The strategy’s 1.8% outperformance in the second quarter builds on the 0.3% alpha generated in the first quarter. A strong first half means relative performance for the trailing twelve months is just behind breakeven, demonstrating a resilience that has overcome the challenges of low exposure versus the benchmark to the US and Tech combined with overweights to Energy and Materials. Strength has persisted in the third quarter, and the strategy is well placed to continue to outperform in a broadening market.

To all intents and purposes, the quarter started in the Rose Garden of the White House on 2 April with the Trump administration’s “declaration of economic independence” for the United States by means of the imposition of a 10% base tariff on all trade partners, in addition to varying levels of reciprocal tariffs on certain countries based simplistically on the level of their trade surplus with the US. A week later, on 9 April, the reciprocal tariffs were put on a 90-day pause with the exception of those on China, but the base tariff remained in place. Although the S&P 500 index finished the quarter up 25% from its trough on 8 April (the day before the pause announcement), for the quarter as a whole it finished up just 11%, a laggard against the rest of the world, even before accounting for the 7% decline in the value of the US dollar during the quarter.

We published a Hosking Post by Jeremy Hosking shortly after Liberation Day, which cautioned against a “dash for cash” at time of market turmoil; even if a quarter is an unreasonably short measurement period, our performance appears to have vindicated this stance. Trading activity during April was mainly to trim profits on stocks which had held up well and add to more cyclical positions which had reacted more severely to the dislocation, with turnover during the month amounting to 2.4% of the strategy.

For the quarter in its entirety, leaving aside the positive contribution from the strategy’s longstanding US underweight which currently stands at a 29% difference versus the benchmark, the main contributions were from idiosyncratic stock selections. These included naval defence company Babcock, which benefitted from growing overseas as well as UK domestic demand for its expertise in defence leading to an upgrade to medium-term targets, and UK-listed private equity company 3i, whose investment in Dutch hard-discount retailer Action continued to combine strong like-for-likes with consistent store rollout execution across continental Europe. Holdings in semiconductor supplier SK Hynix, e-commerce company Coupang and Shinhan Bank mean the strategy has an overweight to South Korea, which was itself the strongest performing market in Asia during the quarter, in part due to the resolution of political uncertainty with the presidential election. It was gratifying that our combined selections outperformed even the Korea country benchmark.

Over the last year we have assembled a basket of platinum miners in the form of Impala Platinum, Sibanye Stillwater, Northam Platinum, Valterra Platinum (formerly Anglo American Platinum) and Sylvania Platinum, accounting for 2.5% of the strategy and contributing 0.5% towards the strategy’s outperformance in the quarter. Barriers to exit in the platinum mining industry have depressed valuations to deep discounts to replacement value, and a marginally less bad outlook for the use of platinum in combustion engines has resulted in very strong share price gains on the back of the commodity platinum price spiking almost 50%. In Japan, the deep value Toyota Industries was finally bid for by its parent Toyota Motor, but despite the bid price representing a 25% premium to the undisturbed price it is still a significant discount to the fair value of Toyota Industries’ real estate and cross-shareholdings. Watch this space for some robust engagement!

On the negative side of the ledger, the underweight to AI beneficiary Broadcom as well as the nil exposure to Nvidia, Microsoft and Meta all detracted, partly offset by positive contributions from the memory chip manufacturers Micron and the aforementioned SK Hynix. A recent paper from Empirical Research points out that the market seems to be paying greater attention to the hyperscalers’ free cash flow margins, which remain positive despite being squeezed by the heavy AI capex burden, rather than their incremental free cash flow margins which have all turned negative since the start of the year. Meanwhile, the increasingly absurd amounts being spent on hiring talent in the AI space suggest that the barriers to entry resulting from incumbency are not so high, which does not augur well for future returns on capital so long as this arms race continues.

New companies in the strategy during the quarter included Techtronic Industries (power tool manufacturer with strong barriers to entry from high R&D spend and backward compatibility of its battery packs), Japanese SaaS provider Sansan (85% market share in digitising business cards), Lifenet (Japanese online life insurer offering premiums 50% cheaper than traditional competitors) and Argentinian Vaca Muerta shale play Vista Energy. Additions were made to Ivanhoe Mines after the share price fell by a third after flooding at its Kakula copper mine in the Democratic Republic of Congo (another example of the diversified strategy’s ability to accommodate idiosyncratic risk), Wise (the scale-economies-shared cross-border payments operator), European chemicals company Lanxess (trading below replacement cost and industry supply rationalising) and base-metals royalty company Altius Minerals (which also has a significant gold royalty). These trades have been funded by profit taking in US financials and in memory semis.

After a half-year which has seen the strategy outperform its benchmark by 2.2% (12.2% (net) versus 10.0%) what can we expect for the rest of the year and beyond? The macro noise is full of signals which can be interpreted as positive or negative according to one’s prior beliefs. What does seem clear to us, however, is that the willingness of the current US administration to turn away from the status quo in terms of trade policy is likely to result in a bigger reordering of winners and losers than currently subdued levels of market volatility and generally buoyant valuations suggest is likely.

We were recently reminded of a quotation from the Greek poet Archilochus which we often used in the early days of Hosking Partners but which we have rarely repeated in recent years: “a fox knows many things, but a hedgehog knows one big thing”. In a market dominated by US large-cap tech leaders, it feels like it might be enough to know just one thing (aka momentum). During a time of potential change, however, when different outcomes present themselves as equally balanced possibilities, a strategy diversified across many distinct and idiosyncratic holdings and avoiding over-confidence in any single idea seems a more attractive bet. A further advantage of such a diversified set of holdings is that it makes wholesale change as an over-reaction to individual events much more difficult!

Duration is not simply a function of diversification, however, but a source of competitive advantage by itself. John Maynard Keynes put this very well in his General Theory in 1936 when he wrote that “the professional investor and speculator … are concerned, not with what an investment is really worth to a man who buys it 'for keeps', but with what the market will value it at, under the influence of mass psychology, three months or a year hence ... For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence”. He goes on to blame the “fetish of liquidity” for the difficulty of holding to a long-term view of fundamental value. The duration opportunity available to a long-term investor today is as great as it ever has been.

Richard Grinold’s Fundamental Law of Active Portfolio Management states that performance is the product of Skill and Breadth. If we can increase our Skill by taking advantage of duration, and expand our Breadth through global diversification, expected Performance outcomes improve. In a recent speech in Omaha, Portfolio Manager Omar Malik discussed the benefits of diversification as a differentiated lever that we utilise in our dynamic asset allocation. The Hosking Partners strategy, consisting of c370 stocks, benefits from our truly unconstrained global remit that allows us to hold a large number of companies to exploit idiosyncratic risk that other, more concentrated managers are not able to access. The companies we own trade at a large discount to their long-term value, each with a margin of safety required by the duration of the investment.

As we write, we are yet to find out what measures the White House will take when the 90-day pause comes to an end (and it appears the “end” is slipping from 9 July to 1 August), whether the Big Beautiful Bill will achieve the White House’s professed goal of “restoring fiscal sanity” and what the consequences will be in terms of inflation, interest rates and exchange rates. Our insurance against this uncertainty is a globally diversified strategy, avoiding the concentration of the supposedly diversified index by means of a weighted average market cap of US$146.3 bn (versus MSCI ACWI benchmark’s US$752.2 bn), with 64% exposure outside the United States (versus 36% for the benchmark) and 15% in Emerging Markets (versus the benchmark’s 10%). The capital cycle lens is the powerful tool that we have used to assemble this unique collection of individual holdings, at times when they seemed quite unfashionable; they are now starting to deliver and should be capable of continuing to offer robust performance even as assumptions are reset.