ClearBridge's International Growth Strategy: Navigating Style Rotation in a High-Growth Market

The ClearBridge International Growth Strategy delivered strong absolute returns in 2025, but it was a year of severe style rotation that left growth strategies trailing. The core benchmark, the MSCI EAFE Index, rose 31.2% for the full year, outperforming the S&P 500. Yet within that broad rally, the market's appetite shifted decisively toward value. Growth stocks underperformed value stocks by over 2,100 basis points for the year, the widest dispersion in 50 years.

Against this backdrop, the strategy's performance tells a clear story. While it slightly underperformed its primary MSCI EAFE benchmark for the fourth quarter and full year, it managed to outperform its secondary MSCI EAFE Growth benchmark for the year. This divergence highlights the brutal environment for pure growth managers. The MSCI EAFE Growth Index itself gained 20.8% for 2025, trailing its value counterpart by that massive margin. In such a value-dominated period, the ClearBridge strategy's relative underperformance against the core index is a direct reflection of the market's style shift, not a failure of the underlying holdings.

The annual results were supported by strong stock picking in Asia Ex Japan, Japan, Europe, and Canada, which offset weakness in the U.K. and emerging markets. The strategy's selective approach to growth-focusing on structural growth segments like cyclical stocks and turnaround stories-proved resilient but insufficient to overcome the overwhelming momentum in cheaper, more defensive value names. The bottom line is that the strategy captured significant upside from its global growth portfolio, but it was left behind by the broader market's clear preference for value in 2025.

Investment Themes: Structural Growth and AI Infrastructure

The ClearBridge International Growth Strategy is built on a deliberate bet against the market's recent style tilt. While value stocks dominated in 2025, the firm's portfolio is heavily weighted toward structural growth themes, viewing them as the engine for long-term market expansion. This includes a clear focus on the foundational build-out of AI workloads, where the strategy has seen strength in holdings like semiconductor equipment maker Tokyo Electron and chip giant Taiwan Semiconductor. These are not speculative plays but investments in the physical and technological infrastructure required to power the next wave of digital transformation.

A key part of the strategy's approach is its selective definition of growth. It targets what it calls "structural growth," which encompasses more cyclical stocks and turnaround stories. This allows the portfolio to participate in broad economic cycles while maintaining a growth orientation. The firm has actively increased exposure in this segment, notably by rotating into European and U.K. banks. This move is based on a view that these institutions are positioned for a potential economic upturn and rising interest rates, with stable credit quality and high dividends supported by strong cash generation and excess capital.

The firm's thematic focus also extends to companies demonstrating pricing power and resilient business models, which are critical in a moderating global economic environment. This was evident in its holdings, where management's ability to stockpile DRAM ahead of price increases helped retain pricing power for a gaming division, a factor that supported the stock's outlook despite market volatility. The strategy's rotation into banks and its continued investment in AI infrastructure represent a forward-looking setup. They aim to capture growth from two powerful secular trends: the capital-intensive shift to AI and the cyclical recovery in financial services that often follows periods of fiscal stimulus.

Sector Allocation and Specific Holdings: Capitalizing on Dislocation

The strategy's sector positioning is a direct response to the market's style rotation and the specific dislocations it has created. While the broader market favored value, ClearBridge's selective growth approach has concentrated on structural themes where long-term demand is undeniable, even if short-term sentiment is poor. This is evident in its key holdings, which target the physical build-out of the future economy.

A cornerstone of the portfolio is its investment in Siemens Energy (SMEGF), a German supplier of electrical equipment critical for powering data centers and the broader energy transition. This is a pure play on the capital-intensive infrastructure spending that underpins the AI and clean energy revolutions. Similarly, the strategy holds Tokyo Electron (TOELY), a key supplier to the semiconductor industry. Its position here is a bet on the foundational work required to support the exponential growth of AI workloads, providing a direct link to the technological infrastructure theme.

The firm's thematic rotation into financials is also a targeted play on a specific dislocation. By increasing exposure to European and U.K. banks, the strategy is betting that these institutions, often classified as value, are positioned for a cyclical upturn. U.K.-based NatWest Group (NWG) exemplifies this move, having been a leading contributor in the quarter. The rationale is that rising interest rates and higher fiscal stimulus will fuel loan growth, which will be more profitable for banks with stable credit quality and strong capital buffers. This is a classic growth investor's view: identifying companies with durable business models that are currently undervalued due to a temporary market mispricing.

These specific holdings illustrate the strategy's forward-looking setup. It is not chasing the momentum of the moment but rather allocating capital to the structural trends-AI infrastructure, energy transition, and a potential financial sector recovery-that are expected to drive market expansion over the next decade. The portfolio's performance in 2025, while trailing the value-dominated core benchmark, reflects the cost of this conviction. The strategy is betting that these secular themes will eventually reassert themselves, and its current holdings are the vehicles for capturing that future growth.

Risks and Challenges: Consumer Weakness and Geopolitical Headwinds

The strategy's forward-looking setup faces clear headwinds that could pressure near-term performance. The most immediate risk is cyclical vulnerability, particularly in the consumer discretionary sector. This area showed weakness in the quarter, directly impacting the portfolio. Holdings like Sea Limited (SE) and Japan's Sony (SONY) were hurt by profit-taking and operational concerns, including margin pressure from rising DRAM prices. For a growth strategy, this highlights the fragility of consumer-facing businesses when sentiment turns or input costs spike, even for companies with strong underlying franchises.

Geopolitical and regulatory pressures in key markets add another layer of risk. The health care sector has overall underperformed for the year, a trend that could persist due to ongoing policy uncertainty. While specific portfolio holdings like Argenx and UCB managed to perform, the broader sector faces challenges from pricing discussions and regulatory scrutiny, which can weigh on valuations and growth trajectories. This is a material risk for any international portfolio with exposure to large, complex markets like China, where the healthcare landscape is particularly sensitive to policy shifts.

The most persistent threat, however, is the continuation of the powerful style rotation toward value. The market's clear preference for cheaper, defensive stocks created a 21 percentage point differential of value over growth in 2025. This wasn't a minor blip but the widest dispersion in 50 years. For a growth-oriented strategy, this environment is inherently hostile. Even with strong stock picking and a focus on structural themes, the portfolio's inherent tilt toward growth stocks means it will continue to struggle to outperform a core benchmark that is heavily weighted toward value, especially if the macroeconomic backdrop favors stability over expansion.

The bottom line is that the strategy's resilience depends on its ability to navigate these pressures. Its selective approach to cyclical growth and its focus on AI infrastructure are designed to build a durable foundation. Yet, in a market where value has been the dominant story for a full year, the path to outperformance will require not just conviction in its themes, but also patience as the market eventually re-prices for growth.

2026 Outlook: Preparing for a Potential Reversal

The outlook for the ClearBridge International Growth Strategy in 2026 is one of cautious preparation. The firm acknowledges a market environment defined by moderating global growth and persistent economic uncertainty. The historic, 21-percentage-point gap between value and growth stocks in 2025 is not expected to close overnight. This sets the stage for continued pressure on growth-oriented portfolios, even those with strong stock selection.

The key catalyst for a performance turnaround will be a reversal in that extreme style dispersion. The strategy's portfolio is built for this moment, with its selective focus on structural growth themes. Its holdings in AI infrastructure-like Siemens Energy and Tokyo Electron-and its rotation into European banks are positioned to benefit if the market's focus shifts back toward expansion and capital spending. The firm's view that banks can work as a growth play, supported by stable rates and rising loan growth, is a direct bet on a cyclical recovery that could re-rate the entire growth segment.

Investors should monitor corporate earnings and capital expenditure trends as the primary signals of this potential shift. The strategy's success hinges on the visibility of a sustained economic recovery, which would validate its bets on cyclical growth and infrastructure build-outs. Early signs of companies increasing investment to fund AI and energy transitions would be a major positive for the portfolio's core holdings.

For now, the setup remains challenging. The strategy's underperformance against the value-heavy MSCI EAFE benchmark in 2025 was a direct consequence of the market's style tilt. In 2026, it will need to outperform on its own merits while navigating a still-hostile environment. The bottom line is that the strategy is not waiting passively. It has actively reallocated capital into areas it believes are mispriced relative to long-term growth trends, positioning itself to capture upside when the market eventually re-prices for growth.