The fast view
- Following a dynamic 2024, this year is already amplifying market volatility with fresh uncertainties.
- In this evolving landscape, achieving resilient and adaptive compounding demands an unwavering focus on quality—favoring businesses with distinct advantages, robust fundamentals, and attractive market opportunities.
- We recommend actively diversifying abroad to mitigate persistent US market concentration risks.
- Since its inception, Ninety One’s International Franchise strategy has provided investors with a compelling growth alternative and complement to conventional investment styles, consistently delivering strong, attractive returns while preserving upside potential.
Focusing on the true drivers of value creation
Global equities climbed in 2024, fueled by strong earnings, AI excitement, and stabilizing macro dynamics. President Trump’s November re-election added fuel to the rally, with investors betting on tax cuts and deregulation. Once again, the US stole the show—the S&P 500 surged 25%, marking its fourth 20%+ gain in six years. Meanwhile, international markets posted a solid but underwhelming 6% in comparison. However, evidence so far this year shows the hegemony of the US darlings from 2024 may be challenged, while the concentration and valuation risks of the US market still remain. Consequently, a greater case can be made that investors should diversify actively into markets and quality companies outside the US.
At the start of 2024, investors were cautiously optimistic, but few foresaw such strong returns—underscoring the risks of market timing and oversimplifying complex forces. The real drivers of long-term value? Growth in earnings and dividends—tangible measures of economic productivity—explain most equity returns over time.
Figure 1: Free cash flow growth and dividends account for the bulk of long-term returns
Source: Ninety One, Bloomberg, December 31, 2024. Index analyzed: MSCI ACWI ex-US.
Market valuations faithfully oscillate around these core fundamentals, re-tethering to economic realities between moments of euphoria and despair. While their catalysts vary, these corrections are often momentous, predominating performance signatures and revealing portfolio tendencies. Recent experience includes several, including the pandemic, international conflicts, and extreme shifts in monetary policy. Throughout the volatility, companies with strong competitive advantages, secure funding positions, and accretive reinvestment opportunities have proven adaptable compounders of wealth.
Furthermore, these and the following attributes drive the resilient growth outcomes delivered by the quality approach of Ninety One’s International Franchise strategy.
Figure 2: Our definition of quality companies
|
1 |
2 |
3 |
4 |
5 |
International Franchise seeks to compound shareholder value faster and with greater resilience than the broader market across a full market cycle. Over time, shares reflect a company’s intrinsic value, which we measure using cash earnings per share. Elevating quality characteristics alongside strong earnings growth can increase performance consistency across different market environments.
Since inception, Ninety One’s International Franchise strategy has comfortably outperformed its MSCI ACWI ex-US benchmark, performing in the top decile and delivering 460 bps (gross)/370 bps (net) of annualized alpha for clients.1
Figure 3: International Franchise has comfortably outperformed its benchmark since inception
| 1 year | 5 years p.a. | Since inception | |
|---|---|---|---|
| Composite (gross) | 10.2% | 7.7% | 11.4% |
| Composite (net) | 9.4% | 6.8% | 10.5% |
| Benchmark | 5.5% | 4.1% | 6.8% |
Source: Ninety One, December 31, 2024. Where performance is gross of fees, returns will be reduced by management fees and other expenses. Net performance is net of the highest institutional segregated portfolio management fee. Both gross and net returns are in USD, shown net of all trading expenses. Income is reinvested. International Franchise strategy inception: December 31, 2018. International Franchise benchmark: MSCI ACWI ex US. International Franchise description: Global ex-US equity mandates focused on high quality companies with strong franchises, comparison indexed against the MSCI AC World ex-US index.
We are pleased to see returns reflect the portfolio’s earnings over time, shown below, which have compounded at just under 9% per year. Two important observations: First, a materially lower drawdown than the market in 2020. Second, this superior earnings growth has been the predominant driver of the strategy’s outperformance, and has not relied on a large re-rating; whereas the market’s anemic earnings contributed only nominally to its returns.
Figure 4: International Franchise’s EPS has compounded faster and more consistently than its benchmark’s
Source: Ninety One, Bloomberg, December 31, 2024. Based to 100 at Dec 2018. Earnings based on blended 12-month forward EPS. Based on a related portfolio with substantially similar objectives as those of the services being offered.
This International Franchise has been tested by six very different environments, notably:
2019: a steady ‘goldilocks’ economy
2020: the COVID-19 pandemic
2021: a low-rate, money-stimulated bull market
2022: war in Europe, rampant inflation
2023: record interest rate hikes, slowing global growth
2024: an AI-fueled bull market
Strong performance across diverse circumstances, especially in the context of efficient turnover (~15% per year), reveals another key benefit of our approach – adaptability2. How a company responds to change, disruption, and stress compounds over time, so we look for companies with low vulnerabilities, large resources, and growth opportunities. As seen in the pandemic, challenge only serves to amplify the advantages of adaptable businesses.
Our quality lens also imbues valuation discipline. We concentrate on growth in cash earnings per share instead of its less reliable precursors, such as growth in users, revenue, or even manipulable accounting metrics. A cash focus helps ensure our appraisals remain grounded in economic realities, including the costs of growth and the flightiness of external funding sources. Valuation discipline in 2021 proved critical in 2022 when rate rises dramatically compressed the multiples of highgrowth equities, especially those yet to turn a profit.
A diverse cohort of growth potential
International markets offer a large and diverse array of opportunities which we scour in a benchmark agnostic fashion for companies exhibiting our preferred quality attributes. As the investment landscape evolves, our attribute-led philosophy and process naturally adapts our focus to new opportunities as they emerge and mature. We construct the portfolio with focus and conviction, seeking to optimize risk across 25–40 holdings3, and as of December 2024, the strategy owned 31 companies across seven sectors domiciled in 14 countries4. Quality allows us to differentiate the return stream (active share of 93%) while keeping a lid on risk (0.88 beta).
Many of our holdings rely on intangible assets, including patents, technology and trademarks. Such businesses can enjoy inherent protections to competition and often don’t require significant capital to maintain or grow. Consider the heritage of French luxury house Hermes5, founded in 1837, and Japanese gaming giant Nintendo. Scaled, multi-generational customer resonance is an irreplicable asset and creates a foundation for high-return innovation and brand extension. Other examples include well-loved brands from L'Oreal and EssilorLuxottica, which serve the regular and essential demands of global consumers.
Ample, accretive reinvestment opportunity is another characteristic we prize. This attribute is exemplified by Canadian holding Constellation Software, a consolidator of niche software businesses, which include municipal bus scheduling systems and software for special education programs. Constellation has acquired a highly diverse array of more than 800 companies over 120 different markets. In conservative contrast to other acquirors, Constellation primarily uses its own cash flow rather than debt to fund deals. Offering ‘staples-like’ diversification with software financials, we believe Constellation is a free cash flow machine with vast room to run.
Holdings in the portfolio are thoroughly vetted in a robust, collaborative process involving the analysts and portfolio managers in the global Quality team. Founded in 2007, the Quality capability is a scaled, global equity platform managing over US$30 billion in assets6. Over time, the capability has introduced new strategies to meet client needs, including International Franchise in the US led by portfolio manager, Elias Erickson, supported by Abrie Pretorius and Clyde Rossouw. Underpinned by the same investment philosophy and process practiced by the team since 2007, International Franchise further validates the team’s track record of delivering resilient growth performance with its quality approach.
Where does International Franchise fit in portfolios?
International Franchise’s results are compelling and its performance pattern distinctly asymmetric. The strategy’s upside/downside capture ratio stands at 1.24 net of fees since inception. The upside capture is currently 103 – meaning the portfolio has captured an additional 3% in up periods of the market, with the downside capture at 83. This is a powerful pairing; preserving the base enables richer compounding during more profitable times. Strong bull markets may favor more aggressive or momentum styles, but the appeal may not last across more varied backdrops.
Figure 5: International Franchise has outperformed its five largest growth alternatives through a variety of environments
Source: eVestment, December 31, 2024. Performance is net of fees. 5 Largest Growth Managers defined as those with the largest strategy AUM in the ACWI ex US Equity, where Primary Equity Style Emphasis = Growth, Secondary Equity Style Emphasis = Not Applicable, Primary investment Approach = Fundamental.
Figure 6: Adding an International Franchise sleeve can provide a stronger alpha signature
Risk vs. return – since inception (%)
Market capture ratio – since inception (net of fees)
Past performance does not predict future returns; losses may be made.
Source: eVestment, December 31, 2024. Performance is net of fees. Growth Manager the largest strategy AUM in the ACWI ex US Equity, where Primary Equity Style Emphasis = Growth, Secondary Equity Style Emphasis = Not Applicable, Primary investment Approach = Fundamental, Value Manager the largest strategy AUM in the ACWI ex US Equity, where Primary Equity Style Emphasis = Value, Secondary Equity Style Emphasis = Not Applicable, Primary investment Approach = Fundamental.
Stable foundations for long-term growth
The surprises of 2024 serve as a reminder that markets are ever-changing, and 2025 is bringing its own uncertainties. Yet, while the economic landscape shifts, the fundamentals of successful investing remain constant. In the short term, markets may reflect sentiment, but over time, they ultimately weigh the true driver of value: a business’s ability to generate cash for its owners. For investors, the key is ensuring that this capacity continues to grow. Sustainable and resilient growth is best achieved through a disciplined focus on quality. Since its inception, International Franchise has offered a compelling alternative and complement to traditional investment styles, delivering consistent and attractive outcomes without compromising potential upside.
1 Since inception, top decile vs. eVestment ACWI ex US Large Cap Equity (gross universe).
2 Ninety One, September 2022. Antifragile investing: Companies that can ‘Be like Mike’.
3 These internal parameters are subject to change not necessarily with prior notification.
4 The portfolio may change significantly over a short space of time.
5 This is not a buy, sell or hold recommendation for any particular security.
6 Source: Ninety One, as of December 31, 2024.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Past performance does not predict future returns. Investment objectives may not necessarily be achieved; losses may be made. Target returns are hypothetical returns and do not represent actual performance. Actual returns may differ significantly. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios.
