{"id":9490,"date":"2025-07-09T09:27:31","date_gmt":"2025-07-09T09:27:31","guid":{"rendered":"https:\/\/www.taml.co.uk\/7\/blog\/half-year-letter-to-investors\/"},"modified":"2025-08-11T14:41:58","modified_gmt":"2025-08-11T14:41:58","slug":"half-year-letter-to-investors","status":"publish","type":"post","link":"https:\/\/www.taml.co.uk\/7\/blog\/half-year-letter-to-investors\/","title":{"rendered":"Half Year Letter to Investors"},"content":{"rendered":"\n
Had you fallen asleep at the start of the year, only to be revived six months later, you might be forgiven for thinking that markets were similarly sedate. Of course, the first half of the year has been anything but dull, mainly thanks to the return of Donald Trump as US President, and the actions of his domestic and international allies.<\/p>\n\n\n\n
Figure 1: Troy Global Equity Strategy YTD performance 2025<\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: FactSet, 30 June 2025. Past performance is not a guide to future performance. All references to benchmarks are for comparative purposes only.<\/p>\n\n\n\n
A slump in the US dollar also means that returns are defined by the currency in which they are denominated. Sterling-based investors in the Strategy experienced a modest decline, whereas solid progress was made when returns are measured in USD.
The Strategy\u2019s returns were strongly positive in January. The Strategy then protected relatively well through to April as volatility spiked in response to the risks posed by higher tariffs. However, stock-specific drags from the likes of Alcon and Fiserv \u2013 driven by deteriorating sentiment rather than significantly weaker fundamentals \u2013 meant that the Strategy\u2019s rebound in May was comparatively subdued, and June was poor. This is despite steady earnings growth from the portfolio\u2019s companies and the Strategy being relatively well insulated from the first-order effects of higher tariffs.<\/p>\n\n\n\n
Figure 2: Troy Global Equity Strategy monthly performance YTD 2025<\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: FactSet, 30 June 2025. Past performance is not a guide to future performance. All references to benchmarks are for comparative purposes only.<\/p>\n\n\n\n
The Strategy also defied some market-wide trends. Tech was a tailwind for us rather than a headwind. Meta Platforms and Microsoft were significant positive contributors to the Strategy, together with other tech companies Intuit and Take-Two Interactive Software. Europe was a mixed bag. Whilst Heineken was among the largest positive contributor to returns, other European holdings including LVMH and Diageo fared less well.<\/p>\n\n\n\n
Figure 3: Year to date stock attribution <\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: FactSet, 30 June 2025 . Past performance is not a guide to future performance. Contribution to return is provided as gross absolute returns in base currency and does not include charges and fees. Asset allocation subject to change. Reference to specific securities in this slide is not intended as a recommendation to purchase or sell any investment.<\/p>\n\n\n\n
We made no dramatic changes to the portfolio over the past six months. We\u2019ve taken money out of several payments companies after a very strong run for their shares and a re-rating in valuations. They remain a core part of the Strategy. The sales funded increased investment in areas where growth is similarly strong and consistent, but where valuations are more appealing, including Adobe. We took advantage of the sell-off in US tech at the start of April to add to Alphabet and Microsoft. Lastly, the exit from Medtronic was precipitated by uncertainties about their ability to navigate higher tariffs. On balance, we believe these changes improve the quality of the portfolio whilst preserving the appeal of its valuation.<\/p>\n\n\n\n
In aggregate, the Strategy\u2019s companies have continued to grow at a healthy rate. Earnings per share have grown at approximately +10% over the past 12 months, ahead of the MSCI World Index, and the capital efficiency of this growth remains outstanding.1<\/sup> This means that, given the slight setback to performance in the first half of the year, the valuation of the Strategy has become more attractive.<\/p>\n\n\n\n
Figure 4: Significant transactions year to date 2025<\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: FactSet, 30 June 2025. The reference to specific securities in this is not intended as a recommendation to purchase or sell any investment. The reference to transactions above is not indicative of all transactions in the period.<\/p>\n\n\n\n
Source: FactSet, 30 June 2025. Neither past performance nor forecasted performance are guides to future performance. All references to benchmarks are for comparative purposes only. Characteristics are shown excluding banks. Free Cash Flow Margin is a profitability ratio that measures a business\u2019 cash from operating activities, less capital expenditure, as a percentage of its revenue over a given period. Free Cash Flow Yield is a financial valuation ratio that divides the free cash flow a company earns against its market value. ROIC is a measure of financial performance that calculates how efficiently a company\u2019s management is utilising all forms of capital available. EBITDA is a ratio measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortisation expenses. P\/E is Price to Earnings.<\/p>\n\n\n\n
No extra points for originality<\/h2>\n\n\n\n
We are often asked a politely phrased version of the following question: \u2018Why should I pay you to own [X] stock?\u2019, with \u2018X\u2019 invariably being a big household name, based in the US, which has delivered fantastic results for investors. Alphabet, Microsoft or Visa are three popular examples.
The question is an important one that gets to the heart of our strategy and investment process. It also acknowledges that returns from global equities over the past decade have been defined by a small collection of large US companies. These same companies can be owned cheaply through a passive investment strategy. It further recognises that outperformance is harder, by definition, if everyone is crowded into the same large cap stocks.
A first response is to look backwards. The simple fact is that these companies have <\/em>delivered material outperformance over many years. The same question was asked of us five and ten years ago, and these companies have thrived despite their large size and the scrutiny they receive. This does not appear to be a bubble set to burst. The companies in question have delivered outstanding shareholder returns that are backed by their operating performance. Of the four listed below, only Microsoft has significantly re-rated, but only to a level, in our view, which remains reasonable. Alphabet, Meta and Visa have delivered returns that have grown roughly in-line with the earnings and\/or cashflows per share. Perhaps the onus is therefore on the doubters to explain why this pattern cannot continue!<\/p>\n\n\n\n
Figure 6: Returns vs Operational Growth<\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: FactSet, 30 June 2025. Past performance is not a guide to future performance. TSR is total shareholder return. CAGR is compound annual growth rate. EPS is earnings per share. FCF is free cash flow.<\/p>\n\n\n\n
Value hiding in plain sight<\/h2>\n\n\n\n
Why might this anomaly remain? There are many explanations, several of which are company specific. In general, we can point to the behavioural challenges of owning these stocks. Our own experience can be characterised as short-term pain for long-term gain. The pain largely originates from the very same thing that suggests sustainably high returns are unachievable; excessive attention, both from investors and competitors. Far from pricing these companies for perfection, the attention they receive results in endless \u2018headline risk\u2019 and unnerving swings in share prices. The size of these companies means that everyone has an opinion on them, no matter how well they are informed. Commentary is stimulated by the steady stream of competitors that these highly profitable companies attract. Not all the dedicated reporters, bloggers and analysts are motivated to give them a fair hearing.<\/p>\n\n\n\n
What looks obvious and easy in hindsight is therefore far harder in real time. Our ownership of Meta since 2018 is the most extreme example, culminating in the gut-wrenching drawdown of 2022. The company is a lightening-rod for criticism, some of it deserved, much of it misplaced, in our opinion. Owning the shares can be exhausting. Less dramatic, but no less memorable, were the loud and confident venture capitalists who in 2021 claimed that buy-now-pay-later providers, Klarna and Affirm, would disrupt the card networks. The irony here is that these fintechs, and many others, chose instead to partner with Visa and Mastercard to take advantage of their ubiquity, reinforcing the card networks\u2019 competitive advantages and growth potential.2<\/sup><\/p>\n\n\n\n
It takes more than just patience and grit to sit through these uncomfortable moments. Our conviction is based on deep research accumulated over many years of continuous ownership. This must look forwards as well as backwards, and it must be continuously updated for new information, involving qualitative insight and imagination as well as financial analysis. To do this we form perspectives on addressable markets, competitive strategy, management skill and reinvestment, none of which is easily captured in quantitative models. We\u2019ve found that these companies have defied expectations because their addressable markets are far larger and more dynamic than is often appreciated. They also have management teams that have the intent and resources to invest to sustain highly profitable growth for the foreseeable future. Whereas a passive strategy will, in effect, ascribe a lower weight to an underperforming share, we tend to lean in and buy more when the share prices of our companies sell off significantly. This was the case with Meta in 2022 and Visa in 2021. Passive strategies also tend to be more diversified. We believe higher absolute returns are achievable by concentrating investors\u2019 capital in these companies, and those with comparable characteristics, to the exclusion of all others.<\/p>\n\n\n\n
Alphabet: A case study in patient investing<\/h2>\n\n\n\n
Alphabet is a live example of this in action. The company\u2019s shares are lower this year because of the disruptive threat posed by the rapid growth of ChatGPT and other Large Language Models (LLMs).3<\/sup> The threat is real, and the stakes are high. There are, however, several reasons why we remain optimistic about our investment in Alphabet. In summary, we highlight:<\/p>\n\n\n\n
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The size and evolving nature of search<\/li>\n\n\n\n
Management\u2019s steady and committed reinvestment<\/li>\n\n\n\n
Alphabet\u2019s diversification, accelerated by AI<\/li>\n\n\n\n
A low valuation for Alphabet\u2019s shares<\/li>\n<\/ul>\n\n\n\n
Competition between LLMs and Google Search is often framed narrowly as a zero-sum game in which Google\u2019s 10 blue links lose their monopoly status to new entrants. We believe this framing fails to recognise the size of the search market and how it has grown and evolved. Search is far larger and more fragmented than is commonly conceived, and as such, it supports the growth of multiple large players. The success of Booking Holdings in travel (also a large customer of Google\u2019s) and Amazon\u2019s retail marketing business (on track for $65bn in ad sales in 2025) are clear evidence for this.4 <\/sup>And whilst Google Maps and YouTube are also routinely excluded from the discussion, they can be reasonably considered as Google\u2019s dedicated search engines for mobility and video. The growth of these various services in part comes from the continued expansion of ecommerce, which still only accounts for less than 25% of addressable US retail sales.5<\/sup> Despite its age, the web continues to grow at a rapid pace because the internet has no physical constraints and there are no upper limits placed on human creativity and curiosity. In the last two years alone, the number of web pages that Google Search indexes has grown +45%.6<\/sup> This suggests coexistence as much as competition in what is a large, dynamic and immature market.<\/p>\n\n\n\n
Google Search has also evolved dramatically over the past decade as technology advances and computing becomes cheaper. Natural language processing for predictive terms in the Search box has improved speed and accuracy. Since Google has long focused on providing answers rather than links, 60% of searches result in no subsequent clicks. More recently, Google has introduced Circle to Search on Android and Google Lens, both of which expand Search further into multi-modal formats. Visual searches often have higher commercial applications, which is good news for the company\u2019s ad revenues.<\/p>\n\n\n\n
Figure 7: Circle Search (L), Google Lens (R)<\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: Google<\/p>\n\n\n\n
LLMs create new possibilities for Search. The integration of Gemini, Google\u2019s answer to ChatGPT, into the new AI Overviews and AI Mode, allows users to submit longer and more complex search queries for new use cases. Rather than simply substitute past behaviour, we are confident that LLMs expand the market for the retrieval and synthesis of web-based information.7<\/sup> For Google, these new experiences promise to further transform Search from a \u2018distribution mechanism [for the rest of the web] to an engagement sink\u2019.8<\/sup> Google\u2019s management has said that engagement for AI Overviews is higher and continues to scale, and that ads inside AI Overviews already monetise at the same rate as traditional Search ads. It is conceivable that LLMs\u2019 commercial value grows as they go from chatbots to personalised assistants. Google\u2019s data and distribution advantages across multiple properties give it a unique position to deliver on this vision.<\/p>\n\n\n\n
Whilst competitive analysis often centres on the company\u2019s 15 products with over 500m users (and the oceans of data they confer), the evolution of Search is underpinned by three competitive advantages that are easily underestimated in the debate about LLMs. First, Google has over 25 years of technical expertise of running Search at huge scale, including the design of in-house processing chips (a substitute for NVIDIA\u2019s) that are into their seventh generation. Closely related to this is a massive and highly complex global network of physical infrastructure that delivers Google\u2019s various services efficiently to billions of people. And third, there is the world\u2019s content creators, businesses, advertisers and other partners that are highly optimised for Google\u2019s products. All three deliver performance and cost advantages that new entrants will struggle to replicate.<\/p>\n\n\n\n
These interlocking strengths are all expressions of management\u2019s commitment to innovate and reinvest with hundreds of billions of dollars spent each year on R&D, technical hardware, and real estate. Alphabet\u2019s management is often maligned as wasteful and bureaucratic. They also deserve praise for betting early on transformative technology, accelerating the pace of internal innovation, and building a growing number of large and successful businesses. Whilst all the focus is on LLMs and Search, Alphabet\u2019s diversification away from Search can be overlooked. We recall many investors were dismissive of Alphabet\u2019s prospects to become a credible third-party cloud computing infrastructure provider to rival Amazon Web Services and Microsoft Azure. Google Cloud Platform (\u2018GCP\u2019) is now a $50bn+ annual revenue business, growing at approximately +30%, with improving profitability. GCP and YouTube ad revenue represent a growing share of group revenues, in combination equal to ~25% of the total, outgrowing core Search, which has continued to compound at a very healthy double-digit rate.9<\/sup> Far from being disrupted by AI, GCP and YouTube are clear beneficiaries from the technology.<\/p>\n\n\n\n
Figure 8: YouTube & GCP’s combined contribution to Alphabet’s group revenues <\/h4>\n\n\n\n<\/figure>\n\n\n\n
Source: Bloomberg, 30 June 2025. Past performance is not a guide to future performance. All references to benchmarks are for comparative purposes only.<\/p>\n\n\n\n
Alphabet\u2019s investments in AI drive other parts of the company in highly promising areas that are yet to contribute meaningfully to revenues. Of these \u2018Other Bets\u2019 the most visible and exciting is in robotics and specifically autonomous vehicles. Waymo is expanding fast since its commercial launch last year, reaching over 250,000 journeys per week in all four of its established US cities, and taking ~25% market share of ride hailing in San Francisco. Behind Waymo there are further astonishing advances in the life sciences and quantum computing. All are testament to Alphabet\u2019s deep and continuous investments into new technologies.
In this context it makes little sense to us that Alphabet should be available to own at less than the US market\u2019s own multiple of earnings. Whilst we readily acknowledge the risks and capital costs of LLMs, Alphabet\u2019s shares are priced as if disruption of Search is a foregone conclusion. We believe that there is reason to believe that AI can be a tailwind for Search and not simply a disruptive force. The company\u2019s current valuation gives the company little credit for its leadership in AI, Alphabet\u2019s accelerated speed of innovation, and the many hard-to-replicate assets that it continues to develop. This creates a good chance that Alphabet\u2019s shares can continue to generate value for its owners, and for this reason the company is the Strategy\u2019s largest single investment. We were pleased to have the opportunity to add to the Strategy\u2019s investment in Alphabet during April\u2019s sell-off.<\/p>\n\n\n\n
Amadeus IT: Beyond the mainstream<\/h2>\n\n\n\n
Our enthusiasm for Alphabet is only one part of why we think we can generate value owning what appear to be popular stocks. The other part of the answer is to emphasise that our investment process is also applied elsewhere, often far away from the biggest companies in the world. Amadeus IT is a Spanish company that has become a top 10 holding for the Strategy since it was first purchased last year. The company may not be a household name, but as the preeminent provider of ticket distribution and IT software to the airline industry, its services are essential for its airline customers and their passengers. Amadeus also has a growing presence running software for hotel chains.
We turn the same investment lens and process on Amadeus as we do for Alphabet, and we appreciate them for similar reasons. Like Alphabet, Amadeus is:<\/p>\n\n\n\n
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