Capitulation and Comebacks

It has been a volatile quarter, but not an entirely unexpected one. The four key forces shaping the global economy are accelerating, with security and technology driving sharp and often indiscriminate moves in share prices. We have previously highlighted how we believe the market is overreacting to AI disruption  (see note). That disruption narrative is now being compounded by geopolitics. Escalating tensions involving Iran have added a further layer of pressure, weighing on commodity markets, supply chains, and corporate sentiment.  Investors have got more defensive and shifted into obvious short-term beneficiaries , energy for example,  selling growth and small caps to fund it.   

Markets have reacted swiftly, arguably too swiftly. Beneath the surface, the long-term opportunity set is not only intact, but strengthening. The path forward is becoming clearer. The world must reduce its dependence on hydrocarbons. Defence spending is no longer optional. And with ageing populations across developed markets, economies must increasingly rely on technology to automate while radically improving healthcare efficiency.

These are not cyclical shifts; they are structural imperatives. Periods of capitulation create dislocations. Dislocations create opportunity. Increasingly, we are seeing the first signs of a comeback.

SOITEC provides a useful illustration of what is possible among future leaders. We wrote about this investment as one of our main detractors in the previous newsletter, yet over this quarter the stock rose by more than 100%. The narrative shifted from oversupply into the smartphone supply chain to the potential of becoming an AI data centre beneficiary, with silicon photonics replacing copper-based communication. This underscores how short-term market thinking has become. Taking a long-term view is particularly challenging during periods of heightened macro and political noise. Following meetings with SOITEC management, we increased our position as we sensed the fundamentals were closer to turning. The holding contributed over 3% to attribution during the period. We believe several attractive mid-cap names in the portfolio could recover quickly in the coming months.

During the quarter, Pinewood Technologies announced that private equity firm Apax Partners might make a possible cash offer of 500 pence per share for the company, which the board was inclined to recommend. Apax subsequently withdrew its offer, citing challenging market conditions, which we believe were related to the broader AI-driven software sell-off. Anticipating this risk, we exited the position following the bid announcement and are now rebuilding it at a discount of more than 50%. The company has reiterated its 2028 guidance and recently secured a strategic customer that could further enhance long-term potential. Two bids since launch underscore the inherent value the Future Leaders portfolio holds for both trade and private equity buyers, particularly as market conditions stabilise.  We may see more bids in the near future.

The healthcare sector detracted from performance, driven primarily by weakness in digital advertising, an important revenue stream for businesses such as Doximity and Phreesia, while other healthcare technology companies sold off in line with the broader SaaS market. The sector has faced sustained pressure following a Covid-era boom, which led to subsequent destocking. More recently, uncertainty has increased for large-cap pharmaceutical companies, driven by heightened scrutiny of drug pricing and vaccine policy. This has weighed on near-term investment decisions, but we believe the long-term structural drivers for healthcare remain intact. Digital healthcare advertising should continue to take share from traditional channels, such as pharmaceutical sales representatives and television advertising, due to superior returns on investment. AI is also likely to be a tailwind, given the scale of patient data available and the competitive advantages it offers incumbent software providers.

From a valuation perspective, since the end of December 2025, the portfolio's average 12-month forward P/E (harmonic average, excluding two marginally profitable businesses) has declined from 23x to 19x. Over the same period, the valuation premium to the benchmark compressed from approximately 14% to 4%, despite modest upgrades to 2027 earnings estimates. Given superior earnings growth driven by stronger top-line momentum and operating leverage, we believe the portfolio can still achieve its targeted return profile over the long term. This assumes an exit multiple of just 11.3x at the end of our five-year forecast horizon, well below where we expect these Future Leaders to trade, given their growth, margin, and quality profile.

Source: Bloomberg, Goodhart Partners. 31/3/16 to 31/3/26. Refers to MSCI World GICS Level 1 Sector Indices, Level 2 for Semiconductors & Semiconductor Equipment and Level 3 for Software. 

This chart shows how Information Technology and Healthcare both screen as attractive sectors to be investing in given current valuations.  Looking at the Software and Semi subsets of Information Technology, Software is well below historic levels.  If the high growth and returns are maintained, and we believe so, the fund looks well positioned  given the majority of our exposure is in these areas.

Outlook

The fund has had a challenging start, but the outlook for the types of companies Future Leaders invests in has rarely been stronger. In a world increasingly reliant on technological solutions to improve productivity and better utilise finite resources, we believe the fund is well positioned, with potential to recover early losses and deliver attractive long-term returns.