The AI build-out is capital intensive with uncertain returns, as leading companies spend gigantic sums in an arms race. Unlike the internet boom, AI requires massive capital investment with datacentres subject to rapid obsolescence. The relentless innovation could make current cutting-edge technology obsolete within years, making satisfactory returns challenging. Private equity and debt markets face significant challenges with funds struggling to exit investments at elevated prices. The industry has taken more companies into funds than can be sold into public markets, creating a major logjam. Rising interest rates and overinvestment have caused pressure to reduce prices, potentially forcing substantial losses. Hard assets offer protection against monetary inflation as governments attempt to print their way out of decline. Construction of datacentres and infrastructure in booming countries require commodities when mines have suffered from underinvestment. Competition between China and the US for strategic metals underpins the outlook for these resources. The oil market has been in three-year consolidation due to subdued growth and large OPEC supply increases. Lower prices damage future supply as producers pull back on new capacity spending. OPEC's spare capacity is limited, and while the world isn't running out of oil, it's running out of oil producible below $60. The biotech sector offers exceptional long-term performance potential despite poor performance in the 2020s. AI is reducing costs and speeding up product development, while new technologies and cost declines are unleashing a wave of new treatments. This combination can underpin a new cycle in a huge market.

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.

The fund is positioned around the European and UK housing, construction, and mortgage broking market recovery with approximately 40% allocation. The manager sees opportunities in the Italian mortgage market recovery through Moltiply Group, similar to UK positions in Mortgage Advice Bureau and The Property Franchise Group. Around 20% is allocated to software and SaaS companies, driven by ongoing digitization needs. The fund holds positions in companies like Nagarro SE and Crayon Group, with the latter potentially merging with SoftwareOne to create a larger Microsoft partner. The portfolio benefits from recovery in European construction markets through building materials exposure. The segregated account investment in QXO Inc. aligns with extensive research in building and construction materials sector, targeting industry consolidation opportunities.

Manager believes 2026 will be the year AI efforts become less speculative and more focused on real-world applications. Views generative AI as the general-purpose technology of our era, possessing unique ability to improve over time and serve as a platform for new innovations. Expects AI efforts to become more practical and productive by second half of 2026. European equities nearly doubled SPY performance in 2025, returning +31.4% versus +17.7% for US. Europe has become a story of breadth with 8 of 11 sectors outpacing S&P 500. Fundamental paradigm shift in Germany abandoning fiscal austerity for fiscal excess, targeting defense and infrastructure spending. Manager expects inflation to remain well anchored in all regions except the US where consumers with extra cash could drive inflation higher. Combination of refunds and lower withholdings will frontload benefits into 2026. US inflation may get stickier as economy reaccelerates and government stimulates struggling low-income consumers. AI race catalyzes nuclear fusion research with at least three private-sector companies expected to achieve Net Energy Gain milestone. One company expected to reach Sustained High-Power Density Operation viable for fusion power plant by late 2026. Oil prices expected to climb into $60-70 per barrel range by Q4 2026 as demand drivers exhibit firmer underlying consumption amid more constrained supply growth than widely assumed by market that believes oil is oversupplied. Red tape expected to be cut at pace across Financial Services, AI/Tech Services and Energy sectors under guise of National Security to prop up economic growth before midterms. Great Financial Crisis capital requirements expected to be watered down, benefitting banks the most.

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.

Credit spreads are near historically tight levels with investment-grade at 80 basis points and high-yield at 290 basis points over Treasuries. Compensation for corporate default risk sits near tight end of historical ranges while issuer leverage and credit metrics have begun to soften modestly. Prices imply confidence but leave little room for disappointment. Growing role of private credit in today's market means assets that might have repriced more quickly in public markets during stress are now held in structures with different liquidity, valuation, and reporting dynamics. This can slow the feedback loop that market pricing typically provides and delay recognition of underlying issues. Markets are not broadly pricing stress despite geopolitical tensions and other risks. Strong valuations do not mean low risk, and overconfidence born of seemingly benign conditions can itself create incremental risk. The manager emphasizes that price is risk and focuses on downside protection when valuations assume favorable outcomes.

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.

Manager discusses AI's potential impact on investing, running thought experiment on AI agents taking over public market investing. Explores prerequisites like agentic diversity, regulatory guardrails, and human oversight. Analyzes both positive consequences like market efficiency and negative risks like game theory problems and black swan vulnerabilities. Manager emphasizes learning from 13-year winners, highlighting importance of competitive advantages, reasonable valuations during temporary hardships, and not selling purely on moderate overvaluation. Current stance is neutral due to high market valuations with only selective pockets offering reasonable prices. Analysis of winning companies reveals focus on businesses with dominant market positions, durable moats, low capital intensity, and strong management execution. Emphasizes companies with sustainable competitive advantages, efficient capital allocation, and clean accounting practices.

2025 has been marked by resilience with equities pushing higher despite episodes of volatility, international leadership emerging after years of US dominance, and fixed income delivering strong positive returns. The experience of 2025 fits the story perfectly: despite a 20% drop earlier in the year, the US stock market closed the year with a 16% total return. It's a reminder that volatility and setbacks are a normal part of investing, and that keeping a long-term perspective is essential. President Trump unveiled his long-awaited tariff plan on April 2nd, with measures far more sweeping than the expected modest 10% tariffs. The surprise sent shockwaves through global markets, sparking panic selling as investors recalibrated the potential impact on trade, supply chains, and corporate earnings. On April 9th, Trump announced a 90-day pause on the newly implemented tariffs, giving each country an opportunity to negotiate a trade deal before higher rates would take effect. The US dollar declined ~11% since January, but after zooming out for context, the dollar index sits slightly below its pre-election level. The dollar has spent the past three years oscillating within a 100-115 range, and over fifteen years, the prevailing trend has been upward. Currency swings are just one factor among many rather than the primary driver of outcomes. The Federal Reserve has reduced the Fed Funds target rate by 175 basis points over the past five quarters, from 5.00% to 3.75%. Yet yields on Treasury securities with maturities beyond five years have risen modestly, reflecting concerns that inflation may prove stubborn. The yield curve is moving back toward normal, with short-term yields easing and long-term yields staying elevated. Elevated inflation has been an ongoing concern for consumers and a key driver of investment returns since 2022. The Federal Reserve has made significant progress: inflation has fallen from a peak of 9% in June 2022 to 2.7% in the most recent readings. Some economists expect inflation to ease further in early 2026 as elevated monthly readings roll out of the 12-month calculation.

The AI revolution is accelerating with technology companies in fierce competition to dominate this new super cycle. Companies are pouring billions into data center construction with staggering energy demands. Looking ahead to 2026, growth is expected to be underpinned by ongoing AI integration across industries.

The AI boom has driven global stock markets with the Bloomberg AI index up 250% in three years, becoming a core driver of US economic growth. However, the manager draws parallels to the Dotcom bubble, noting over $3 trillion expected investment despite negligible revenue generation and intense competition that may destroy profitability. Gold was the Trust's largest investment and performed exceptionally well, rising 52% for the year. The manager maintains significant gold exposure as part of their defensive positioning amid market uncertainties and elevated valuations. The manager continues to find attractive value opportunities despite expensive markets, purchasing undervalued companies like Centene, GlaxoSmithKline, Carrefour and PayPal trading at low multiples with strong fundamentals.

Kingdom Capital focuses on overlooked microcap companies trading at significant discounts to intrinsic value. The portfolio includes businesses like UNFI trading below 4x EV/EBITDA and generating substantial free cash flow, demonstrating the manager's value-oriented approach. The fund specializes in microcap investing with a concentrated, research-intensive approach. Despite significant challenges including bankruptcies and customer losses, the strategy delivered strong returns by exploiting inefficiencies in overlooked areas of the market. 2025 tested the fund's thesis severely with a bankruptcy, major customer losses, and cyber-attacks, yet delivered 17.45% net returns. The manager emphasizes that edge comes from exploiting inefficiency rather than avoiding adversity, demonstrating portfolio resilience through active management.

The fund maintains an overweight position in mining and metals, driven by rising demand for copper in manufacturing and batteries. Performance was largely driven by strong stock selection within the sector, though they remain cautious on incremental additions at current valuations above long-term averages. Despite a challenging year due to tariff-related concerns and adverse headlines from the US, many healthcare businesses continue to invest meaningfully in their core franchises and R&D capabilities. The fund's exposure is aligned toward companies where earnings quality and long-term visibility remain intact. The fund's exposure spans banks, NBFCs, and select non-lending financial institutions. They remain opportunistic in adding risk selectively, guided by valuation discipline and balance sheet strength, with a bottoms-up outlook on lending growth. The fund's consumer exposure is less focused on brands and more on businesses that control distribution channels. They believe this segment has potential to drive incremental growth as consumption normalizes and pricing power becomes more relevant.

AI spending exceeded expectations with hyperscalers accelerating capex, emergence of OpenAI and Anthropic as major spending sources, and Alphabet selling custom AI chips to competitors. The managers acknowledge underestimating AI spending magnitude and are repositioning with purchases of Broadcom, Marvell Technology, Datadog and Oracle while exiting lower-conviction AI plays. Cloud infrastructure remains central to AI deployment with data center operators like Equinix positioned as later-stage beneficiaries. Oracle's cloud business represents significant upside potential despite current market skepticism, with the company having a large backlog of signed contracts and generating free cash flow. Semiconductor exposure through Nvidia has been a top holding since 2018, with additional positioning in Broadcom for custom silicon chips and Marvell Technology. The managers regret not scaling positions more aggressively in semiconductor beneficiaries during the AI-driven rally. Healthcare positioning was repositioned with purchases of high-quality biotechnology company Vertex Pharmaceuticals, which was a leading contributor in Q4. The managers exited Eli Lilly too early before GLP-1 reimbursement deals and oral treatment readouts drove shares higher.

Manager focuses on undervalued securities across multiple markets, highlighting companies trading below intrinsic value such as TOC Co. with real estate worth ¥184B against ¥75B market cap, and FILA trading at attractive enterprise value multiples. The approach emphasizes finding bargains in less picked-over international markets. Japan basket represents a significant holding with focus on corporate governance reforms under new Prime Minister Sanae Takaichi. Manager sees opportunity in companies with excess cash being forced to improve capital allocation, with ¥83 trillion in corporate cash providing catalyst for shareholder returns. Portfolio concentrated in smaller companies across multiple geographies including Australian micro-caps, Canadian small caps, and niche industrial businesses. Manager seeks opportunities in less efficient markets where smaller companies may be mispriced or overlooked by institutional investors.

AI will radically change lives, labor markets and the economy, but investors already ascribe trillions of dollars of value to AI-related enterprises while aggregate AI-related revenues are minimal relative to embedded expectations. The landscape is evolving too swiftly to conclude today's favored players will be ultimate winners, with fundamental questions remaining about LLM commoditization and revenue sustainability. The strategy's average holding has grown its dividend at 10% over the last 12 months with similar growth expected in coming years. The fund maintains focus on dividend-paying companies as part of its core investment approach and diversification strategy. The ClearBridge Dividend Strategy trades at a significant discount to the broader market with a P/E ratio of 19.8x versus 24.7x for the S&P 500. The managers value securities based on free cash flow yields and gravitate toward those with asymmetric risk-reward profiles.

Gold beat all major equity markets in 2025, driven primarily by geopolitical concerns and record purchases by the People's Bank of China seeking neutral reserve assets. The Whisky Portfolio held significant exposure to gold mining stocks and silver, which was reduced from 38% in October to 20.6% as precious metals enter a more volatile phase. The manager emphasizes finding value across countries, asset classes, and sectors, focusing on deep value opportunities. GMO forecasts favor deep value investing, especially in small-caps in Japan and emerging markets. The approach consistently seeks opportunities backed by fundamental value rather than following momentum. The dollar had a weak year in 2025, with the Euro rising 13.4%, Pound 7.6%, and Renminbi 4.4% against it. This weak dollar was a tailwind for stockmarkets and particularly beneficial for gold prices, while Bitcoin fell despite normally being inversely sensitive to dollar strength. Japan remains a high-conviction overweight position. The normalisation of the bond market with a cheap currency should lead to strong long-term performance. Japanese equities have been the worst place to invest since 1990, and this should change as yields rise at the fastest pace in years. The manager is focused on broadening exposure to industrial metals and eventually other commodities including energy and agriculture. Commodities tend to move as a group, and this cycle is expected to be no different. The BlackRock Mining Trust returned 67% as mining stocks had their best run since 2016. The ByteTree Quality Portfolio focuses on the highest quality companies with very high conviction in their future performance that could reasonably be held for decades. The discipline of what not to invest in is just as important as what to invest in, especially given current market valuations.

AI remained the dominant theme driving US equity markets with the S&P 500 up 17.8% and Nasdaq gaining 21%. The AI trade broadened beyond chips to include data center companies, with three of the S&P 500's top 10 performers being data storage companies. Investment in AI infrastructure is reaching unprecedented levels with trillions in spending, though questions remain about whether revenue can justify the massive capital deployment. President Trump's hardline tariff agenda became one of the most consequential stories of 2025, lifting average tariff rates to nearly 17% from less than 3% at the end of 2024. The tariffs generated roughly $30 billion monthly for the US Treasury and brought world leaders to Washington seeking trade deals. Despite multiple rounds of meetings, a final agreement with China remains incomplete, with China using its leverage in rare earth minerals to push back against further tariffs. Safe-haven gold gained 65% in 2025, its best annual gain since 1979, driven by geopolitical uncertainties, expectations of US rate cuts, strong central bank buying, and the de-dollarisation trend. Gold mining companies delivered massive returns with Gold Fields up 200%, AngloGold up 242%, Harmony up 124%, Sibanye up 313%, and Implats up 204%. European defense shares surged 56% driven by pledges of higher defense spending across Europe. Germany is expected to spend up to a trillion euros on defense and infrastructure, reflecting the broader commitment to increased military expenditure across the region. The Fed cut interest rates three times in 2025, lowering the benchmark rate to 3.5%-3.75% range as employment growth slowed and unemployment rose. However, new projections show only one rate cut expected this year with further cuts likely on hold until inflation falls or unemployment rises more than anticipated.

AI capex boom is set to significantly support US growth with estimated 140bp boost in 2026 and 150bp boost in 2027. The resource grab phase involves massive data center build-out primarily in the US, creating acute price pressures in power, memory chips, and materials while having limited labor market impact. Global data center capacity build-out is accelerating with majority occurring in the US. The construction creates supply chain pressures for key components like memory chips, generators, and transformers, while requiring minimal labor relative to capital investment. Memory chip supply chains are overwhelmed with companies like SK Hynix sold out until 2027. These supply pressures affect other goods using same inputs, with memory chips representing about 10% of iPhone cost of goods sold. Surging compute demand is hitting power availability constraints in the US, including insufficient peak generation capacity and transmission capacity. Hyperscalers are turning to behind-the-meter solutions like natural gas turbines despite cost disadvantages.

AI remains central to investment thesis despite bubble concerns. The technology development is in infant stages requiring sustained financial support. AI-related spending drove economic growth across multiple sectors in 2025, though concerns about data center spending and funding levels created volatility. All eyes remain on artificial intelligence as the primary innovation driver. The manager expects AI productivity gains to broaden beyond the Magnificent 7 to benefit the broader S&P 493 companies through reduced labor costs and improved efficiency. For the first time in years, the financial sector led by banks has started to outperform. Debt markets both public and private have become more popular as funding sources. The manager sees greater contributions from the Credit Cycle needed to realize AI's long-term dreams.

The manager extensively compares current AI valuations to the 1999 internet bubble, arguing AI represents a trend rather than a fad. Technology companies have doubled net income over four years and grown earnings 550% since 2008, demonstrating sustainable profitability unlike the dot-com era where 74% of internet companies had negative cash flows. Bitcoin declined roughly 6% in 2025 despite widespread price targets of $200,000 from major firms and up to $1.5 million by 2030 from Cathie Wood. The manager uses Bitcoin's volatile history to illustrate the futility of one-year predictions for highly speculative assets.

Manager emphasizes investing based on cash flows rather than relying on expensive valuations. Contrasts undervalued holdings like Garrett Motion with 14% FCF yield against Microsoft's 2% yield. History shows extreme valuations are unsustainable and always suffer painful declines long-term. Seven holdings are actively repurchasing more than 5% of shares outstanding annually. Low valuations enable holdings to repurchase much more stock, accelerating sleepy consumer staples companies into double-digit earnings growers. Fund's dividend yield is 2%, double the S&P 500.

Massive AI capital expenditure by hyperscalers is driving extraordinary levels of bond issuance, with companies like Microsoft, Amazon, Meta and Google requiring $500-800 billion of additional debt annually. This AI spending boom is creating significant macroeconomic impact and supporting US growth expectations as companies redeploy capital back into the economy. Hyperscalers are increasingly accessing private credit markets for bespoke AI infrastructure projects, with Meta's $29 billion public/private credit deal representing the largest private credit transaction in history. The private credit market is becoming a key funding source for off-balance-sheet AI projects and data center development. Global shift from monetary to fiscal policy is driving increased government infrastructure spending, with Germany releasing their debt-brake and Japan electing a pro-fiscal policy prime minister. This fiscal expansion is creating a new paradigm of government-led growth initiatives alongside corporate AI infrastructure investment.

Fed cuts drove fixed income performance with two cuts in Q4 and three expected in 2026. Current Fed pricing implies three cuts but managers view two as more likely given growth momentum. New Fed leadership may provide dovish boost mid-year. AI valuation concerns emerged as a risk factor during Q4. AI investment progression and subsequent funding needs identified as key macro risk for 2026 with potential to impact both fixed income and equity valuations. Private credit cracks identified as macro risk for 2026. Liquidity conditions changing with less liquid markets like private credit showing stress. Managers note reduced liquidity as evidenced by global central bank pivot toward tightening. Value outperformed growth in Q4 (+3% vs +2.2%) breaking year-long trends. Managers positioning with lower average valuation multiples than broad market and focusing on valuation opportunities including healthcare, banks, and retail sectors.

Artificial intelligence remained a key investment theme in Q4, but the narrative matured as investors became more selective. The market shifted focus from broad enthusiasm to companies demonstrating pricing power and a path to profitability rather than growth at any cost. Questions emerged about capital requirements for data centers and whether companies could maintain aggressive capex spending without pressuring cash flow. The Federal Reserve cut interest rates by 0.50% in Q4 but signaled a pause, hinting it could cut less than the market expects in 2026. Fed officials appeared divided with some warning policy remains too restrictive while others caution cutting too soon could reignite inflation. The government shutdown delayed key economic data, making Fed policy a source of near-term uncertainty and market volatility.

AI capital expenditure buildout is tracking historic investment cycles like railroads and telecommunications, with current cycle still in early innings. AI capex remains sustainable as it's funded by free cash flow rather than debt. The diffusion of AI throughout the economy is expected to drive productivity gains and corporate profitability improvements. Productivity growth is starting to boom as a result of AI and capital investment, approaching levels seen in the 1960s and 1990s. This productivity surge is expected to drive corporate profitability through margin expansion and create better employment conditions over time. Rate cuts are finally helping smaller companies, which could be the catalyst for the much-anticipated broadening out trade. Small businesses are showing spiking hiring plans as uncertainty fades, and nominal GDP growth particularly benefits smaller and cyclical firms.

The update reviews a resilient economy, moderating growth, and improving fixed income returns following Federal Reserve rate cuts. Portfolio construction emphasizes diversified asset allocation across equities, bonds, and international exposure to navigate valuation risk. Allocation discipline is positioned as critical amid uncertain macro and policy conditions.

AI-related infrastructure demand drove materials and memory semiconductor outperformance. Fanuc showcased significant advancements in AI-enabled robotics with commercialization expected in coming years. Application software and IT services faced pressure on concerns that generative AI could disrupt traditional business models. Significant de-escalation in U.S.-China trade tensions with agreements reducing fentanyl-related tariffs and suspending reciprocal tariffs. Average effective U.S. tariff rate remains elevated at 17% versus 2-3% in 2024. Tariff pass-through to consumer prices has been more muted than initially feared but remains an upside risk to inflation. Chinese exports resilient despite trade tensions, with trade surplus crossing $1 trillion for the first time. Domestic demand remains weak with property sector downturn continuing. Policymakers signaled shift toward boosting household incomes as priority for consumption growth. Memory semiconductors delivered outsized returns as high-bandwidth memory demand for AI datacenters rewarded players in the consolidated industry. Micron reported strong results with improved pricing in both DRAM and NAND, with management seeing supply tightness across 2026. Central bank policy paths diverged with Fed continuing easing, ECB holding steady, and BOJ raising rates to highest level in nearly three decades. Fed faces delicate balancing act between weakening labor market and inflation remaining above target.

AI-related infrastructure demand drove commodities rally and memory semiconductors delivered outsized returns as high-bandwidth memory demand for AI datacenters rewarded players in that consolidated industry. Fanuc showcased significant advancements in AI-enabled robotics with commercialization potentially arriving in coming years. Significant de-escalation in U.S.-China trade tensions with Presidents Trump and Xi reaching agreement in October. U.S. reduced fentanyl-related tariffs and extended suspension of reciprocal tariffs for one year. Average effective U.S. tariff rate remains elevated at 17% compared to 2-3% at end of 2024. Economic data remained mixed despite trade war stabilization. Exports resilient but domestic demand stubbornly weak. Property sector downturn continues in fifth year. Policymakers identified raising household incomes as priority for boosting consumption, signaling recognition that economy's reliance on exports has become precarious. Memory semiconductors delivered outsized returns as high-bandwidth memory demand for AI datacenters rewarded players in that consolidated industry. Micron reported strong results with improved pricing in both DRAM and NAND, with demand continuing to outpace supply and management seeing tightness across 2026. Fanuc reported strong robot orders up 38% year-over-year, driven by reshoring-related automation demand in North America, European automation investments, and new energy vehicle spending in China. Company showcased significant advancements in AI-enabled robotics at international robot show. Sea Limited reported strong results with revenue growing 38% and gross merchandise value growing 28%, though Shopee's adjusted EBITDA margin declined sequentially as management signaled preference for growth over near-term margin optimization with ongoing investments in logistics and fulfillment capabilities.

Gold delivered exceptional performance with +65% returns for the year, driven by central bank buying, geopolitical risk, and Federal Reserve rate cuts. The firm maintains a modest position as portfolio insurance against currency devaluation and global volatility rather than a prediction of crisis. The Federal Reserve delivered two quarter-point rate cuts in October and December, signaling a more dovish stance amid easing inflation concerns and softening labor market. This shift towards less restrictive monetary policy should alleviate pressure on corporate margins and consumer debt. Small cap companies participated more modestly in the rally, with the S&P 600 Small Cap Index returning only +1.3% for the quarter and +4.2% for the full year. The firm sees value in small cap equities which remain attractively priced relative to U.S. large cap counterparts.

AI remained the loudest theme but tone shifted from breakthrough to balance sheet. The market's new habit of asking show me the cash flow reinforced that AI isn't being abandoned but is being priced more realistically. AI infrastructure remained the sturdier expression across equity and credit books. Fed announced short-term Treasury bill purchases as technical measure to maintain ample reserves. This mix of policy easing and practical focus on liquidity helped explain December's feel of being supportive when conditions were orderly, jittery when they weren't. Funding markets can suddenly drive the agenda. Fed cut rates by 25bps on December 10 while describing growth as moderate and inflation as still somewhat elevated. Markets took message as cut now, likely pause soon. The opportunity set was less about calling one Fed meeting and more about trading the path via rates and FX. Healthcare and biotech took a breather after strong run, falling back over December. Managers believe this pause reflects digestion rather than dramatic change of heart. Biotech remained a stock-picker's market where one good dataset can massively move the needle. Momentum fell 1.91% over the month with quick switches between stick with winners and take the money and run. Many quant teams operated with shorter lookbacks, smaller position sizes, and tighter crowding guardrails because Momentum has become too popular for its own good. Utilities fell 5.79% as market rotated away from defensives, though structural story didn't disappear. Managers continued to blend core yield exposure with targeted bets on transmission upgrades, renewables rollout, and data-center power demand seeking mix of income and growth.

Manager deliberately avoids U.S. AI infrastructure stocks due to valuation concerns, drawing parallels to historical technology bubbles. Argues that obvious growth prospects are priced so aggressively that even excellent execution cannot generate adequate returns. Maintains AI exposure through Alibaba's cloud division at more reasonable valuations. Significant exposure through Alibaba position, which represents 43% of portfolio. Monitoring competitive pressures in Chinese quick commerce and margin compression from aggressive investments. Cloud revenue growing 34% year-over-year with AI-related products showing triple-digit growth. New position in Clorox at decade-low valuations following ERP implementation disaster. Company dominates essential categories with 61% of North American bleach market and generates 35%+ returns on invested capital. Temporary operational disruption creates opportunity in quality franchise. Core investment philosophy emphasizing valuation discipline over growth narratives. Seeking asymmetric risk/reward opportunities where temporary complexity obscures underlying business quality. Concentrated portfolio approach with deep research on handful of ideas.

Artificial intelligence was the central theme of 2025, driving stock indices and sparking debate between believers and bubble warnings. The conversation is shaped by massive capital requirements for AI infrastructure, enormous energy consumption, uncertainty over profitability, and asset depreciation risk. AI-related capital investment represents around 2% of U.S. GDP, highlighting extraordinary scale and complexity. Data centers are industrial facilities requiring copper, steel, cement, concrete, and energy. Each megawatt of capacity requires tons of copper, cooling systems, and diesel backup generators. The cloud is not ethereal—it is heavy industry. Real beneficiaries are indirect players: industrial manufacturers, component distributors, and raw material suppliers. Without copper, there is no electrification, digitalization, AI, or data centers. Each megawatt of data center capacity requires roughly 30 tons of copper; with 10,000 MW added annually, this amounts to approximately 300,000 tons—about 1% of the 30 million ton annual market. Minor supply deficits can trigger significant price volatility, reinforcing a structural, long-term bullish outlook. Sprouts Farmers Market remains a high-quality business with some of the best operating margins in its sector and continues to repurchase shares aggressively. The company has ambitious expansion plans, aiming to triple its footprint from 450 to 1,400 stores nationwide while maintaining its fresh-first mission. Olvi Oyj announced strategic acquisitions in Q1 2026, including Estonia's leading mineral water producer Värska Originaal, Bosnia's largest brewery Banjalucka Pivara, and a 51% acquisition of Brewery International. These transactions expand Olvi's non-alcoholic and alcoholic beverage portfolios, increase sales volumes, and strengthen production capabilities across the Baltics, Nordics, and Mediterranean markets.

Solar and storage dominated renewable generation with 85% of new capacity additions. Solar installed 11.7 GW in Q3 2025, accounting for 58% of all new electricity-generating capacity. Battery prices continued declining to $108 per kilowatt-hour, representing a 12.6% annual decline since 2013. Parabolic increase in energy demand from datacenters due to AI is driving massive power requirements. Microsoft's Fairwater datacenter will consume 3.3 GWs of electricity when fully operational, more than the city of Los Angeles, spanning 315 acres with hundreds of thousands of NVIDIA GPUs. EV tax incentives were curtailed by July's One Big Beautiful Bill, causing a surge in Q3 sales followed by a sharp Q4 drop. However, EV charging infrastructure remained consistent with over 230,000 publicly available chargers deployed in the US for the first time. Rice University chemist James Tour developed breakthrough flash Joule heating process to recover rare earth elements from electronic waste, cutting energy use by 87% and offering path to domestic independence from China's 90% dominance in REE processing. Exit environment steadily improved with Q3 2025 global M&A increasing 26% QoQ and 35% YoY. Secondary market volume expected to reach $210B in 2025, split 52% GP-led and 48% LP-led, with favorable dynamics for impact secondary buyers.

Manager learned hard lessons about position sizing and concentration risk after Kneat position at 30% of portfolio caused significant drawdown. Establishing strict rules around maximum position sizing regardless of conviction level. Used long-dated deep in-the-money options for leverage on Wix and Clearwater Analytics positions but found the inherent leverage made it difficult to hold positions through volatility. Planning to use options more sparingly going forward. Kneat remains largest holding despite poor Q2/Q3 results with net new ARR below expectations due to macro headwinds and deal delays. Company ended 2025 with highest number of new strategic customer wins in history, setting up for growth in 2026-2027.

Latin America demonstrates how inflation destroys wealth and institutions over decades. Hyperinflationary environments force short-term defensive behavior, erode trust in institutions, and make long-term investment impossible. Even 2-4% annual inflation erodes significant purchasing power over a generation. Corpay represents a technology-driven solution for corporate payment automation and cross-border transactions. The business benefits from recurring revenue, high switching costs, and the ongoing digitization of business payment flows with strong cash generation potential. The region shows enormous natural resource wealth but persistent institutional failures that prevent capital accumulation. Recent political shifts toward market-oriented policies in several countries could create new investment opportunities if institutional improvements prove sustainable.

The manager extensively discusses whether we are in an AI bubble, noting that AI appears to be the most significant digital disruptor of our lifetime. While acknowledging extremely stretched valuations in AI-associated hardware and semiconductors, the fund avoids these sectors due to inability to forecast cash flows confidently. The fund employs value-based investing principles, focusing on concentrated investments in high-quality businesses at fair valuations. The manager notes they often underperform during periods of extreme sectoral valuation surges but expects long-term success from this approach. The anticipated recovery in the homebuilder sector has stalled due to persistent affordability issues driven by high home prices, despite lower interest rates and strong wages. The fund maintains conviction in Builder FirstSource despite the housing market recession.

Materials sector was one of the largest positive contributors to returns during November. The Fund's exposures to materials companies like PLS Group, Genesis Minerals, and Northern Star were among the largest contributors to performance. Healthcare sector contributed positively to returns during November. Sonic Healthcare was specifically mentioned as one of the largest positive contributors to performance across both funds. Industrials sector was a significant positive contributor to returns during November. Companies like Reece and Qube Holdings were among the largest positive contributors to performance.

Manager invested significantly in AI capabilities in 2025 but found results disappointing compared to expectations. Despite hiring an AI expert and running dozens of experiments, the technology proved unreliable with frequent hallucinations and limited practical value for complex business tasks.

The letter highlights a cautious stance driven by elevated valuations, narrow market leadership, and limited margins of safety across equities. Cash is positioned as a strategic asset, preserving optionality and protecting capital while waiting for more attractive risk-reward setups. Capital preservation and patience are framed as competitive advantages late in the market cycle.

Gold has been on a tear this year, up about 70%. The fund participated nicely with gold companies up 70% to 175% each. Central banks are increasing gold holdings and international trade might start to be net settled in gold. The cryptocurrency industry has developed gold-backed coins and invested in gold royalty companies. The US stock market was led by AI-related companies for most of the year. The fund believes the AI boom will eventually bust but doesn't know when. They observed a reversal in market reaction to AI capital spending announcements from October onwards, suggesting waning excitement. The fund continues to have limited exposure to AI. The fund invested in a microchip maker (not AI-related microchips) as the industry was in the midst of a severe cyclical downturn. Historically, investing in cyclical companies when their business cycle was at its nadir was profitable. So far, these investments have not made money but they continue to expect they will.

The commentary outlines core fintech themes shaping markets into 2026, including payments innovation, predictive markets, digital assets, and regulatory asymmetry versus traditional banks. The fund emphasizes discipline, fundamentals, and long-term compounding over macro forecasting, viewing volatility as inherent rather than destructive. Fintech remains positioned as a structural disruptor as software, tokenization, and real-time payments reshape financial infrastructure.

The letter focuses on deep value opportunities in South African equities created by years of capital flight, depressed valuations, and improving fundamentals. Liquidity recovery and declining discount rates are seen as catalysts for rerating mid- and small-cap stocks. Value investing is positioned as entering an early-cycle recovery phase with asymmetric upside.

The commentary emphasizes income-oriented investing through dividends, real assets, and fixed income amid slowing growth and moderating inflation. Portfolio positioning reflects a focus on cash-generating assets with inflation resilience and downside protection. Income is positioned as a stabilizing return source as markets transition away from liquidity-driven growth.

AI remains the largest structural EPS driver into 2026, but investors are increasingly focused on companies translating AI spend into pricing power, margin leverage, and measurable revenue outcomes. The early-year AI melt-up reversed sharply in April, exposing speculative excess as story stocks began to lose momentum. ROI discipline and selectivity now define performance, reinforcing a true stock-picker's market. Small caps are breaking multi-year bases with early signs of leadership rotation beneath the surface. Small cap earnings revisions turned positive for the first time in years, reinforcing the durability of market broadening into 2026. Small caps and cyclicals trade at a meaningful discount to large caps, creating attractive opportunities where fundamentals are improving faster than prices. Earnings leadership is broadening across Financials, Industrials, Health Care, and small caps. Small- and mid-cap earnings expectations are inflecting higher after several years of underperformance, narrowing the growth gap versus the largest stocks. Consensus points to more balanced EPS growth across market segments in 2025-26, supporting a healthier and less concentrated earnings backdrop.

The letter outlines a systematic, risk-controlled equity strategy centered on insider alignment, cash flow durability, and disciplined valuation. Proprietary insider signals and layered risk management are positioned as core drivers of consistent alpha generation. Quality investing is framed as compounding capital while actively avoiding downside risk across market cycles.

Succession planning is critical for families and businesses, requiring early planning, clear communication, and strong values. The letter emphasizes that successful transitions involve preparing the next generation through gradual involvement, fostering stewardship mindset, and maintaining continuity while allowing evolution. Japanese businesses with over 100 years of operation demonstrate how values-based succession creates resilience.