Q2 performance and portfolio positioning
The portfolio’s returns this quarter reflected an ever-widening divide between companies the market sees as AI beneficiaries and those facing uncertainty over AI’s long-term impact. Beneath this lay a more persistent pattern: the market rewarded a narrow band of momentum-driven, earnings-revision stories while showing little patience for high-quality businesses quietly compounding through consistent delivery. Several of Generation’s holdings sit in this second group, still growing earnings, winning customers and expanding margins, yet lagging because the narrative, not the fundamentals, moved against them. The investment team continually test for deterioration in underlying investment theses and see the gap in valuations as a strong opportunity for future alpha delivery.
Against this backdrop, Generation’s strongest contributors were tied to the AI and digital infrastructure buildout. TSMC was the standout: demand for the advanced chips AI depends on is running well ahead of what the company can make, and that scarcity is driving faster growth and strong profitability. Schneider Electric also did well, helped by the electricity this computing consumes, with appetite for its products broadening beyond high datacentre demand into the wider power grid. Nutanix benefited from upheaval at a larger rival: after Broadcom took over VMware and raised prices, mid-sized customers have steadily moved across to Nutanix.
Elsewhere, West Pharmaceutical Services contributed to performance. The company makes the specialised components that package injectable drugs and benefits from high barriers to entry, giving West real durability and healthy margins. Sika, the construction chemicals business, was also a positive as the company stood by its full-year plans and moved early on pricing to reflect increased input costs and protect profitability.
On the other side, Intuit was the largest detractor. Fewer people used the free, do-it-yourself version of its TurboTax software this tax season, especially lower-income filers, which impacted its share price. However, its higher-value assisted service kept growing strongly. The investment team are watching how AI might reshape tax filing, but their long-term view on the business is intact with key differentiation on confidence, accuracy, auditability and seamless human-in-the-loop support.
Several other holdings fell despite solid results. Microsoft is the clearest example: its cloud and software businesses continue to grow, yet investors discount the business given uncertainty on the return-on-investment of its elevated AI capex. SAP’s shares fell despite continued acceleration in its AI product development and no evidence so far of AI-related delays in customer cloud transitions. Danaher’s revenue growth was modest, but earnings remained resilient and its bioprocessing business showed early signs of recovery. Mercado Libre is investing to defend its position against intensifying competition in Brazil, which is compressing margins in the near term but should solidify its market position in the long term.
Generation exited several positions to reallocate capital to more compelling opportunities. They exited Accenture, where disappointing order intake and several unconvincing strategic decisions left the investment team doubtful about how well it is navigating the pressure AI is placing on its consulting business. They also sold Thermo Fisher, which is more heavily reliant on strained academic and government research budgets than Generation’s other healthcare investments. They exited Assa Abloy as rising macroeconomic uncertainty and persistent weakness in North American residential markets limited the visibility of near-term catalysts, reducing their conviction.
Generation initiated a new holding in Stryker, the largest orthopaedics company and a key medical technology provider. The company has a broad portfolio and high share in niche categories including robotic joint replacements. A recent cyberattack created an attractive entry point. The investment team model this event’s expected impact in their valuation and validated their research through customer surveys.
condividi.