Elise Johnston (EJ): A&D has been a key driver of performance across international equity strategies. What factors are fueling this strength, and do you see it continuing?

Brian DeAngelo (BD): This has certainly been the case so far in 2025, with the European A&D sector returning over 90% year to date through September 30, 2025.¹

One of the primary reasons for the robust performance of European A&D companies this year is the recent agreement by NATO member states to target spending 5% of gross domestic product (GDP) on defense and security-related measures by 2035. Several factors contributed to this new increased spending agreement and will be applied across armaments and critical infrastructure in Europe:

• The long-term threat of Russia: Russia’s invasion of Ukraine in 2022 broke the post-Cold War security order, proving that large-scale conventional war is possible in Europe. The new spending goal is a direct response to the need for a sustained, robust deterrent against a long-term, existential threat.NATO allies recognized that the former 2% of GDP spending target is no longer sufficient to secure the necessary capabilities, replenish depleted stockpiles (due to support for Ukraine), and execute new regional defense plans.

• U.S. political pressure: The commitment was partly a political move, heavily influenced by a desire to secure the U.S.’s future commitment to the alliance. This demonstrates to U.S. political leaders that European allies are committed to fair burden-sharing and are serious about defending themselves.
• Closing capability gaps: 3.5% of the 5% total commitment is targeted for core defense intended to provide the funding necessary to rapidly fill existing capability shortfalls, from air defense to a massive increase in artillery and missile production capacity.
• The need for resilience and "whole-of-society" defense: The 5% commitment reflects a recognition that modern warfare extends beyond the battlefield. Of the 5% total target, 1.5% will target sectors essential for national and collective resilience, such as critical infrastructure (e.g., ports, airfields, energy grids, and upgrading roads and bridges) and enhancing cyber defense.
• Technological innovation: Technological advances from the East, namely China, further reinforce the need for increased spend. The rate of innovation in A&D is accelerating and that trend is expected to continue with the rise of artificial intelligence (AI). To keep capabilities current, there will need to be significant and sustained funding by European states.

On a go-forward basis, the outlook for European defense spending has totally transformed from a position of contraction to expansion, as this 5% agreement has been described as a “quantum leap”² by NATO Secretary-General Mark Rutte from the alliance's long-standing financial commitments of only 2% of GDP. The previous commitment was established in 2014 in response to Russia's annexation of Crimea. Given undersupply in Europe, the lasting conflict between Russia and Ukraine, the risks of a Russian incursion into other Eastern European countries, and accelerating technological advances, our managers see further upside in A&D businesses.

EJ: How do you evaluate companies in this sector – what metrics or qualities are most important to IRG?

BD: Within public equities, we seek to partner with best-in-class investment managers that focus on investing in quality businesses – businesses that sell essential goods and services and operate in attractive markets with high barriers to entry. These companies have strong balance sheets and strong free cash flow growth, along with high returns on invested capital. Our managers also look to invest in companies with exceptional leaders who are strong capital allocators. In our minds, investing in great companies managed by great operators is the best way to preserve and grow capital over time.

With the above criteria in mind, we are pleased that managers in our portfolios have captured this year’s rally in the A&D sector. As part of our continued due diligence, we seek to stress test managers’ investment theses from both a quantitative and qualitative perspective. We’ve found that their rationale for owning certain defense and aerospace names aligns with our quality framework.

In fact, our managers began building exposure to this sector before Russia invaded Ukraine, predicated on the view that these businesses were trading at attractive valuations and had a path to improving earnings that would be accretive to the company’s share price. As the broader story of NATO increasing their spending unfolded, we watched as our managers prudently managed position sizing, taking profits as stock prices appreciated and approached price targets, while still maintaining meaningful exposure for further potential upside.

EJ: Geopolitical tensions have kept defense spending in focus. How do you balance short-term political catalysts with longer-term fundamentals when assessing opportunities?

BD: Amid short-term political catalysts like we have seen with NATO’s 5% spending agreement, it is important that our investment managers prudently manage risk in their portfolio by trimming positions after periods of strong share price appreciation and remain valuation-sensitive going forward.

On a long-term basis, our managers constantly stress test what is implied in a company’s stock price vs. what they believe the company can achieve on a long-term basis. Despite the recent rapid appreciation of the A&D sector, our managers believe there are secular tailwinds that will be supportive of these companies for years to come. Geopolitical threats will not go away overnight, and NATO allies must keep up with advances from potential adversaries that are continuously pushing military innovation.

There is a saying that “war is the mother of invention,” and the world has seen this play out on the battlefield in Ukraine as drone warfare is now commonplace. Given the long duration of this agreement by NATO, and consensus by member nations (especially those in closer geographical proximity to Russia) that Europe needs to rapidly fill existing defense shortfalls, this sector will likely continue to experience supportive tailwinds. Overall, the path to safety for Europe and the West relies on more spending and innovation in this sector – the Russia/Ukraine conflict has only served to bring this necessity to the fore.

EJ: Supply chain constraints and production delays have been a recurring challenge for aerospace manufacturers. How do you see industry addressing these challenges, and what impact might that have on future growth?

BD: This is true and there was certainly a narrative in the market that despite the NATO spending increase, many of these defense companies had a long (several year) backlog of orders to fill. According to our managers, the supply chain constraint can be overcome, and the market is already seeing signs of this. For example, companies have been striking joint venture agreements and allocating capital to increase capacity to meet demand.

The biggest barrier to overcoming the supply chain issue is the willingness for company management teams to truly believe NATO member states will achieve their spending goals. In Western European countries, further from the fray in Ukraine, management has been a bit more skeptical that their governments will raise taxes or cut spending for social programs to achieve the 5% goal. Countries closer to the current conflict appear more willing to loosen the purse strings to spend, which has already unlocked capacity at certain companies that initially experienced supply chain constraints.

EJ: What is the most crucial point for readers to take away from this interview?

BD: The key to compounding wealth for the long-term is staying invested. The market may throw curveballs, but great managers are able to look around the corner to identify new and sustainable trends, such as combatting the structural undersupply of A&D in Europe given the critical role it plays in maintaining safety and resilience. By partnering with best-in-class active managers that focus on owning tremendous businesses with secular tailwinds, your portfolio should be able to ride through bouts of volatility and grow over the long-term.

EJ: Brian, thank you for your time.