AI narrative has negatively impacted vertical-market software companies, representing 20% of Global fund exposure. Management believes AI poses opportunities rather than uniform threats to VMS, particularly for mission-critical systems with high switching costs. They view trusted incumbents as better positioned to deploy AI effectively than new entrants. Portfolio companies completed 145 acquisitions in 2025, with 70% outside Nordic countries. Companies maintain disciplined approach to M&A with average acquired sales of EUR 12m. Acquisition-driven compounders demonstrate resilience through dual growth engines of organic growth and acquisitions. AI infrastructure build-out has been a clear tailwind for companies exposed to data center expansion. Halma and Diploma benefited from demand for compute, power, cooling, and electrical systems. Amphenol saw robust demand as data-center architectures evolve to support higher power densities. Tariff and trade-related uncertainty under Trump administration affected portfolio companies including IMCD and Judges Scientific. IMCD experienced macroeconomic pressure from tariffs, while policy uncertainty created headwinds for university funding affecting Judges Scientific.

Companies globally are investing hundreds of billions into AI infrastructure including data centers, chips, and power systems based on assumptions of massive future demand. This speculative buildout mirrors historical technology cycles where early investment accelerates development and separates winners from losers.

Hyperscalers plan close to $500 billion in AI capex spending for 2026, raising questions about converting this investment into meaningful profits. The AI chip rental market remains competitive with sticky pricing, suggesting the AI bubble has not yet burst. Survey data shows substantial increase in AI use among large American companies with 40% expecting additional AI use in 2026. Physical gold recorded new all-time highs during the quarter driven by geopolitical instability, currency debasement, and physical supply shortages. Central banks have been the marginal buyer, purchasing record amounts including 634 tonnes in the first three quarters of 2025. Gold ended 2025 with gains of 65%, its best calendar year in decades. Silver returned 54% in Q4 driven by a deepening structural deficit from exhaustion of above-ground inventories and absence of new production. Silver's transition to a strategic industrial asset for AI data centers, solar panels, and EVs created supply/demand mismatch. The US officially added silver to its Critical Minerals List, acknowledging its vital role in national security and energy transition. The Federal Reserve cut rates by 25 basis points but exposed deep fractures within the FOMC over prioritizing weakening jobs versus high inflation. The ECB left rates unchanged at 2% with President Lagarde suggesting the rate cutting cycle is complete. The Bank of Japan raised rates to a 30-year high, forcing a global bond re-pricing. Chinese equities broke out to decade-plus highs despite the country remaining firmly in deflation with no sign of consumption recovery. China's growing competitiveness across high-tech sectors including EVs, battery storage, robots and automation is underappreciated. China's formidable edge regarding cheap and limitless access to energy power is likely to become a major talking point.

The letter outlines a balanced growth approach combining participation in AI-driven momentum with downside protection through diversified stock selection. Emphasis is placed on companies with durable fundamentals, innovation-led growth, and disciplined capital allocation. Growth investing is positioned as increasingly selective amid heightened volatility and dispersion.

AI continues to drive significant investment opportunities with Alphabet's Gemini 3 model leap-frogging competitors and validating custom chip investments. The AI scaling laws are hitting physical power constraints, requiring distributed data center solutions that benefit networking infrastructure providers like Ciena. Data center infrastructure is experiencing unprecedented demand driven by AI workloads requiring massive compute power. Hyperscalers are scaling across multiple locations due to power constraints, creating opportunities for networking and infrastructure providers. Google Cloud demonstrated strong momentum with a record $50 billion sequential increase in backlog to $158 billion, driven by unique TPU offerings and AI workload demand. Cloud providers are differentiating through custom silicon and AI-optimized infrastructure. TSMC continues benefiting from compute demand and plays a critical role in chip manufacturing regardless of whether hyperscalers use Nvidia products or custom solutions. The semiconductor cycle remains supported by AI infrastructure buildout.

Small-cap earnings continued to gain strength with expected profits to grow around 15% in 2026, slightly exceeding current forecasts for the S&P 500. Small caps are more sensitive to refinancing costs and should benefit disproportionately from falling rates. The market is beginning to broaden out as small value stocks outpaced the majority of the Magnificent 7. The strategy focuses on bottom-up fundamentals based on the 10 Principles of Value Investing, requiring attractive valuations, quality balance sheets, and sound business strategies. The team seeks undervalued companies with low debt, positive earnings dynamics, and competitive advantages. Value investments are confirmed by share buybacks, insider buying, and dividend growth. The team looks for improving fundamentals confirmed by active share buybacks as a sign of management confidence in future profits and cash flows. A majority of companies in the portfolio are active in buyback programs. LAMR has been active on its buyback program and BLDR has been a consistent acquirer of its own shares through buybacks. Growing dividends are viewed as confirmation of improving fundamentals and management confidence in future cash flows. The team seeks companies active in dividend growth as one of three focus areas for capital allocation. LAMR increased its dividend this year as part of its capital allocation strategy. Lamar Advertising was one of the top contributors to performance in the quarter as the nation's leading out-of-home advertising company. LAMR's pacings have been strong, which should lead to positive earnings growth in 2026, with additional boost expected from mid-term election cycle political advertising spending. Builders FirstSource is the largest distributor of lumber and building products materials for contractors and home builders. The company has been a consolidator of smaller regional lumberyards and made a push towards increasing value-add building products such as pre-assembled trusses to save builders time and labor.

Small-cap stocks are experiencing strengthening fundamentals with profit growth on track to surpass large caps for the first time in 13 quarters. The Russell 2000 Value Index outperformed the S&P 500 in Q4, and small stocks nearly pulled even with large caps in 2025, marking their best relative performance since the pandemic. Attractively priced small stocks are finally gaining investor attention, with four portfolio holdings taken private in the quarter and 14 takeouts over the past year. The fund applies rigorous fundamental analysis focusing on low valuations, high-quality balance sheets, and positive earnings dynamics through their 10 Principles of Value Investing. Federal Reserve rate cuts are expected to benefit emerging businesses more than giant multinationals, contributing to the improving outlook for small-cap stocks. Lower interest rates historically favor smaller companies over large corporations.

India combines sustained economic growth, rising formalization, deepening capital markets, and a growing pool of well-run, founder-led businesses with long reinvestment runways. The economy has grown from about $1 trillion to around $4 trillion over roughly 17 years, with credible estimates suggesting it could roughly quadruple over the next 15-20 years. India has moved from the periphery to the center of global equity markets as the fourth-largest listed market in the world. AI represents a new layer of software and automation that is already changing how work is done, how products are built, and how decisions are made. It has triggered a significant investment cycle across the physical stack including chips, servers, networking equipment, power generation, cooling, and data centers. Several businesses in the portfolio are already using these tools to improve efficiency, decision-making, and service quality. The alternative-asset industry is still in the early stages of moving from the margins into the mainstream, both for institutions and particularly for private-wealth clients. KKR's three-engine model is designed for this structural shift, with management aiming to build a business that can double and then double again, taking adjusted net income per share from $3.42 in 2023 to more than $15 within roughly 10 years. HEICO operates in the unglamorous world of replacement parts and mission-critical components, serving as the world's largest independent supplier of FAA-approved PMA replacement parts. The business benefits from structural tailwinds including Americans driving more, an aging vehicle fleet, and rising repair complexity that means more vehicles are totaled rather than repaired. The excess and surplus (E&S) segment has grown steadily for years, with AM Best estimating that direct premiums written are approaching $130 billion, accounting for more than a quarter of all U.S. commercial-lines premium. Kinsale has built a focused underwriting business designed for speed, discipline, and cost efficiency with consistently low expense ratios in the low-20s.

AI narrative shifted from Magnificent 7 to hardware providers building data centers. Memory chip providers like Micron and Samsung surged 240% and 120% respectively. Industrial businesses like Caterpillar and Finning benefited from AI-related capital spending for power generation equipment. Gold prices rose 64% as global central banks bolstered reserves and investors sought store of value amid geopolitical concerns and US deficit levels. Precious metals had their best year since 1979, contributing significantly to Canadian market returns. European financials rose 65.7% in 2025 as positive interest rates re-ignited profitability. Canadian bank stocks rose 43.4% as falling rates caused yield curve steepening. Over five years, European financials returned 111.5% versus S&P 500's 82.3%. Manager emphasizes opportunities in defensive areas like healthcare and consumer staples trading at historically low multiples. European cyclicals and smaller cap companies globally trade at low earnings multiples with depressed margins, offering reasonable returns with conservative assumptions. Industrial metals moved to new highs following precious metals surge. Manager sees opportunity in companies that manufacture raw materials into value-added products and pass through cost increases. Commodities rising alongside capital expenditure and fiscal stimulus.

The fund focuses on businesses with enlightened managements that buy back their stock at compelling valuations. Three businesses in the portfolio that fit this mold have committed to return capital to shareholders through buybacks or dividends. The fund believes these businesses could deliver higher returns going forward than the Magnificent 7 through buybacks. The fund is invested in a handful of metallurgical coal businesses, with two near the bottom quartile of the cost curve and all led by exceptional managers. All three businesses have some of the best met coal reserves on the planet. The fund believes there will be no meaningful alternative to using met coal to produce steel for several decades. The fund trades at a trailing P/E of 11 compared to the S&P 500's trailing P/E of 30. The fund seeks to buy capital-light businesses with high returns on equity at no more than a bit more than tangible book value. The fund believes a metallurgical coal miner or offshore oil driller that earns even single digit returns can be a fantastic investment if purchased at a fraction of replacement cost. TAV operates 15 airports in 8 countries with guidance of 10-14% annual passenger growth across its airports, which may continue for decades. TAV has high operating leverage where if passengers grow 12%, cash flow may grow at more than 2x that. The fund believes it is led by an exceptional management team and is very cheap compared to other global airport operators. The fund is invested in a couple of U.S. homebuilders who have morphed into asset-light, efficient factories with shrewd capital return policies. The U.S. is structurally underbuilt with a deficit of 4-7 million homes. The high-quality, scale homebuilders have unique advantages that could allow them to capture a growing portion of this growing pie. Traditional car dealerships are hated by the market due to concerns with the rise of electric vehicles and the perception that EVs do not carry the same parts and repair content as traditional ICE vehicles. The fund believes the market's concerns are overblown and not valid. These are great businesses with high-margin recurring revenues that will continue for decades. The fund has a position in U.S. offshore oil services. Offshore accounts for 1/3 of global oil and gas production and breaks even at levels far below fracking. Drillships are complex and expensive with no new supply in the pipeline. The fund believes supply-demand tightness can yield very high day rates for these ships.

The fund demonstrates classic value investing principles, buying companies trading below book value. Secure Trust Bank trades at half its book value, effectively allowing investors to buy £1 for 50p. The contrarian approach of buying when oil dropped 20% and others are selling exemplifies value discipline. Significant exposure to UK banking sector with Secure Trust Bank, Metro Bank Holdings, and CMC Markets representing major positions. Secure Trust Bank's division sale at premium to book value and new lending strategy announcement expected at Capital Markets Day are key catalysts. Despite oil dropping 20% in 2025 and Trafigura expecting further declines amid supply glut, the fund maintains contrarian positioning. Kistos doubled oil and gas production through Middle East acquisition, creating what the manager views as the most mispriced stock in the portfolio. Shorted Fermi, a £12bn AI data centre IPO, betting against the peak of AI data centre euphoria. The thesis relied on political shifts and tech breakthroughs reshaping the landscape. The stock dropped 70% within three months, validating the short position.

The letter extensively discusses the rise of second-order pricing constructs that have replaced fundamental valuation discipline. The manager argues that investors are increasingly relying on relative valuation and greater fool theory rather than first principles of business cash flow generation. This has led to elevated market multiples that lack fundamental anchoring and create fragility when sentiment shifts.

Fund focuses exclusively on healthcare sector with concentrated portfolio of small-cap companies. Investment approach targets special situations within healthcare including spin-offs, asset sales, business model pivots, and new product launches. Portfolio includes pharmaceutical, medical device, biotechnology, and healthcare IT companies. Fund employs fundamental value-oriented approach with focus on margin of safety and intrinsic value calculations. Seeks companies trading at discounts to long-term intrinsic value using cash flow yield or asset value methodologies. Emphasizes downside protection relative to estimate of intrinsic value. Concentrated portfolio of small-cap companies with limited sell-side coverage and institutional ownership. Invests where most institutional managers cannot or will not participate, allowing for asymmetric return potential. 44% of Russell 2000 stocks have zero Wall Street coverage, creating mispriced opportunities.

Blue Tower focuses on value investing with international diversification. The manager notes that the valuation spread between cheap and expensive stocks is one of the greatest in market history, creating a favorable environment for their value-oriented approach. Enova has been aggressively repurchasing shares, reducing share count by more than 5% over 12 months and from 36.87M shares in Q3 2021 to 24.88M shares in Q3 2025. Georgia Capital also pursued aggressive share repurchases, reducing shares outstanding by 8.8% in the first nine months of 2025. The manager believes AI represents true innovation with measurable impacts on businesses and worker productivity. A Federal Reserve study found AI usage translated to roughly 1.1% aggregate productivity gains, with expectations for higher quality tools to drive further improvements. Enova represents a rapidly growing fintech company with machine learning-driven underwriting algorithms that are retrained frequently. The acquisition of Grasshopper Bank will create a more vertically integrated financial services platform with new banking and lending products.

The MJG partnership's exposure to copper has increased to 43% of the weighted portfolio across seven different investments, marking the highest weighting towards a single metal since gold exceeded 50% in mid 2020. Each copper-focused position presents opportunity for share price appreciation through the drill bit, permitting success, or M&A activity without reliance on further increases to the copper price. The MJG partnership benefitted from ferocious performance by precious metals, with gold increasing 65%, silver 148%, platinum 126%, and palladium 81% in 2025. However, silver's parabolic move historically signals pain ahead for precious metals investors, prompting the partnership to reduce precious metals exposure below 30% of the portfolio. The resurgence of mining investment within the United States is driven primarily by brinksmanship between China and the United States over critical minerals. The MJG partnership's US-focused investments comprised 30% of the weighted portfolio entering 2025 and outperformed the broader portfolio. The MJG partnership's exposure to the prospect generation business model has increased to 37% of the weighted portfolio across seven different positions. 2026 is set up for a boom in exploration activity, with high-quality prospect generators and explorers set to benefit from increased interest by investors and strategics alike.

AI boom entering new phase with tech companies turning to debt markets to fund infrastructure investment. Over $400 billion in debt issued by global tech companies in 2025. OpenAI considering IPO in 2026 with $1.4 trillion capital expenditure commitments for data centers and chips. Tariffs remained a clear headwind throughout 2025, creating uncertainty for supply chain planning. Tariffs at 125% against China with frequent changes making strategic planning difficult. Companies like Costco have sued the government for potential refunds if tariffs deemed illegal. Federal Reserve announced $40 billion monthly Treasury Bill purchases on December 10, moving back to quantitative easing under reserve management guise. Fed balance sheet normalized from $9 trillion peak in 2022 to $6.5 trillion before new purchases began.

AI has driven massive market concentration with 42 AI-related stocks representing 45% of S&P 500 market cap and accounting for 78% of returns since ChatGPT launched. The capital intensity of hyperscalers is reaching 29% capex-to-revenue by 2026, raising questions about return generation. FMI sees long-term potential but questions whether enormous capital spending will generate attractive returns. Quality businesses have underperformed significantly in 2025 as investors favored low-quality junk rally stocks. FMI maintains focus on businesses with sustainable competitive advantages, strong balance sheets, and ROIC above cost of capital. Quality Value has demonstrated superior long-term performance despite recent headwinds. Small cap markets have been dominated by companies that lose money, have low ROE, or lack sales since April 2025. Active small cap managers have struggled to keep pace during this junk rally environment. FMI continues finding attractive opportunities despite challenging backdrop.

AI-related companies continued to dominate markets in 2025, with 42 AI stocks representing 45% of S&P 500 market cap and accounting for 78% of returns. The top five hyperscalers are expected to spend over $500 billion on capex this year, with capital intensity reaching 29% of revenue by 2026. FMI questions whether the enormous capital spending will generate attractive returns and warns of potential downside risks similar to the 2000 tech bubble. High-quality businesses have underperformed low-quality sharply in 2025, despite outperforming over the long run. FMI maintains their focus on quality businesses with sustainable competitive advantages, strong balance sheets, and ROIC above cost of capital. They believe quality value investing offers superior downside protection during market downturns and creates a powerful compounding effect over time. Small cap active managers have struggled to keep pace during the junk rally, with companies that lose money, have low ROE, or are high beta dominating since April 2025. The Russell 2000 gained 12.81% in 2025, but quality has been a meaningful laggard as investors extended out along the risk curve and were rewarded for taking on more speculative positions.

AI has become a dominant theme across major equity indices, with Nvidia leading the S&P 500, ASML dominating MSCI EAFE, and TSMC leading emerging markets. The fund benefited from AI-related dynamics, particularly through Samsung's memory products experiencing substantial price increases due to DRAM shortages driven by AI demand. The fund focuses on investing in companies with low valuations that are unloved, ignored, or out of favor but remain fundamental to the global economy. Despite persistent bubble discussions, opportunities continue to exist away from media headlines in companies trading at attractive valuations. New investment in Swatch represents exposure to luxury watch brands including Omega, Longines, Tissot, and others. The investment thesis is based on tangible assets including Swiss real estate and the potential for operating leverage when luxury demand recovers from current structural pressures.

Market concerns about AI capex cycle intensified with Oracle results falling short. The fund is positioned to benefit from AI-driven power requirements and data center architecture transitions, particularly through holdings like Vicor which provides power solutions for XPU applications. China still lacks ability to design and manufacture leading-edge chips at US levels. The fund holds ACM Research, China's leading wafer-fab cleaning equipment manufacturer, positioned to benefit from China's semiconductor self-sufficiency push. National security has become central focus for both US and China. Added Huntington Ingalls to capture increased shipbuilding needs as defense becomes key battleground between rivals and government spending focuses on naval readiness. Portfolio ended quarter with approximately 35 percent in gold and cash. Hold precious metals as hedge positions to protect portfolio against inflation and potential economic setbacks.

The firm avoids direct AI-IT company investments but focuses on beneficiaries of AI infrastructure buildout. They invest in companies controlling necessary resources like natural gas, water, and land for data centers rather than the technology companies themselves. Significant focus on Permian Basin investments through TPL, LandBridge, and WaterBridge. The firm emphasizes water handling infrastructure and land ownership as critical limiting factors for oil production in the region. Long history of investing in securities exchanges from TPL to MIAX to ICE. The firm views exchanges as blue-chip businesses with near-perpetual longevity that don't fail or get displaced. Core philosophy centers on long-horizon value investing with focus on making time work for investors through unbroken compounding. Emphasis on high sustainable return on equity and margin of safety. Water infrastructure is highlighted as a critical limiting factor for both oil production and data center operations. WaterBridge represents a key investment in water handling and disposal infrastructure.

The AI-driven expansion rests on genuine technological innovation with capacity to deliver meaningful productivity gains. OpenAI reports one-tenth of world's population uses ChatGPT with potential $200 billion annual revenue by 2030, yet has committed $1.4 trillion in computing spend over eight years. The tension between genuine productivity gains and conspicuous speculation defines the AI ecosystem.

AI-related investments drove portfolio performance with impressive execution from semiconductor foundries, chip equipment manufacturers, and power management companies. The team maintains high conviction in a picks and shovels approach to AI, focusing on performance efficiency and companies improving power supply delivery. Despite market concerns about elevated AI capital expenditure, the team believes AI-driven secular tailwinds remain intact. Energy efficiency remains a core focus with holdings in HVAC, heat pumps, and power management electronics. Weaker US residential construction volumes contributed to underperformance from energy-efficient HVAC and heat pump exposure. The strategy emphasizes companies bending the total power demand curve and improving efficiency of power supply. Industrial gases holdings like Linde and Air Liquide provide operationally defensive businesses with resilient end markets and clear multi-decade pricing power. These companies operate within oligopolistic market structures benefitting from durable demand and attractive pricing power, serving as portfolio ballast despite current muted volume growth. Waste and recycling holdings offer compelling reward-to-risk characteristics through operationally defensive businesses tied to resilient end markets. The team maintains exposure to high-quality businesses in waste and recycling as portfolio ballast, benefiting from oligopolistic market structures and durable demand patterns. Smart and efficient grids exposure faced challenges with companies like Itron disappointing on order intake expectations. However, grid upgrades remain attractive secular growth opportunities over the long-term as part of the broader infrastructure modernization theme. Water infrastructure holdings experienced underperformance during the quarter due to factors including profit taking and poor business execution. Despite near-term challenges, water infrastructure remains part of the long-term environmental markets opportunity set.

AI has had a staggering impact on global stock markets, with 42 AI-related stocks representing 45% of S&P 500 market cap and accounting for 78% of returns since ChatGPT launched. However, FMI questions whether the enormous capital spending will generate attractive returns, citing OpenAI's unsustainable economics and hyperscalers' 29% capex-to-revenue ratios. FMI emphasizes their focus on quality businesses with sustainable competitive advantages, strong balance sheets, and ROIC above cost of capital. Quality has underperformed in the current junk rally, but historically provides superior downside protection and long-term outperformance through economic cycles. Quality Value (cheap stocks that rank high on quality metrics) has demonstrated long-term relative outperformance despite recent headwinds. FMI believes buying advantaged businesses at discount valuations creates margin of safety and superior risk-adjusted returns over time.

AI has driven massive market concentration with 42 AI-related stocks representing 45% of S&P 500 market cap and accounting for 78% of returns since ChatGPT launched. The top five hyperscalers are expected to spend over $500 billion on capex this year alone, with capex-to-revenue reaching 29% in aggregate by 2026. FMI questions whether the enormous capital spending will generate attractive returns and warns of potential bubble conditions similar to the 2000 tech crash. FMI emphasizes their focus on quality businesses with sustainable competitive advantages, strong balance sheets, and ROIC above cost of capital. Quality has underperformed low-quality sharply in 2025, particularly in small caps where money-losing companies have dominated. Despite recent headwinds, Quality Value's long-term relative outperformance is unmistakable and offers superior downside protection during market downturns. The firm maintains a value orientation, tracking Quality Value versus other gradients including cheap stocks and junky value. They believe buying advantaged businesses at discount valuations is a winning formula, though value has faced headwinds in the current junk rally environment where low-quality stocks have outperformed significantly.

The fund holds significant positions in semiconductor companies including Samsung Electronics, Taiwan Semiconductor Manufacturing, and Contemporary Amperex Technology. These technology firms were leading contributors to portfolio performance during Q4 2025, with the manager highlighting their role in the digital economy transformation. Financial intermediaries represent 20.5% of the portfolio, with the manager believing they should benefit from interest rates determined primarily by free market forces. Key holdings include Citigroup, Bank of Ireland, BNP Paribas, NN Group, Capital One, and Charles Schwab, which were significant contributors to Q4 performance. The portfolio includes major e-commerce platforms Alibaba Group, Tencent Holdings, and Meta Platforms, though these were among the most significant detractors from Q4 performance. The manager maintains exposure to firms tied to the digital economy despite recent underperformance. Energy investments comprise 6.9% of the portfolio, including positions in Shell PLC and Total Energies SE. The manager notes periodic fluctuation of investor confidence in industrial commodity sector businesses, with Total Energies contributing positively to Q4 performance. The manager explicitly discusses evolving U.S. trade policies and their impact on global trade flows, noting that winners and losers among multi-national producers of tradeable goods will become obvious in time. The current outlook for many global businesses remains uncertain due to new trade policies.

AI was the dominant investment theme of 2025, driving performance in Technology and Communications sectors. China's DeepSeek model initially caused market volatility by appearing to achieve performance comparable to US models at lower cost. Despite initial concerns, AI-related stocks recovered and led market gains through most of the year. The US Dollar Index fell 10.08% in 2025, its steepest drop since 2017. This weakness turbocharged returns for dollar-based investors in international markets, with developed and emerging market ETFs returning over 30% in dollar terms. Gold surged to all-time highs reaching $4,314 by year-end, surpassing previous peaks even in inflation-adjusted terms. The rally was driven by debasement concerns and central bank interest, with gold deriving value from what it is not - an asset based on full faith and credit of the United States. Silver soared even more than gold to $71 by year-end, though remaining short of its inflation-adjusted peak of $170 from the Hunt brothers era. The rally was influenced by supply and demand imbalances and extensive industrial uses, especially in solar power.

Trade tensions remained a significant theme with continuing negotiations between the U.S. and major trade partners including China, which is also in contentious trade talks and tit-for-tat tariff and procurement walls with the European Union. Technology-related industries showed strength, particularly in Northeast Asia and the U.S., where chip stocks rallied on AI optimism during the fourth quarter. The U.S. Federal Reserve cut its target rate 25 basis points in December. The Bank of Japan lifted its rate a quarter point while the ECB stood pat, creating rate differentials that played out in currency markets.

Artificial intelligence remained a key investment theme in Q4, but the narrative matured as investors became more selective. The market shifted focus from headline growth to AI economics, questioning capital requirements for data centers and whether companies could maintain spending pace without pressuring cash flow. Companies involved in large-scale AI projects faced increased scrutiny, especially where spending plans outpaced near-term cash flow. The Federal Reserve cut interest rates by -0.50% in Q4 but signaled a pause, emphasizing future cuts will depend on incoming data. Officials appeared divided between those warning policy remains too restrictive and others cautioning against cutting too soon and reigniting inflation. The shutdown data fog made Fed policy a source of near-term uncertainty and market volatility.

A key question for 2026 is whether AI investments will translate into measurable productivity gains and margin expansion beyond the technology sector. The downside scenario involves a reassessment of AI and data center ROI which could trigger sharp corrections in high-flying growth stocks. Companies are investing in technology that allows them to make their existing workforce more productive, representing an AI-driven productivity boom. Inflation remains persistently above the Federal Reserve's 2% target for the fifth consecutive year, though showing signs of cooling on many fronts. Tariffs have pushed up goods prices, causing inflation to remain elevated. The psychological scars of 2021/22 inflation remain despite real wage growth trending up since Q3 2022. The FOMC delivered a 25 basis point rate cut to 3.50-3.75% range with significant division among policymakers. High interest rates and persistently high prices have pushed monthly payments up at a shocking rate relative to income growth. The Fed announced it would begin purchasing shorter-term Treasury securities to maintain ample reserves. Gold delivered exceptional gains consistently as investors sought assets tied to real scarcity and low correlation to financial assets. Persistent geopolitical risk, elevated fiscal deficits, and gradual erosion of confidence in fiat currencies supported sustained inflows. Central banks continued to be net buyers, with gold posting an extraordinary 63.7% annual return. Bitcoin exhibited far greater volatility and a different return profile than gold, experiencing powerful rallies earlier in the year but proving fragile as risk appetite faded. The sharp drawdown in Q4 highlighted Bitcoin's sensitivity to speculative positioning and leverage. Rather than behaving as a defensive hedge, Bitcoin traded more like a high-beta risk asset.

Diversification proved its value across asset classes in 2025, with leadership rotating beyond U.S. large cap stocks. Non-U.S. equities outperformed, with developed international gaining over 30% and emerging markets rising more than 33%. Portfolios built for balance and resilience captured gains while mitigating volatility during periods of stress. Infrastructure delivered strong double-digit returns, supported by structural demand tied to data centers, energy transition, and modernization. The sector benefited from ongoing investment needs in critical infrastructure systems. Gold's safe haven status and central bank purchases provided a strong tailwind that was accelerated by retail purchases. Over the year, gold ETFs saw net flows exceed $40 billion, demonstrating continued investor appetite for the precious metal. Silver shone brightest over the quarter, reiterating its status as gold's riskier and perhaps undervalued counterpart by gaining more than 50% over the quarter and nearly 150% over the year. Small caps surged following the April selloff, gaining more than 40% from the lows. However, that rally was concentrated in lower-quality names, with the Russell 2000 significantly outpacing the higher-quality S&P 600.

Manager emphasizes bottom-up investing approach, looking for companies that will do better in years ahead when stocks are priced attractively. Seeks good companies at fair prices to protect against market struggles while avoiding missing big years. Primary goal is to avoid blowing up and survive through bad times. Uses rules like not buying whole positions at once, demanding 50% upside, watching leverage, and knowing when to double down. Maintains defensive portfolio positioning. Decade-long investment theme in office furniture companies including Kimball International, Steelcase, and HNI Corporation. Believes return to office theme hasn't played out but might be soon, with order growth showing improvement across major players.

Capital spending on artificial intelligence has been immense but highly concentrated among firms with scale and balance sheets to pursue it. Much of market performance was driven by companies at the center of AI investment. Corporate investment in AI remains high going into 2026. The seven largest stocks accounted for more than half of S&P 500 returns for three consecutive years. Today's market shows unprecedented concentration in large technology companies, creating concentration risk never seen before. Market leadership has been unusually narrow. The uncertain and chaotic implementation of the U.S.'s highest tariffs in 93 years resulted in a 19% market correction in just six weeks. Policy shock interrupted business optimism that was building coming into 2025.

Eagers Automotive made a $1 billion investment in Canadian dealership CanadaOne, acquiring 65% stake. The Canadian market is less competitive with only 36 car brands versus 75 in Australia, and CanadaOne covers fixed costs through service departments before selling cars. Bravura Solutions provides mission-critical software to financial institutions globally with high switching costs. The company was acquired by interests connected to Constellation Software's playbook of buying sticky software businesses.

Tesla is described as a leading artificial intelligence company with formidable competitive advantages. The manager believes Tesla's AI capabilities remain underestimated and undervalued, anticipating the company will eventually operate millions of autonomous vehicles and own the majority of the autonomous market. The letter extensively discusses robotics as a transformative medium that changes workplaces, economies, and society. Amazon's robotic warehouses are highlighted as exemplifying the medium's power, creating unparalleled logistics efficiency and competitive advantages. Tesla is positioned as leading the inexorable shift toward electric vehicles, steadily eroding the foundations of legacy automakers burdened by obsolescent infrastructure. The manager expects Tesla to significantly increase vehicle production as the overall EV market expands. Amazon Web Services is described as the undisputed leader in cloud computing, accounting for more than 50% of Amazon's aggregate operating profits. The transition from local servers to cloud environments is highlighted as a key growth driver. Amazon's e-commerce arm continues to capture additional market share with remarkable agility despite its immense scale. The shift from brick-and-mortar retail to digital marketplaces is identified as a key trend driving Amazon's revenue growth.

The letter marks the orderly transition of Centerstone Investors Fund into the FPA Crescent Fund, emphasizing continuity of philosophy rather than a change in investment approach. The core principles of patience, discipline, and long term capital stewardship remain intact under the new structure. The message reinforces trust, governance stability, and alignment with shareholders during the transition.

Fed leadership change expected with Powell's term expiring May 2026, Trump advocating for lower rates. FOMC controls short-term rates but market participants control long-term rates. Municipal yield curve normalized from hockey stick to S-shape with investors receiving compensation for longer maturities. Dollar dropped significantly in first half of 2025 due to market uncertainty from trade policy changes, budget deficit concerns, and Fed independence questions. This contributed to international equity outperformance. Consensus expects continued dollar depreciation in 2026 but at slower pace. Municipal new issuance reached record $567 billion in 2025, surpassing 2024's $494 billion. Higher construction costs drove state and local government borrowing for additional infrastructure and energy needs, with growth expected to continue into 2026.

The fund focuses on high-quality companies with superior returns on equity (35% vs market 14%), higher operating profit margins (24% vs market 16%), and strong cash conversion (97%). These quality metrics remain intact despite recent underperformance, with the fund trading at attractive valuations with a 5.5% free cashflow yield versus 4.6% for the market. The fund has become increasingly attractive from a valuation perspective, with a 5.5% free cashflow yield compared to 4.6% for the market. Despite operational outperformance, share price performance has diverged materially from underlying fundamentals, creating compelling value opportunities as quality companies trade at discounted valuations. BAT represents a cornered resource through the intersection of brands, regulation and distribution. Regulatory barriers, licensing regimes and advertising restrictions create extraordinary barriers for new entrants, while incumbents retain rights to distribute, price and innovate within defined boundaries, transforming brand equity into a scarce economic asset. Diageo exemplifies brands crystallizing into cornered resources through production realities competitors cannot accelerate, including long-dated aging inventories and protected geographic distribution areas. Recent demand has softened following Covid-led surge, particularly in South America, requiring cost discipline under new leadership.

Major tech companies are in an arms race to build AI capacity through massive capital expenditure on GPU chips and data centers. Whether this spending produces adequate returns remains an open question, with companies like Apple potentially benefiting by avoiding the race and leveraging others' infrastructure. Index funds now hold over 50% of US equity fund assets, creating momentum-driven buying that distorts markets. This passive investing creates a multiplier effect where $1 of flows can move stock prices by 5.5x, benefiting large index constituents regardless of fundamentals. Weight loss drugs are having a lasting impact on consumer behavior, directly affecting companies in snacks and alcoholic beverages. The manager sold positions in Brown-Forman and PepsiCo due to reduced appetites from these medications. The fund maintains focus on companies with high returns on capital (31% ROCE), strong margins (62% gross, 28% operating), and consistent cash conversion (94%). These quality metrics remain superior to broader market indices despite recent underperformance.

The fund has benefited from AI winners like AppLovin, which applies machine learning to improve ad algorithms with 72% revenue growth and 89% EBITDA growth. The manager views AI as creating opportunities through the Jevons paradox, where lower content creation costs increase demand for editing tools like Adobe. PAR Technology is positioned as an AI beneficiary through its unified platform strategy enabling Coach AI functionality. ASML is highlighted as a monopoly in the semiconductor industry during an AI boom. The manager outlined bear case arguments and explained why they were misguided, with the stock appreciating from €600 to over €900 per share in a quarter as other investors agreed with their thesis. The fund holds multiple software positions including PAR Technology, Adobe, and others. PAR is viewed as benefiting from restaurant technology consolidation, with potential McDonald's partnership validation. Adobe is seen as an AI beneficiary rather than victim, trading at 15x earnings despite double-digit revenue growth. PAR Technology represents a play on restaurant technology consolidation, with potential tier-1 client wins including McDonald's. The manager believes even large tech-forward restaurants are realizing POS software is too complex to maintain internally, favoring best-of-breed vendors like PAR with unified platform strategies. Floor & Decor represents a category killer business model in hard surface flooring with 75,000 square foot warehouse stores carrying 2,350+ SKUs versus 630-680 at competitors. The company has grown comparable store sales at 11% annually over 14 years, with strong unit economics and store rollout potential to 500 locations. The manager extensively analyzes mortgage rate dynamics affecting Floor & Decor's housing-dependent business. They expect mortgage spread normalization from current 300+ basis points back toward historical 168 basis point average, potentially reducing rates to 5.5-6.0% range and unlocking housing transaction velocity.

The letter highlights a risk-on allocation backdrop as easing inflation, expectations of rate cuts, and ongoing fiscal spending supported both equity and bond markets into year-end. Asset allocation favored equities, particularly UK and European exposures, alongside diversified fixed income as bonds benefited from improving inflation dynamics. The outlook stresses maintaining flexibility into 2026, balancing constructive market conditions with awareness of downside risks such as recession shocks or renewed policy-driven inflation.

The fund's holdings trade at a discount of at least 50% to what independent buyers would pay. Portfolio trades at 11.3x 2025F P/E and 10.2x 2026F P/E with 20% ROIC, which the manager considers far too cheap for cash-rich profitable companies in stable, high-growth economies. Fund is 99% invested across Singapore (11%), Malaysia (33%), Indonesia (52%), and Philippines (4%). The manager is establishing a Pangolin ASEAN Benchmark Index and focuses on companies in these stable and high-growth economies.

Manager expresses skepticism about LLMs as a path to AGI, viewing them as sophisticated pattern recognition systems that mimic understanding without genuine comprehension. LLMs face architectural limitations including quadratic computational costs, memory inefficiency, and persistent hallucinations. The manager believes a fundamental breakthrough in architecture is needed beyond current transformer models. Sea Limited represents the manager's conviction play on Southeast Asia's digital transformation through its dominant Shopee platform with 52% market share. The company has achieved an inflection point with rising take-rates and improving profitability across its integrated ecosystem of e-commerce, logistics, and financial services. Manager avoided memory semiconductor investments despite strong 2025 performance, citing historical cyclicality and commoditization concerns. While acknowledging industry consolidation into an oligopoly, the manager questions sustainability of current supernormal profits and prefers exposure through TSMC and NVIDIA rather than memory-specific players. Manager declined Oracle investment despite strong cloud growth due to concentration risk from OpenAI and high leverage. Also avoided neoclouds like CoreWeave and Nebius, viewing them as commoditized GPU providers vulnerable to demand fluctuations and lacking durable competitive advantages versus hyperscalers.

The fund made significant investments in AI-related debt including Beignet Investor LLC (Meta's AI data center financing) and xAI corporate debt. The quarter saw massive AI-related IG issuance of $90 billion with expectations of $50 billion more in Q1. The fund expects AI to drive continued massive capital needs with OpenAI alone requiring ~$600 billion through 2029. The fund had significant losses in distressed investments, particularly First Brands (a fraudulent auto parts company) and Eye Care Partners. The manager acknowledges mistakes in underwriting management quality and position sizing. Despite setbacks, they see future opportunities in sectors facing productivity-driven disruption. The fund expects increased capital solutions opportunities as PE-backed companies face refinancing challenges from higher rates. They participated in several rescue financings and expect more zombified PE companies to need capital solutions in various structures from prefs to hybrid equity. The fund invested in EchoStar's spectrum assets which became valuable for AI inference and wireless carriers. They also have exposure to LNG through Delfin, positioning for the coming oversupply period. Power demand from AI datacenters is driving infrastructure investment opportunities. The fund analyzed the growth in asset-backed finance driven by insurers seeking yield on annuity proceeds. They're cautious about residual risks in BNPL and FinTech lending, noting credit box expansion and potential fraud risks as the market grows rapidly.

Global FX volatility has declined significantly despite ongoing high geopolitical, policy, economic and market uncertainties. The disconnect between market volatility and perceived risks is visible across most asset classes. Rising volatility can have two-dimensional FX effects depending on the nature of the shock. USD outlook remains bearish for 2026 but risks are spread in several directions. The correlation between FX volatility and USD has turned essentially zero, implying movement could go either direction. USD performance depends on whether shocks affect the global economy more than the US or impact primarily the US. Most central banks expected to keep rates on hold including ECB and SNB. Main exceptions are cuts from Fed and BoE and hikes from BoJ. US inflation expected to remain resilient due to residual tariff effects and tightening labor supply.

The portfolio has shifted toward higher quality businesses with better profitability, lower leverage, and less volatile earnings. Quality stocks underperformed significantly in 2025, creating attractive entry points for value investors. The manager maintains price discipline while seeking quality companies trading at discounts to intrinsic value. Harris Oakmark maintains its value investing approach, requiring significant discounts to intrinsic value estimates. The firm seeks quality businesses but only at attractive entry prices, protecting against downside risk while capturing excess returns when correct. Japan shows increasing capital allocation discipline with activist funds growing ten-fold and private equity transactions up four times over the past decade. However, management teams still lag Western standards in value creation focus, with most having rote medium-term plans without proper benchmarking. Korea has been a fast follower in shareholder rights enhancements, with government legislation and most companies now having value-up plans. The KOSPI Index gained 79% in 2025, though the market still trades at less than 11x forward earnings, suggesting the Korean discount remains.

The past two years have rewarded momentum investing, with stocks in the top quintile of trailing nine-month returns generating 91% cumulative returns versus 47% for the S&P 500. This momentum period ranks as the second strongest since 1998, only behind the dot-com bubble era of 1998-1999. Value investing has underperformed as investors have been rewarded for buying stocks that have already gone up the most. The Oakmark Fund trades at 13 times expected earnings, well below the S&P 500's 22 times, creating an attractive risk-adjusted opportunity for value-oriented investors.

The manager expresses skepticism about the AI buildout, noting that the Magnificent 7 have a $520 billion capital expenditure program for AI in 2026. He questions whether the required $135 billion in earnings will materialize from this investment, suggesting the market may punish share prices if returns don't meet expectations. Inflation has remained above the Federal Reserve's 2% target for over 5 years. The manager notes some government officials suggest raising the target to 3%, which would benefit debtors like the US government with its $38 trillion debt burden. The debasement trade and weakening US dollar drove strong commodity performance in 2025. Gold rallied 67%, silver gained 49%, copper increased 42%, and platinum jumped 124%. The trend for commodities is higher prices with further gains projected into 2026. The manager maintains a value investing discipline, allocating capital only when sufficiently rewarded for risks taken. With markets at historically high valuations and the S&P 500 trading at 31.3x trailing P/E versus a 10-year average of 21.6x, new opportunities are scarce.