Commentary: International Growth ACWI ex-US Strategy

• The Strategy underperformed primarily due to our positioning in the information technology and consumer discretionary sectors which offset strength in health care and materials.
• We meaningfully upgraded our bank and AI-related exposure, highlighting an energetic period where we also increased our weighting to the improving Chinese market.
• Broader macro trends like a weakening U.S. dollar are moving in favor of overseas companies, with emerging markets seeing the greatest benefit. These complement positive economic policy, regulatory and earnings trends in the regions where we invest.

International equities delivered mixed results in the third quarter as the unbridled optimism that lifted European markets earlier in the year began to fade. The benchmark MSCI All Country World Ex-U.S. Index rose a respectable 6.9%, led by emerging markets, Canada and Japan, while Europe Ex U.K. underperformed. The MSCI ACWI Ex-U.S. Small Cap Index increased 6.8%.

Emerging markets continued to outperform despite a flat U.S. dollar, boosted by a 20.7% rally in China, which represents 30% of that benchmark. Dealing with stubborn weakness in the real estate sector and sluggish consumer demand, the People’s Bank of China cut two key lending rates in July. Chinese prices saw a mild recovery from near-deflation levels, while second-quarter GDP growth rose 5.2 % year over year due to infrastructure spending and exports. Chinese equities were spurred by excitement around artificial intelligence (AI) opportunities and increasing investor interest due to the market’s valuation. Taiwan advanced 14.3% and Korea climbed 12.7%, driven by AI demand, with Taiwan a key manufacturer of semiconductors for AI workloads and Korea a key supplier of memory products. India was the weakest of the major EM markets, down 7.6% mainly due to a rotation into other regions as well as a subdued consumer backdrop.

The strong momentum in Europe in the first half of 2025 — sparked by easing monetary policy, increased fiscal spending and a weaker U.S. dollar — slowed in the third quarter. While inflation has been gradually declining, with a 2.2% reading in September, it remains above the European Central Bank’s 2% target, causing the central bank to signal its intention to pause after a 25-bps reduction in September and leaving its key interest rate at 1.75%. Second-quarter eurozone GDP grew by just 0.1% quarter over quarter, with Germany’s output flat, while industrial activity continued to contract.

In Asia, Japan continued its controlled normalization of monetary policy but has begun to deal with reinflation in its recovering services sector due to a tight labor market. Second-quarter GDP expanded modestly, boosted by tourism, while manufacturing activity remained restrained.

During a period of rising bond yields, international value stocks retook leadership from growth. The MSCI ACWI Ex-U.S. Value Index rose 8.1% in the quarter, outperforming the MSCI ACWI Ex-U.S. Growth (+5.7%) Index by 250 basis points.

Exhibit 1: MSCI Growth vs. Value Performance

Exhibit 2: Growth Has Meaningfully Underperformed in 2025

The ClearBridge International Growth ACWI Ex-U.S. Strategy underperformed its core MSCI ACWI Ex-U.S. benchmark in the third quarter, with our sector positioning in information technology (IT) and consumer discretionary creating headwinds. The Strategy outperformed its secondary benchmark, the MSCI ACWI Ex-U.S. Growth Index.

Within IT, Canada’s Constellation Software was pressured as M&A deployment has been slower than expected while AI disruption remains an overhang across much of the application software sector. Japanese semiconductor equipment maker Tokyo Electron fell sharply after quarterly earnings and revenue missed forecasts but made up ground late in the quarter on continued optimism around semiconductor demand to support AI buildouts.

Weakness in several consumer discretionary names also weighed on relative results in the quarter. Latin e-commerce and fintech provider MercadoLibre sold off as the company is extending its free shipping and reducing merchant fees. These initiatives, while potentially boosting volume, could weigh on near-term profitability. The company has also been hurt by profit taking after a strong first half and continues to deliver stellar revenue growth. Chinese EV maker BYD declined after cutting its domestic 2025 sales targets and reporting its first drop in monthly shipments in 18 months.

Offsetting these losses, the Strategy saw solid contributions in health care, led by European biotechs Argenx and UCB. Health care has been a sector under pressure from the U.S. government tariffs and most favored nation pricing worries for much of the year. Argenx was lifted by robust sales of its Vyvgart autoimmune treatment and renewed confidence in its long-term pipeline. UCB rose on robust first-half results, strong uptake of recently launched treatments Bimzelx for psoriasis and Rystiggo for an autoimmune condition, and positive phase 3 clinical trials for a seizure disorder. A Bimzelx competitor in an indication for an autoinflammatory skin condition has had less than compelling data, boosting UCB’s position in this disease area. Japanese medtech and technical equipment maker Hoya also delivered strong performance, boosted by strength in its semiconductor business.

We expanded participation in an emerging Chinese biotechnology industry with the purchase of WuXi AppTec, a leading contract development and manufacturing organization for biotech companies. Wuxi AppTec has a track record of developing peptide and small molecule drugs with better efficiency and at much lower costs than competitors.

Materials was another strong contributor, boosted by mining stocks Antofagasta and Agnico Eagle Mines. U.K.-based copper miner Antofagasta, whose primary operations are in Chile, was higher as supplies tightened due to a mine shutdown by a competitor. Copper continues to be a beneficiary of the electrification demand. Canada’s Agnico Eagle rose strongly with the surging price of gold, which was up 16% in the quarter.

Overall, the Strategy added 11 positions while exiting seven others. We repositioned our bank exposure, adding three Banco Santander and HSBC while closing out of BBVA. Banco Santander was bought with the proceeds of the BBVA sale. Spain-based Santander has a similar footprint as BBVA, but without the deal risk. The company is streamlining its geographic footprint and business lines from high-capital-consuming to low-capital-consuming operations. Santander’s cost-cutting measures should promote a sustainably lower cost/income ratio, which, combined with its other effects, should improve profitability.

HSBC has an outstanding franchise in Hong Kong and the U.K. and is well-placed to capture the structural growth opportunity in fast-growing Asian wealth management. HSBC benefits from a strong inflow of mainland Chinese money due to the larger investment opportunities and higher rates which the Hong Kong dollar enjoys through its peg with the U.S. dollar. We believe the market underestimates the company’s return potential, which is supported by one of the highest dividends and share buyback programs among global banks.

Meanwhile, our thesis for Indian lender HDFC Bank has partly played out and we were close to our price target. Increased competition and slowing overall economic growth in India led us to trim the position in favor of higher-return candidates in the portfolio.

In addition to our buys in financials, our largest purchase was Canada’s Celestica, a high-conviction AI infrastructure play, benefiting from hyperscaler capex growth, rising networking intensity and the shift toward white-box architectures. Its connectivity and cloud solutions segment is poised for 20%+ annual revenue growth, supported by deepening AI-related engagements and next-gen compute deployments. With accelerating earnings and margin expansion, we believe Celestica offers a differentiated, underappreciated way to gain exposure to the structural AI infrastructure buildout.

Japanese investment holding company Softbank has an ownership stake in many technology companies — including chip maker ARM Holdings, a key developer of custom silicon for AI customers and offers exposure to privately held OpenAI — and trades at a meaningful discount to its NAV.

Also within the overall technology theme, we added to Tencent as its valuation has become attractive again. The Chinese conglomerate’s core gaming business is doing well on new game launches. Additionally, due to the nature of the reach of its content and data ecosystem on WeChat and other platforms, Tencent is well-placed to use AI solutions to accelerate growth via better user experience and advertising growth.

The Strategy closed out of London Stock Exchange, a position we have been steadily trimming, which fell sharply in the quarter due to concerns of AI threatening its desktop and data business. We closed out of Bureau Veritas, a French provider of lab testing, inspection and certifications, as our investment thesis was taking longer than expected to play out and, as a result, we looked for better opportunities elsewhere. Swiss dermatology products maker Galderma Group, meanwhile, hit our price target.

The regions where we invest continue to make progress on growth and equity-friendly policies. While still early days, in the development of more stimulative economic and regulatory policies, and earnings growth among stocks in the pan European Stoxx 600 has begun to improve with forecasts for double-digit EPS growth over the next year.

Broader macro trends, like a weakening U.S. dollar, are also shifting in favor of overseas companies. Emerging markets are taking the baton on the weak dollar and running with it, as evidenced by their outperformance versus developed markets in the third quarter. While our MSCI EAFE benchmark does not include emerging markets, we have maintained steady exposure to the asset class and have recently been expanding our EM weighting with a return to China.

Exhibit 3: A Sluggish Dollar Bodes Well for International Equities

We believe that China, the world’s second-largest economy, is poised for growth due to its push to develop not only a standalone AI and technology universe but also a self-sufficient health care system. The latter priority has led to a burgeoning homegrown biotechnology industry. Meanwhile, its bellwether tech and Internet names have been gaining share in domestic consumer markets.

During the third quarter, the ClearBridge International Growth ACWI Ex US Strategy underperformed its MSCI ACWI Ex-U.S. Index benchmark. On an absolute basis, the Strategy produced positive contributions across six of the 10 sectors in which it was invested (out of 11 total), with the industrials and materials sectors the top contributors and IT the main detractor.

On a relative basis, overall stock selection detracted from performance. In particular, stock selection in the IT, consumer discretionary and financials sectors and an underweight to the materials sector weighed on results. On the positive side, stock selection in the health care, materials, communication services and industrials sectors and an overweight to consumer discretionary contributed to performance.

On a regional basis, stock selection in emerging markets, North America and Japan and an underweight to emerging markets hurt performance while stock selection in Europe Ex U.K. and Asia Ex Japan proved beneficial.

On an individual stock basis, the largest contributors to relative returns in the quarter were Antofagasta and Agnico Eagle Mines in materials, Prysmian in industrials, UCB in health care and Celestica in IT. The greatest detractors from relative returns included positions in Tokyo Electron and Constellation Software in IT, MercadoLibre and not holding Alibaba in consumer discretionary as well as HDFC Bank in financials.

In addition to the transactions mentioned above, we initiated positions in Heidelberg Materials, Laopu Gold and Richemont in consumer discretionary, Alcon and ProMedicus in health care and Vonovia in real estate. We also received shares in Sony Financial Group following a spinoff from portfolio holding Sony. We also closed positions in L’Oreal in consumer staples, ASML in IT and Schneider Electric in industrials.