As this is the final quarterly report for 2025, I thought I would use the opportunity to reflect on the year just gone which was marked by the dismantling of economic globalization, massive reshaping of geopolitical norms and institutions, and a technological paradigm shift with the rapid development of AI.
While Queen Elizabeth II referred to 1992 as an “Annus Horribilis” following upheaval within the British royal family, for us at ECP, 2025 would definitely fall into this category. Not only did three of our long-standing portfolio stalwarts falter, namely Domino’s, James Hardie, and IDP Education, but market participants have chosen to ignore business fundamentals and focus on the euphoria surrounding the benefits of artificial intelligence, as is evident from the following facts pertaining to the S&P 500. Over the twelve months to September 25, the Meme stocks were up 120%, profitless tech was up 66%, the S&P500 was up 17% and quality tech up only 1%.
While this data pertains to the S&P 500 in the US, the same theme is evident in Australia where business models are assumed to be under threat by AI, while AI-associated companies are assumed to be winners. Furthermore, market performance has been skewed by the outperformance of the materials sector after the March 2025 announcement of new tariffs by the US administration.
The Disconnect Between Fundamentals and Market Performance
The irony is that our portfolio companies, by and large, continued to execute exceptionally well. Across our combined Australian and Global portfolios of 68 companies:
- 90% grew revenues during the year
- 93% generated positive free cash flow
- 77% delivered earnings growth
- 87% gained market share
- 96% continued investing in growth through capital expenditure
Customer retention was near perfect, with only 3% of holdings experiencing any significant contract or client losses. These are not the characteristics of businesses in distress. They are the hallmarks of quality compounding through a difficult environment.
Yet market focus has been elsewhere. Characterised by low ROE and high leverage, the last six months have witnessed the strongest outperformance of lower-quality stocks in the last 25 years, outside of the GFC recovery. Our portfolio stands in stark contrast: 85% of our holdings maintain gearing below 30%, and 72% operate in net cash positions.
AI: From Speculation to Deployment
Over the past year, artificial intelligence has clearly progressed from speculative enthusiasm toward tangible commercial deployment. This is evident in our own holdings. Across the combined portfolio, 88% of companies are now actively deploying AI in their products or services, while 87% maintain active R&D programs investing in future growth. Innovation remained robust, with 82% releasing new products or capabilities during the year.
Companies have increasingly embedded AI into core business functions, delivering productivity improvements and supporting earnings growth across a range of industries. However, the rapid pace of investment in AI infrastructure has also led to the emergence of a highly interconnected ecosystem of strategic partnerships, creating concentrated exposure and elevating systemic risk.
A number of high-profile arrangements highlight this dynamic. Nvidia has committed up to US$100 billion to support OpenAI’s data-centre expansion, followed by a separate US$300 billion agreement between OpenAI and Oracle. OpenAI estimates its cumulative infrastructure spending could reach approximately US$1.4 trillion over the next eight years, despite expectations that free cash flow will remain negative until late in the decade. By comparison, the combined capital expenditure of Amazon, Microsoft, and Alphabet over the past ten years is less than US$1 trillion. These continued deal announcements have driven significant equity re-rating, making AI-related investment a dominant contributor to market returns.
Australian vs Global: A Tale of Two Worlds
When comparing the stocks in our Australian portfolio with those in a global portfolio, global stocks delivered stronger results across most metrics. 88% of global holdings grew earnings compared to 65% in Australia. Pricing power constraints affected 38% of Australian holdings compared to just 9% globally, reflecting the competitive intensity of domestic markets and the inflation pressures that persisted through the year. Leadership turnover was also elevated in Australia at 44%, nearly double the global rate of 24%.
Workforce restructuring was more prevalent in Australia, with 38% of holdings conducting layoffs versus 24% globally. Yet both portfolios continued hiring for growth (93% of the group), indicating targeted optimisation rather than broad retrenchment.
These differences partly explain the performance gap, but they also highlight where the alpha opportunities lie. Several Australian businesses now trade at valuations that do not reflect the quality of the business or their position early in their growth journeys.
The Year Ahead
In managing portfolios, ECP remains committed to its core philosophy of focusing on the economics of the business rather than attempting to anticipate short-term macroeconomic outcomes. We focus on owning companies with strong competitive advantages, proven management teams, and clear pathways to sustainable earnings growth. By maintaining a long-term ownership mindset and actively managing position sizes as valuations evolve, we seek to balance risk management with the pursuit of attractive returns.
As we look to 2026, the continued expansion of AI and data-driven technologies will remain a powerful structural growth driver, although second-order effects warrant close attention. With 88% of our holdings actively deploying AI and 82% releasing new innovations this year, we are positioned to benefit as AI moves from infrastructure investment to enterprise applications and productivity gains.
Rising demand for energy, computing infrastructure, and specialised labour may create both opportunities and constraints, reinforcing the importance of careful stock selection. Our focus on companies with strong competitive positions (87% gained market share this year), pricing power (71% raised prices), and exceptional customer retention (97%) provides resilience against these pressures.
The current dislocation between quality metrics and market prices also creates opportunity and with fundamentals intact and valuations compressed, the conditions for outperformance are in place.
Portfolio Positioning
The portfolio is a collection of high-growth, high-quality, and capital-light businesses, while the Australian benchmark is currently dominated by more traditional, capital-intensive, and slower-growing companies. This is most evident in R&D spending, where our portfolio invests over 7% of its sales back into R&D, whereas the benchmark invests very little on average. This focus on innovation has driven much of the faster historical growth metrics for the portfolio, with 5-year Sales and Free Cashflow CAGRs (18.1% p.a. and 22.4% p.a. respectively) doubling that of the same ratios of the benchmark (10.6% p.a. and 11.6% p.a.) over the same period.
Operating margins in our portfolio have been trending up as our companies benefit from continued operating leverage, while operating margins for the benchmark appear to have been declining (from a 15.1% median operating margin five years ago to just 9.6% in the latest year). Across our holdings, 69% maintain EBITDA margins above 20%, and 46% exceed 30%. Our portfolio is also more capital efficient, with 71% improving return on invested capital this year. Balance sheets remain healthy: 72% of our companies operate in net cash positions and 85% maintain gearing below 30%. Only 7% raised dilutive equity during the year. In sharp contrast, the benchmark is more capital-intensive (higher CAPEX / Sales) and uses significantly more leverage.
We would expect that these higher-than-average operating metrics should show up in higher-than-average return drivers for the portfolio. In addition, the current expected returns for the portfolio are as good as they have ever been.
Forecast for Future Returns
- Earnings Growth: This expected return is driven by a forecast earnings growth of ~19% p.a. over the same period — high by historical standards.
- Valuation Discipline: The forecast IRR conservatively incorporates an ~2% decline in the portfolio’s multiple. In this environment, ECP remains focused on investing in resilient, high-quality companies with strong balance sheets, scalable business models, and durable competitive advantages.
All that remains is to wish everyone a happy, healthy, and successful year ahead.
