Capitalizing on the asymmetry of market returns
“We see our task as identifying the great winners of tomorrow,” said Tom Coutts, who manages Baillie Gifford’s portion of the International Growth Fund alongside Lawrence Burns. As the fund’s lead subadvisor, Baillie Gifford oversees about 65% of fund assets.
The firm’s investment philosophy is rooted in a belief in the asymmetry of market returns—the idea that a handful of innovative companies drive an outsized portion of the market’s return over time.2
In its search for outlier companies, Baillie Gifford employs fundamental research to identify firms with strong competitive advantages, special cultures, skilled management teams, and the potential for scalable growth. To gain a broader understanding of industries and societal or technological effects on growth, the team maintains relationships with external academic experts and research institutes.
“We’re looking for companies that can reshape industries and grow their earnings at a significantly faster rate than the market,” Coutts said. The team is willing to pay a valuation premium for high-quality companies with strong growth prospects. It’s also willing to hold them for the long term and through volatility. Many of Ballie Gifford’s best-performing long-term holdings—ASML, Mercado Libre, Spotify, and Tencent, for example—have experienced meaningful volatility over short periods.
“It takes time to deliver transformational change,” Coutts added. “We don’t want to sell a company halfway through its growth journey. Patience is crucial to our strategy’s success.”
Finding alpha in “surprise” earnings
Baillie Gifford’s high-growth style is tempered by Schroders’ quality-growth approach within the fund, which produces a more diversified, valuation-conscious portfolio.
“Our philosophy is based on the idea that companies delivering earnings above the level anticipated by the market consensus will outperform,” said Simon Webber, one of two named managers for Schroders’ portion of the fund.
Webber believes that investors often tend to extrapolate historic growth or incorrectly interpret catalysts that can change the growth trajectory of a business. He and his team conduct fundamental research to identify firms that they believe will have a “growth gap” between what the market expects and what the company delivers. “We believe stocks with positive growth gaps will outperform the broader market as their higher growth characteristics are recognized,” Webber said.
The bulk of Schroders’ portfolio consists of high-quality companies with strong fundamentals held for the long term. The team also seeks shorter-term gains through opportunistic investments in undervalued companies that they believe may benefit from transitional growth, often stemming from a business cycle inflection or a turnaround.
Blending innovation and stability
Thematically, the fund’s holdings emphasize innovation in tech and health care, digital infrastructure, and the energy transition. The subadvisors’ complementary strategies produce an aggregate portfolio with little overlap. Of the fund’s 127 holdings as of March 31, 2025, Baillie Gifford and Schroders owned just 11 names in common.
The subadvisors’ contrasting styles are evident in their historical approach to the health care sector. Schroders has favored the stability of pharmaceutical giants like Roche, while Baillie Gifford has been drawn to biotech firms with tech platforms capable of producing a variety of treatments. “Our strategy emphasizes long-term growth and transformative potential,” Coutts said. “Biotech firms align well with our vision because of their potential to innovate and disrupt traditional health care models.”
and Taiwan Semiconductor, the world's largest dedicated semiconductor foundry. Some of the fund’s portfolio companies, such as Mercado Libre, are excluded from some common international stock indexes because they are listed in the U.S., even though their headquarters and operations are overseas.The U.S isn’t the only place to find exceptional companies
Outperforming through volatility
The fund has outperformed its benchmark, MSCI All Country World Index ex USA, by 3.8% annually3 over the past decade, with bouts of volatility along the way.
Baillie Gifford’s portfolio fueled much of the fund's success during the growth-driven bull market that peaked in early 2021. It was also largely responsible for the fund's struggles in 2022. But the team’s characteristic patience with underperforming stocks—reflected in a low fund turnover ratio of 15% in 20224—contributed to a rebound in 2023 and 2024. Schroders’ portfolio provided stability in both up and down markets, as intended by the fund's multimanager design.
For much of the past decade, U.S. stocks have outpaced international markets, driven by strong earnings and a tech rally. That trend showed signs of a reversal in the first quarter of 2025, as international stocks (+5.23%) outperformed U.S. stocks (–4.82%), due to attractive valuations, a weaker dollar, and uncertainty around U.S. trade policy.5 The shift underscores the importance of staying globally diversified through market cycles.
“Entering 2025, we said that the drivers of market returns would likely broaden out beyond the U.S., and that volatility would pick up,” Webber said. “So far, that appears to be playing out.”
Both portfolio managers agreed that even in periods of political transition and macro-economic uncertainty, exceptional companies have demonstrated their ability to generate sustainable earnings growth.
“Technological innovation will continue in AI and other realms, and consumers will continue to demand high-quality goods and services,” Coutts said. “Ultimately, it’s the operational progress of the individual companies we own that will drive the fund’s returns over the long term.”
Sources:
1 As of March 31, 2025. Includes all share classes.
2 A 2023 analysis found that the top-performing 2.4% of firms accounted for all the $75.7 trillion in net global stock market wealth created between 1990 and December 2020. For more, see Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks by Bessembinder et al. (2023).
3 The fund’s standardized performance can be found here. The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.
4 By comparison, the average turnover in 2022 for Morningstar’s US Fund Foreign Large Growth category was 43%.
5 Performance is for the three-month period ending in March 31, 2025. Indexes used: MSCI USA Index for U.S stocks and MSCI ACWI ex USA Index for international stocks. Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Notes:
- For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- All investing is subject to risk, including possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss. Investments in stocks issued by non-U.S. companies are subject to risks, including country/regional risk and currency risk. These risks are especially high in emerging market