International equity markets experienced a prosperous year in 2025, characterized by enhanced fundamental performance and a surge in investor confidence. This positive shift contributed to a reduction in the long-standing valuation discrepancy between U.S. and non-U.S. equities. The International Value Equity strategy notably achieved a 35.5% return, surpassing the MSCI EAFE by 4.3 percentage points and the MSCI EAFE Equal-Weighted Index by 6.0 percentage points. Despite this impressive showing, the strategy slightly trailed the EAFE Value Index, primarily due to the exceptional performance of large-cap and banking sector stocks, areas where the strategy typically maintains a minimal presence.
Looking ahead, the market continues to present compelling opportunities for value investors. Although international stocks have made strides in narrowing the valuation gap, they still trade at a significant discount compared to their U.S. counterparts, despite exhibiting comparable fundamental strength. The strategy's emphasis on resilient businesses, rather than fragile sectors like banking, positions it well for future growth, especially as historical trends suggest a potential reversal in the outperformance of large-cap stocks.
International Equities: Untapped Value Beyond 2025
The year 2025 marked a period of notable appreciation for international equity markets, reflecting strengthened underlying performance and heightened investor belief. This positive trajectory helped bridge the long-standing gap in valuations between global and domestic stock markets. Our investment approach, centered on international value equities, delivered a substantial 35.5% gain, significantly surpassing the MSCI EAFE by 4.3 percentage points and the MSCI EAFE Equal-Weighted Index by 6.0 percentage points. While this performance demonstrated attractive absolute returns and strong relative outperformance against broad market benchmarks, it did not fully keep pace with the 42.2% return of the MSCI EAFE Value Index. This was largely due to the pervasive market trend of larger-cap stocks leading the charge and the unexpected surge in bank stock performance, sectors our strategy typically avoids given their inherent fragilities and often weaker fundamental structures.
Despite the robust returns observed in 2025, a considerable opportunity remains within international markets. Non-U.S. equities, even after their recent rally, continue to trade at a substantial discount compared to the S&P 500, despite showcasing similar fundamental characteristics. This valuation disparity creates an attractive landscape for discerning investors seeking compelling businesses at advantageous prices. Historically, periods where large-cap stocks disproportionately drive market returns have often been followed by phases of mean reversion, where smaller, undervalued companies regain favor. Our strategy, focused on identifying resilient companies with robust earnings growth, is well-positioned to capitalize on these shifts, offering a strategic advantage in a market that still holds considerable untapped value.
Strategic Avoidance: Banks and Market Cap Dynamics
Our investment strategy consciously sidesteps the banking sector, despite its impressive 67% surge in 2025, which significantly contributed to the EAFE Value's returns. This deliberate avoidance stems from our perception of banks as inherently fragile entities, characterized by substantial leverage, opaque business structures, and a heavy reliance on market and depositor confidence, which can swiftly erode. The historical record, replete with financial crises and institutional collapses, underscores the volatile nature of bank stock performance. Instead of engaging in speculative bets on which banks might succeed, our focus remains on resilient businesses capable of weathering economic downturns and delivering consistent earnings growth. This selective approach has positioned our portfolio with companies that possess clearer market values and more predictable revenue streams, offering a more stable and analyzable investment proposition compared to the banking sector.
Furthermore, the 2025 market trend, where large-cap stocks dominated returns for the eighth consecutive year, created a temporary headwind for our strategy. Our portfolio, with a weighted average market cap aligning with the EAFE Equal Weighted Index, has a structural bias towards mid-cap names, differing significantly from the heavily cap-weighted EAFE. While cap-weighted indices have recently outperformed, historical patterns indicate that such extended periods typically precede a mean reversion, favoring equal-weighted approaches and smaller, more undervalued companies. This anticipated shift aligns perfectly with our investment philosophy, which seeks out high-quality, attractively priced businesses that are often overlooked in a market fixated on large-cap leaders. We anticipate that this long-term trend reversal will ultimately benefit our strategy, allowing our carefully selected resilient companies to demonstrate their full value and growth potential.