RGI Global Alpha Fund Update - July 25
Outlook
While tempting to talk about individual share price volatility again, sitting amid another quarterly earnings season where +/- 10% share price reactions seem to be the norm, the new feature that has really caught our attention is the return of corporate animal spirits in the form of M&A activity. Within our own portfolio, Allegion, Baker Hughes, SS&C Technologies, TopBuild, Waters, and Weir Group have all notably stepped up acquisition activity.
In all cases bar Waters, the stock market’s reception has been positive (very positive in the case of TopBuild). The deals at Allegion, Baker Hughes, and SS&C are part of a consistent strategic approach that is pushing these companies’ portfolios towards high margin recurring revenue streams growing at a healthy rate. Of these, Baker Hughes’s acquisition of Chart Industries represents more of a step change in terms of scale, accelerating its transformation into a high quality industrial business notably hooked to long-term growth in LNG and away from upstream oil services.
TopBuild’s acquisition of Progressive Roofing is the most eye-catching on our initial analysis, in terms of the value creation potential over the next decade consolidating a large, fragmented US commercial roofing installation market. It is supportive of a core tenet within the TopBuild investment case, namely backing a management team with an excellent capital allocation track record within a cyclical industry (like building materials) to create value for shareholders via M&A during downturns.
Waters’ acquisition of Becton Dickinson’s biosciences & diagnostics business for $17.5bn is large in the context of its own size. The scale and timing of the deal were a surprise. We saw a clear investment case around the idiosyncratic drivers of its instrument replacement cycle and a very high quality recurring revenue base; despite having a management team we rate highly, this acquisition undoubtedly adds complexity, and we are therefore reviewing the position.
Given various government incentives, such as the One Big Beautiful Bill (as discussed in our recent quarterly report), we expect the next few months to continue to be a busy time for investment bankers.
Strategy Update
Activity
We bought two new investments and exited one in July.
Altus Group is an underfollowed company where the market appears slow to recognise the company’s pivot to software & analytics due to its long history as a broader real estate services company. Following the sale of its Tax business, Altus has guided to high single-digit revenue growth, ~75% recurring revenue mix, 24-26% EBITDA margin and 65-70% EBITDA to free cash flow (FCF) conversion in FY26.[1] We expect these figures will prove to be a staging post over the longer-term, anticipating ~20% compound growth in FCF per share from a starting 5-6% FCF yield.
Altus’s ARGUS software is a crown jewel business with a dominant position in commercial real estate (CRE) valuation software, which creates significant network effects and high switching costs. Having executed its cloud transition and improved group data architecture, Altus has enhanced its pricing model and recently launched adjacent products, such as benchmarking, which are enabling better monetisation of ARGUS’s high quality asset-level dataset (over 53m properties). Our recent meeting with management highlighted a target addressable market of ~$4bn (within a broader $10bn revenue market) versus total Analytics revenues of $411m in 2024.
Hikari Tsushin presents a unique business model in Japan, combining a core operating company with an investment book of 851 listed companies and 36 associates. The operating company involves a cluster of stable businesses with high recurring sales, in sectors such as electricity retail and telcos, which has allowed Hikari to compound recurring operating profit at 10% p.a. over the last 10 years.[2]
Management are laser focused on returns, and new business lines must meet demanding internal hurdle rates (~30% IRR). The pure investment book has shown strong performance (pre-tax IRR 17% over the last 7 years[3]) and in situations where investee companies operate in complementary businesses to Hikari, they are progressed to associates and then, selectively, fully consolidated subsidiaries.
Hikari targets 10% organic growth in operating profit per annum, or 15% with M&A.[4] Its stable end markets and consistent M&A approach bring a predictability to returns. When combined with the performance of its investment portfolio and a starting FCF yield of 5% on the operating business, we see good prospects for a mid-teen IRR.
Hikari Tsushin replaced Tsubakimoto Chain, where our engagement around capital allocation – namely using excess cash and investments to increase shareholder returns – helped deliver an attractive total return on our investment.
Performance
The Fund returned +4.4% in July. In comparison, the MSCI ACWI index returned +5.0% and the MSCI ACWI Value +4.3% (all in GBP).[5]
Baker Hughes (+22% in GBP) was the largest positive contributor. It released strong Q2 numbers and upgraded its guidance. A key feature was its disclosure of $550m of orders in the quarter (and $650m year-to-date) for turbines sold into data centres, which is helping broaden the investment case from orders linked to LNG. TopBuild (+18%) announced the $810m acquisition of Progressive Roofing. This gives it a platform to consolidate the structurally attractive ~$75bn US commercial roofing installation market, of which 90% sits with 35k small businesses. Allegion (+19%) delivered Q2 results ahead of expectations and raised its guidance. Most notably, its US non-residential business is growing organically at a high single-digit rate.
The largest negative contributor to relative returns was John Wiley & Sons (-10%), which has retraced its positive share price move following results on no new information. Certara (-13%) continues to be volatile around headlines relating to issues which might impact pharma R&D budgets, such as ‘Most Favoured Nation’ pricing in the US. Fiserv (-17%) reduced its organic revenue growth guidance at Q2 results to the lower end of its +10-12% range and reduced the margin target (100bps expansion vs. 125bps previously). Our zero weight in NVIDIA cost -0.5% in relative performance.
[1] Source: company presentation, 9 July 2024.
[2] Source: Hikari Tsushin Company Introduction Presentation, June 2025
[3] Source: Hikari Tsushin Company Introduction Presentation, June 2025
[4] Source: Hikari Tsushin Company Introduction Presentation, June 2025
[5] Fund: B share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing. All performance data from Bloomberg Finance LP.