Commentary: International Growth ADR Strategy

• 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.
• The Strategy underperformed in a value-driven period with our positioning in financials, which reflects our orientation as growth managers, creating minimal headwinds.
• We meaningfully repositioned our bank exposure, adding three new positions while closing out of two others, highlighting an energetic period where we also increased our weighting to the Canadian market.

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 EAFE Index rose a respectable 4.8%, led by Asian markets, while Europe Ex U.K. underperformed. The MSCI EAFE Small Cap Index increased 6.2%, while the MSCI Emerging Markets Index continued to outperform despite a flat U.S. dollar, to advance 10.6%, boosted by a 20.7% rally in China, which represents 30% of that benchmark.

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. Dealing with stubborn weakness in the real estate sector and sluggish consumer demand, the People’s Bank of China (PBoC) 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. The economy also got a boost from technology spending.

During a period of rising bond yields, international value stocks retook leadership from growth. The MSCI EAFE Value Index rose 7.4% in the quarter, outperforming the MSCI EAFE Growth Index (+2.2%) by over 500 basis points. Value leads growth by more than 1,300 bps year to date.

Exhibit 1: MSCI Growth vs. Value Quarterly Performance

Exhibit 2: Growth Has Meaningfully Underperformed in 2025

The ClearBridge International Growth ADR Strategy underperformed its core MSCI EAFE benchmark in the third quarter, with our sector positioning in financials, which reflects our orientation as growth managers, creating headwinds. The Strategy outperformed its secondary benchmark, the MSCI EAFE Growth Index.

The Strategy’s financials holdings caused the biggest drag on relative performance. London Stock Exchange fell sharply due to concerns of AI threatening its desktop and data business. After steadily trimming the position, we closed it out during the quarter. Dutch payments firm Adyen was also down after quarterly revenue missed expectations on declining transaction volumes and management lowered its full-year revenue guidance. We also meaningfully repositioned our bank exposure, adding three new positions (Banco Santander, HSBC and KBC Group) while exiting two others (BBVA and HDFC Bank).

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.

We also repurchased shares of KBC, a diversified banking and financial services provider catering to consumers and businesses in Belgium, the Czech Republic and smaller Eastern European markets. The company’s assets under management are growing and fee revenues are growing above net interest income. We believe its cross-selling model successful in Belgium can be replicated in other markets. KBC’s strong capital position also allows for capital distributions or a bolt-on acquisition.

Weakness in several consumer discretionary names also weighed on relative results in the quarter. Chinese EV maker BYD declined after cutting its domestic 2025 sales targets and reporting its first drop in monthly shipments in 18 months. 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.

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.

Overall, the Strategy added 11 positions while exiting 12 others. In the materials sector, Danish chemicals company Novonesis is a leader in enzymes and microbial cultures, which are benefiting from a renaissance of bio-ingredients in food, household products, health care and industrial applications. The company is a science-based innovation powerhouse with an unmatched library and inventory of super-organisms that improve products quality, costs and productivity when customers replace synthetics with naturals. Since the early 2024 combination between Novozymes and Chr Hansen, Novonesis’ sales growth and margins are accelerating with the company penetrating new end markets.

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 the privately held OpenAI — and trades at a meaningful discount to its NAV.

Canada’s Celestica is 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.

Also in Canada, we added to our retail exposure with the purchase of discount retailer Dollarama and grocery chain Loblaw. Dollarama has a track record of resilience in uncertain macro environments, including the current tariff war, and has shown a consistent long-term growth record. The company is well-positioned to benefit from consumers trading down in Canada and expansion efforts in Latin America and Australia. Loblaw is outperforming internal expectations, benefiting from favorable comps due to last year’s boycott and regaining market share from competitors. We also view the rollout of its T&T Asian markets in the U.S. as a long-term growth lever while its Shoppers Drug Mart pharmacies are a highly profitable operation.

The Strategy closed out of Deutsche Telekom and food services provider Compass Group in favor of ideas with less U.S. dollar exposure and greater upside potential. We also exited music streaming service Spotify and financial data provider Thomson Reuters after both hit their price targets.

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, 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).

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 ADR Strategy underperformed its MSCI EAFE Index benchmark. On an absolute basis, the Strategy produced positive contributions across all nine sectors in which it was invested (out of 11 total), with the industrials and health care sectors the top contributors.

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

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

On an individual stock basis, the largest contributors to relative returns in the quarter were UCB and Argenx in health care, Prysmian in industrials, Tencent in communication services and Agnico Eagle Mines in materials. The greatest detractors from relative returns included positions in SAP and Tokyo Electron in IT, RELX in industrials, Novo Nordisk in health care and London Stock Exchange Group in financials​.

In addition to the transactions mentioned above, we initiated positions in Alcon in health care and Vonovia in real estate while also receiving shares of Sony Financial Group in a spinoff. We also closed positions in Straumann in health care, Coca-Cola FEMSA in consumer staples, Sika in materials as well as Bureau Veritas and Monotaro in industrials​.