In the fourth quarter of 2025, the Diamond Hill International Strategy recorded a net return of 3.87%, which was below the MSCI ACWI ex USA Index's return of 5.05%. Despite this, the strategy benefited from a number of strategic decisions and market movements. Significant gains were observed in specific areas such as information technology and industrial sectors, alongside a deliberate overweighting in communication services. These factors collectively shaped the portfolio's performance during this period.
One notable success story within the portfolio was Sumitomo Densetsu, a Japanese electrical contractor. The company's stock experienced a significant uplift following a takeover bid from Daiwa House. Daiwa House's tender offer, made at a premium price, was a major catalyst in driving Sumitomo Densetsu's stock valuation higher, reflecting positive investor sentiment towards strategic acquisitions in the industrial sector. This event underscores the impact of corporate actions on individual stock performance within the broader market.
The strategy's performance was also positively influenced by its stock selection within the information technology and industrials sectors. These sectors, known for their dynamic growth and innovation, provided fertile ground for generating returns. Furthermore, the deliberate decision to overweight communication services proved beneficial, suggesting that the team accurately anticipated growth trends and opportunities within this sector. These contributions highlight the importance of detailed fundamental analysis and sector-specific insights in portfolio management.
However, not all positions yielded favorable results. Alibaba's profitability faced considerable pressure due to substantial investments in its artificial intelligence (AI) infrastructure. As companies increasingly pour resources into AI development, the short-term impact on profitability can be significant, even if these investments are poised to drive long-term growth. This situation illustrates the trade-offs involved in balancing immediate financial performance with future strategic positioning in rapidly evolving technological landscapes.
Looking ahead, the strategy anticipates that the continued trend of industry outsourcing will be a crucial driver for growth. This shift, where companies delegate non-core functions to external providers, is expected to support market share gains for specialized providers, particularly when competing against smaller, less integrated entities. This strategic outlook suggests a focus on businesses positioned to capitalize on structural changes within the global economy.
The Diamond Hill International Strategy's fourth-quarter performance was a mix of calculated successes and challenges. While the overall return slightly lagged the benchmark, the underlying factors reveal a thoughtful approach to investment. Gains from specific company actions like the Sumitomo Densetsu takeover, coupled with strong stock selection in key sectors, provided positive momentum. Meanwhile, the pressure on Alibaba's profitability due to AI investments serves as a reminder of the complexities in navigating dynamic markets. The strategy's forward-looking perspective on industry outsourcing positions it to potentially leverage future market trends effectively.