Navigating International Equity Volatility: Lessons from the Touchstone Sands Capital International Growth Equity Fund Q3 2025 Underperformance

The Touchstone Sands Capital International Growth Equity Fund's underperformance in Q3 2025 offers a case study in the challenges of managing international equity portfolios amid divergent market dynamics. While global equities advanced, with European markets nearing all-time highs, the fund lagged due to a confluence of factors: a reversal in early 2025 growth leaders, ongoing multiple compression in growth holdings, and the broader shift toward value stocks. This analysis explores how strategic portfolio reallocation-both regional and thematic-could have mitigated these risks, drawing on Q3 2025 trends in value/growth rotations and geographic performance disparities.

The Fund's Q3 2025 Struggles: A Confluence of Headwinds

The fund's struggles were emblematic of broader market shifts. Early 2025 had seen a surge in growth stocks tied to artificial intelligence (AI) and high-beta sectors, but this momentum reversed in Q3 as investors recalibrated expectations amid inflationary pressures and regulatory scrutiny. Simultaneously, value stocks-particularly in the U.S.-gained traction, with the Russell 1000 Value Index rising 5.3% compared to the 10.5% gain for its growth counterpart. For a fund focused on international growth, this shift created a double whammy: underexposure to the resurgent value segment and overexposure to decelerating growth sectors.

Compounding this was the fund's reliance on markets where growth stocks faced multiple compression. While European equities surged, driven by resilient financials and industrials, the fund's portfolio likely remained skewed toward sectors that failed to capitalize on this regional momentum. This misalignment highlights the importance of dynamic rebalancing in volatile markets.

Strategic Reallocation: Regional and Thematic Adjustments

Q3 2025 saw investors recalibrate portfolios in response to divergent regional and factor performance. In Europe, financials and industrials outperformed, driven by easing monetary policy expectations. Meanwhile, emerging markets attracted inflows, with consumer-driven economies benefiting from geopolitical optimism and currency tailwinds according to market commentary. For international equity funds, shifting allocations toward these resilient regions could have offset underperformance in growth-heavy sectors.

Thematic reallocation also proved critical. While U.S. investors rotated into small-cap and value stocks, international markets exhibited a more nuanced picture. In the UK, value stocks outperformed due to attractive valuations, whereas emerging markets saw broad-based strength across sectors. This suggests that a one-size-fits-all approach to value/growth rotations is insufficient; instead, strategies must account for regional idiosyncrasies.

Effectiveness of Reallocation Strategies: Mixed Outcomes

The effectiveness of Q3 2025 reallocation strategies varied. U.S. equity ETFs, particularly large-cap tech-focused funds, saw robust inflows, reflecting continued faith in the "Magnificent Seven" despite internal rotations within the group. However, international large-cap funds faced outflows, as investors sought to capitalize on lower valuations in emerging markets and smaller-cap stocks according to performance data.

Small-cap stocks, for instance, rebounded sharply in Q3, with the Russell 2000 hitting record highs amid optimism over rate cuts and fiscal stimulus according to market analysis. This underscores the value of diversifying beyond growth megacap stocks, even in international portfolios. Similarly, gold ETFs attracted $12.6 billion in inflows, signaling a flight to safety amid dollar weakness and inflationary concerns according to investor flows.

Lessons for Future Strategy

The Touchstone Sands fund's Q3 2025 experience underscores the need for agile portfolio management. Key takeaways include:
1. Dynamic Regional Exposure: Overweighting regions like Europe and emerging markets, where earnings resilience and policy tailwinds were evident, could have offset growth sector underperformance.
2. Factor Diversification: While value stocks gained traction in some markets, rigidly shifting to value at the expense of growth may not always be optimal. A balanced approach, leveraging regional value premiums, is preferable.
3. Currency and Earnings Resilience: Developed markets outside the U.S. attracted capital due to currency dynamics and earnings stability, highlighting the importance of macroeconomic context in reallocation decisions.

As 2025 progresses, investors must remain vigilant to shifting valuations and macroeconomic signals. The Q3 volatility serves as a reminder that even well-positioned funds can falter without timely adaptation.