Caterpillar has been a great investment for the fund, and not just once but twice[1]. It is the kind of company you hope to hold forever - an annualised total shareholder return of 18%[2] over the last fifteen years is an exceptional result for a company that still makes physical products.
Unfortunately, once the market realised Caterpillar were also making gas generators used for AI power, it became a victim of its own success. The rising share price has left the forward dividend yield barely above 1%[3], a level never seen in the past 20 years. As is often the case, when everything looks bright there is little room for error.
Happily, we found a home for the proceeds. First, a word of warning. We are looking for something more like Caterpillar of fifteen years ago, not the Caterpillar of today. This new holding is seen by many as a poor company in a poor industry for shareholder returns. It must manage demanding and often disgruntled customers, navigate volatile input prices and spend a lot of money just to stay competitive. It has only just reinstated a dividend in 2024, after a cut to zero in the pandemic. A great starting point? It is if you want to avoid high valuations.
The new holding is International Airlines Group (IAG), a group of several airline brands and a leader in transatlantic travel. IAG made it into the fund not for its flying experience, but by meeting our criteria and winning our confidence in its potential for improvement.
IAG’s financial health is completely changed from ten to fifteen years ago. Its leverage is low, it no longer has a pension problem, and it achieves among the best margins of any airline globally. Other improvements are yet to come.
IAG is often associated with being just British Airways - and for making all its money flying big-spending corporate travellers between New York to London. We believe this is outdated.
Viewed through a different lens, IAG today is a much wider set of critical arteries between Europe and the Americas. Madrid to Mexico City for example, or Dublin to Boston. It connects some of the fastest growing cities and most vibrant economic clusters. Long-distance flying has proven its value, especially among high-end leisure customers – an addressable population that is growing[4]. Rather than cutting back on all extras, several airlines have found a way to succeed by not trying to beat the low-cost airlines at their own game. IAG is one of those who understands this well.
The pandemic was certainly painful short-term, but it might have been one of the best things to happen to IAG long-term. Its mix of profits is now healthier. Aircraft became hard to source, and weaker competitors were decimated. The value of airline loyalty programmes was also revealed, after United Airlines raised $6.8bn in financing, secured by a third-party estimate of $20bn for the value just of its MileagePlus scheme[5].
A large proportion of IAG’s traffic is origin and destination, so it does not tend to face competition with well-resourced Eastern competitors. In any case, most major airports in Europe have reached physical and regulatory limits on their capacity, and IAG also benefits from a close cooperation with both Qatar Airways and American Airlines.
Capital expenditures will increase over the coming years, corresponding to an increased rate of deliveries on its order book. We believe that these new planes are likely to be excellent investments, as they will replace inefficient older varieties, and come with a higher-margin premium seating. In 2026, British Airways will be offering more flights to cities such as Miami, Dallas, Austin and San Diego, further strengthening the network of daily non-stop flight options.
IAG already has high returns on capital. Now it needs to make the right investments to keep them there and return excess cash flows to shareholders. This is well underway, with the commitment to pay a dividend that can be sustained through most downturns. Significant share buybacks will be the other feature, the scale of which may still be underestimated. We see double digit total shareholder returns in the coming years.
We hope that IAG can improve just like Caterpillar did. British Airways was even voted the best short-haul airline and second-best long-haul airline in a poll of 900,000 votes in The Sunday Times Travel Awards 2025. If even the British public are positive, then it must be getting better!
[1] Held 2013-2016 and 2023-2025
[2] Source: Bloomberg, 11/10/2025. GBP
[3] Source: Bloomberg, 11/10/2025
[4] Silver Economy: The age of opportunity I Rothschild & Co