9%. This reinforces an necessary lesson: incomes glorious returns isn’t about chasing no matter is trendy; it’s about proudly owning nice companies at wise costs.
China vs. the Magnificent Seven: who actually delivered?
In final 12 months’s letter, we in contrast a basket of main Chinese language giant caps to the celebrated US Magnificent Seven and argued that worth and sentiment had been pointing in reverse instructions. In 2025, that thesis performed out in actual time. On common, our China basket—Alibaba, BYD, Tencent, Baidu, PDD, and JD.com—returned roughly 30.0%, whereas the US Magnificent Seven as a gaggle delivered about 22.0%. Few would have anticipated the supposedly “uninvestable” Chinese language names to outpace their extremely praised US counterparts, particularly in a 12 months when the Magazine 7 loved an AI-driven momentum tailwind and buyers had been satisfied they’d “change the world.”
Because the late Charlie Munger put it, the job is to fish the place the fish are. For us, which means utilizing our world mandate to go wherever the true alternatives lie—China, the US, or elsewhere—fairly than hugging a single index just because it feels acquainted or common with the gang.
Wanting by means of the lens of a holding firm
We view the fund as a holding firm. Once we purchase a inventory, we consider it as proudly owning a slice of an actual enterprise—its revenues, earnings, and money flows—fairly than only a ticker on a display. To make this concrete, we combination the underlying fundamentals of each share we personal and translate them into income, earnings, and free money move per fund unit. This method permits us to guage our efficiency the way in which an proprietor would: by means of elementary development, profitability, portfolio high quality, and valuation.
In 2025, our portfolio corporations grew revenues by about 30.1% and earnings by 31.0% in US-dollar phrases. Within the native currencies by which they report, revenues grew 25.6% and earnings 26.6%, with the distinction largely pushed by greenback weak point and FX translation results.
As you will note within the development tables within the report, our corporations delivered excellent development—considerably larger than the key indices we take into account related benchmarks. Our roughly 26.3% gross fund efficiency for the 12 months got here virtually totally from this earnings development. We didn’t profit from a number of enlargement; returns had been pushed by fundamentals, not rising valuations.
Valuation: robust returns with out paying up
This lack of a number of enlargement is seen once we examine our portfolio’s valuation at present with final 12 months’s. Regardless of the robust efficiency, our portfolio stays cheaper than, or broadly in keeping with, final 12 months’s ranges on most valuation metrics, and continues to commerce at a significant low cost primarily based on our evaluation of underlying fundamentals.
Once we set these valuations in opposition to these of main indices, the distinction turns into even clearer: our holdings commerce at a considerable low cost to world indices on earnings, gross sales, and free-cash-flow measures, whereas providing larger dividend yield and stronger underlying development. That mixture—higher companies at decrease costs—is strictly what we search for.
Portfolio high quality: returns on capital and profitability
Valuation is simply half the equation; high quality issues simply as a lot. In 2025 we improved the standard of the portfolio meaningfully. Our return on fairness rose from round 17.8% to over 22.3%, and our return on capital employed elevated from roughly 17.0% to only over 20.0%. Inside reinvestment ROIC additionally improved, displaying that incremental capital is being deployed at very engaging charges of return.
Once we examine these metrics to the key indices, the hole is clear. Throughout Return on Fairness, Return on Capital Employed, and Return on Invested Capital, our portfolio corporations earn meaningfully larger returns on capital than the broad indices, highlighting each superior enterprise high quality and higher capital allocation.
Geographic allocation: China nonetheless leads, diversification expanded
Our present geographic publicity in contrast with final 12 months displays each conviction and choose diversification. We diminished our China publicity from the mid-80s to the high-70s and launched two new areas—Denmark and Brazil—the place we discovered distinctive companies that meet our standards. The US allocation additionally elevated modestly as choose alternatives emerged at affordable valuations. We stay keen to go wherever the risk-reward profile is most tasty, fairly than sticking to any home-market bias. The desk & chart under summarizes our geographic allocation at year-end.
Along with geography, we additionally handle diversification by enterprise mannequin and sector. The chart under reveals our sector allocation as of year-end and comparability of final 12 months, highlighting the place we’re discovering probably the most compelling alternatives at present.
Placing all of it collectively
We method public markets with the mindset of enterprise house owners. Investing, to us, is akin to proudly owning a household enterprise: you deal with the long run, the sturdiness of the mannequin, the integrity and alignment of administration, and the worth you might be paying relative to intrinsic worth.
Our technique is easy however demanding in observe:
- Personal excessive–high quality corporations with sturdy aggressive benefits.
- Accomplice with administration groups whose incentives are aligned with shareholders.
- Pay costs that construct in a margin of security.
- Look globally, not domestically, for the very best mixture of high quality and worth.
In 2025, our corporations grew earnings by greater than 30.0%, commerce at valuations that stay properly under world market averages, and exhibit larger returns on capital than the indices. This mix drove roughly 26.3% development within the fund, permitting us to outperform the benchmarks whereas nonetheless leaving what we estimate to be roughly 30% undervaluation within the portfolio. If valuation gaps had been to slim and our holdings had been to maneuver nearer to assessed truthful worth, this may indicate significant upside potential, earlier than contemplating any extra elementary development.
On prime of this, our portfolio gives an estimated whole shareholder yield of about 4.8%, combining a 2.9% dividend yield with 1.9% buyback yield. Even with out assuming incremental development, a convergence towards truthful worth would, in such a state of affairs, symbolize a cloth contributor to ahead returns over time.
We’re very optimistic about our holdings. We consider the businesses we personal are top quality, attractively valued, and properly diversified by enterprise mannequin and geography. We additionally consider deeply in alignment: we make investments alongside you within the fund, and I’ve personally elevated my funding, reflecting my conviction within the alternative forward.
