Direct lending market experiencing sharp rise in defaults with sponsors transferring $21 billion of equity to lenders in first half of 2025. Bad PIK debt now represents over half of distressed direct loans with loan-to-value ratios climbing from 45% to 83%. AI infrastructure spending estimated to reach $7 trillion by 2030 with hyperscalers issuing $120 billion in bonds in 2025. Credit markets showing skepticism requiring increasing premiums for hyperscaler debt while industrial credit spreads decline. Fed cut rates three times in 2025 causing bull steepener with short-term rates falling dramatically while long-term rates remained elevated. Money market yields dropped from above 5% to 3.5% creating need for alternatives. Global capital demand over next decade from AI infrastructure, federal deficit expansion, European defense spending, and reconstruction needs creating potential crowding out effect. Credit markets remain healthy preventing crisis-level disruption.

Superior Plus is a leading North American propane distributor serving 750,000 customers with sticky customer relationships due to company-owned tanks and container laws. The propane industry benefits from stable demand, high switching costs, and pricing power. Superior is executing a transformation program targeting $70 million in EBITDA improvements through cost optimization and customer growth initiatives. Certarus operates the leading over-the-road compressed natural gas delivery platform with 40% market share, serving pipeline-stranded customers. The business is diversifying beyond oil and gas wellsites into utility resiliency, renewable natural gas transport, and AI data center power solutions. Multiple growth vectors include utility infrastructure support and hyperscale data center buildout. AI infrastructure buildout is driving fivefold increase in data center power requirements, creating opportunities for Certarus to provide bridge power solutions while customers wait for permanent grid connections. The portfolio's physical activity focus provides protection from AI displacement risks while enabling participation in AI infrastructure growth through energy delivery services. The portfolio benefits from energy transition trends through renewable natural gas transport via Certarus, which has 50% market share in stranded RNG delivery. RNG production is expected to increase sevenfold over the coming decade, while propane serves as a cleaner alternative to fuel oil for heating applications.

Yacktman builds the portfolio based on evaluating normalized free cash flow and business fundamentals, comparing price to arrive at forward rate of return based on current market valuation. The approach focuses on risk-adjusted returns and long-term underlying business performance, holding companies through periods of stock price underperformance when the long-term thesis offers attractive risk-adjusted returns. South Korea is launching broad value-up reforms modeled after Japan's program, shifting governance standards from company-centric to shareholder value creation focus. The manager believes MSCI will eventually re-rate South Korea from Emerging Market to developed market status, with investor access and index flows beginning to close the 30-year Korean discount. Samsung was late relative to competitors SK Hynix and Micron in HBM design wins with NVIDIA but was awarded HBM qualification in 2025 and ramped production quickly. Samsung has long been a leader in memory including NAND, DRAM, and now HBM, with memory chips appearing in AI data centers and broad array of IOT devices from cars to refrigerators to wearables. The U.S. indices reached record highs driven by artificial intelligence exuberance. Memory chips are ubiquitous in AI data centers, and Samsung reorganized to emphasize Galaxy phones with AI feature leadership to compete with Apple. Hyundai Mobis benefitted from share gain and electric vehicle penetration by Hyundai and Kia, continuing strong capital allocation discipline as one of the top global auto parts suppliers. Warner Bros. Discovery has been a relatively small position that contributed to performance in 2025. After the legacy Warner Bros. merged with Discovery, the company embarked on multi-year deleveraging and management transition. Netflix and Paramount-Skydance bidding process has re-rated the company price.

AI-related demand is driving strong performance for optical networking equipment manufacturers like Ciena, which is dominating market share for scale across data center projects in 2026. The quarter began with concerns about a potential AI capital expenditures bubble affecting market sentiment. Power grid modernization efforts are driving demand for smart metering and grid monitoring solutions. Companies like Itron are well-positioned to benefit from these infrastructure investments despite some regulatory approval delays. Continued reshoring of U.S. manufacturing is identified as a potential tailwind for small/mid-cap stocks. This trend supports domestic manufacturing capabilities and creates opportunities for industrial companies.

Yacktman builds the portfolio based on evaluating normalized free cash flow and business fundamentals, comparing price to arrive at forward rate of return based on current market valuation. The approach focuses on risk-adjusted returns and owner's mindset investing with long-term focus on underlying business performance. Samsung was late relative to competitors in HBM design wins with NVIDIA but was awarded HBM qualification with NVIDIA in 2025 and ramped production quickly. Memory chips are ubiquitous in AI data centers and broad array of IOT devices from cars to refrigerators to wearables. South Korea is launching broad value-up reforms modeled after Japan's program, shifting governance standards from company-centric to shareholder value creation focus. The country may eventually be re-rated by MSCI from Emerging Market to developed market, with investor access and index flows beginning to close the 30-year Korean discount. Samsung has three primary lines of business including memory, foundry, and phones. The company has long been a leader in memory including NAND, DRAM, and now HBM. Samsung has focus on U.S. foundry with massive fab outside Austin in Taylor, Texas. Hyundai Mobis benefitted from share gain and electrical vehicle penetration by Hyundai and Kia, continuing strong capital allocation discipline. The company is one of the top global auto parts suppliers. Warner Bros. Discovery has been a relatively small position along with other sizeable media holdings. After legacy Warner Bros. merged with Discovery, the company embarked on multi-year deleveraging process and management transition. Netflix and Paramount-Skydance bidding process has re-rated the company price.

The fund focuses exclusively on small-cap equities with valuations remaining compelling relative to large caps, with the Russell 2000 Index trading near multi-decade lows on a relative basis. Potential tailwinds include deregulation, lower corporate tax rates, increased M&A activity, continued reshoring of U.S. manufacturing and infrastructure-related spending. Value stocks outperformed growth counterparts during the quarter as the Russell 2000 Value Index returned 3.26% compared to 1.22% for growth. Lower-quality companies outperformed higher-quality companies with factors like high bankruptcy risk, low sales growth, and low price to earnings having the strongest payoffs. MACOM Technology Solutions, a designer and manufacturer of high-performance semiconductor products, was a top contributor with strong quarterly results. The company has meaningful exposure to growing demand from Data Center and 5G end market applications along with domestic manufacturing footprint. Healthcare was the best-performing sector at +18.54% during the quarter. The fund holds positions in companies like Haemonetics in blood management and Acadia Healthcare in behavioral health services, though maintains an underweight allocation as it avoids biotechnology companies due to binary risk. The fund added positions in regional banks including Atlantic Union Bankshares and WesBanco, viewing DOGE-related concerns as creating attractive opportunities. These banks benefit from diversified customer bases, growing market share, and solid balance sheets positioned for trust and deposit opportunities. The fund holds positions in companies supporting power grid modernization through Itron's smart metering solutions and IDACORP's transmission opportunities. These companies are positioned to benefit from critical regional transmission opportunities and grid monitoring solutions.

The AI investment cycle accelerated notably in 2025 and is expected to continue driving the market early in 2026. Bottlenecks from power supply availability remain a key gating factor to bring new computing capacity online. Despite widespread calls that AI stocks are in bubble territory, the managers hold a balanced view and believe investor skepticism may prove supportive of a prolonged investment cycle. Healthcare remains the largest sector in the US with total expenditures reaching $5 trillion and accounting for 17.7% of GDP. The sector has been working off excesses from the COVID-19 pandemic but shows reasons for optimism including increased M&A activity and more favorable valuations. Interest in healthcare stocks could see a resurgence once investors are comfortable with policy and regulatory overhangs. Aerospace stocks have largely outperformed as production challenges at two global aircraft manufacturers have led to sustained increases in high-margin aftermarket parts and services. With manufacturers finally resolving longstanding production issues, original equipment exposed stocks could potentially outperform aftermarket-exposed stocks as aircraft production rates ramp up. Re-shoring and factory automation are expected to emerge as key themes driving broader capital spending in 2026. This represents a significant shift in manufacturing and investment patterns as companies bring operations back to the United States.

Azvalor focuses on finding good businesses well-managed by trustworthy teams that the market offers at attractive prices due to clouds hanging over their short-term outlook. Their portfolios trade at around a 50% discount to broader markets with significant upside potential across all funds. Azvalor built significant positions in gold and silver mining companies when they were largely ignored by the market and have now exited these investments entirely, crystallizing substantial capital gains from all of them as latest arrivals show signs of intoxication. The portfolios remain highly concentrated with top holdings representing 53-57% of assets in a limited number of high-conviction investments that are companies they know in depth and have followed closely for many years.

The extended federal government shutdown added volatility during what was otherwise a risk-on environment, with a mid-quarter shift in market behavior for AI-related equities as the exuberant narrative evolved to one more balanced in assessing the technology's enormous potential against staggering capital spending plans and high expectations. The team initiated a position in Credo Technology as a more diversified way to gain exposure to strong trends in AI-connectivity. MACOM Technology Solutions rose nearly +40% as the company experienced broad-based demand, similar to many semiconductor companies in 2025. The team exited Astera Labs following industry conference presentations that suggested emerging competitive risks and concerns over single customer concentration, while initiating a position in Credo Technology for AI-connectivity exposure. Healthcare was the strongest relative contributor in the quarter with holdings increasing nearly +16% compared to benchmark returns of roughly +12%. Exact Sciences was acquired for a significant premium by Abbott Laboratories resulting in an +86% return, while other strong performers included Tarsus Pharmaceuticals, Glaukos following approval of a new product, Penumbra, and Repligen driven by strong earnings results. The team initiated a position in Curtiss-Wright, believing the company is entering a period where multiple near-term growth drivers are converging, including rising defense budgets, commercial aerospace production ramps, nuclear power plant life extensions and new builds, and submarine production. EMCOR Group was initiated as a new position, viewed as a critical contractor enabling multi-year investment cycles across data centers, semiconductor fabrication, electrification, and broader infrastructure modernization. Its decentralized, cash-generative model, recurring service base, and exposure to structural growth drivers create a profile viewed as more durable than a typical cyclical contractor framework.

Agency MBS performed exceptionally well, gaining 1.7% in Q4 and 8.6% for 2025, benefiting from reduced interest rate volatility and meaningful spread tightening. The fund maintains a sizable overweight position given elevated spread premiums versus similar quality corporates and government guarantee. CMBS finished the year in positive territory with private label deals outperforming agency-backed issues. An improvement in the broader commercial real estate outlook, particularly for high quality properties, supported performance and increased issuance. The fund maintains a broad underweight to corporate credit given asymmetric risk/reward profile and minimal downside protection at current tight spread levels. Credit spreads remain near tightest levels in recent history despite potential economic headwinds.

Gold prices drove a blistering rally that contributed significantly to portfolio returns and local index performance. The fund continues to hold exposure while actively managing position sizes due to the volatility of single commodity miners. Platinum prices experienced strong performance alongside gold, with Valterra Platinum being the largest contributor after benefiting from both strong PGM prices and an accelerated book build by former parent Anglo American. Chinese stocks benefited from improved sentiment, with Prosus and Naspers gaining alongside their Tencent holding. The improving outlook for eCommerce portfolio and continued value-accretive buyback programs supported performance.

The fund emphasizes portfolio diversification as a key strategy, particularly highlighting the need for diversification in fixed income and inflation-resistant assets to hedge against macro risks including government debt, global fragmentation, aging demographics and new technology impacts. The fund views elevated asset valuations, particularly for U.S. stocks, as providing little cushion against near-term risks. However, they believe valuations outside of the AI epicenter are reasonable, with many sectors showing improving growth expectations.

Credit markets show significant dispersion with CCC-rated loans trading over 1,000 bps outside BBs, recovery rates well below long-term averages at 37.7% versus 62.3%, and structural reduced demand for stressed credits from CLOs. Private credit shows stress through PIK reliance with over half of loans with PIK optionality taking the option. Direct lending market has expanded to similar size as broadly syndicated loan market with strong EBITDA growth of 8% YoY and declining net leverage. However, competition remains intense with sustained downward pressure on yield spreads, though deals still command roughly 100 bps premium over syndicated loans. Supply-demand imbalance may moderate in 2026. AI-related stocks have driven three quarters of S&P 500 returns since ChatGPT launch, with hyperscalers' capex reaching $400 billion in 2025. This has created extreme market concentration with 10 largest companies representing nearly 40% of the index, while non-AI sectors significantly underperform. Following 50 bps of Fed rate cuts in 4Q2025, commercial real estate fundamentals continue to improve with most sectors rebounding from 2024 lows. Private-label CMBS issuance reached post-GFC record of $158 billion, representing 39.6% year-over-year increase, showing signs of stabilization.

The fund maintained significant overweight positions in agency MBS, focusing on middle coupon stack securities (4.0% to 5.5% coupons) for higher income and prepayment protection. Agency MBS was the top performing market segment and remained attractive versus corporates despite tightening spreads. The managers reduced allocations to investment-grade and high-yield corporates due to very tight yield spreads versus history. They focused on optimizing income through security selection rather than adding material risk given current tight valuations. The Fed enacted two quarter-point rate cuts in Q4, bringing total 2025 reductions to 75 basis points. The fund maintained neutral duration positioning and retained bias for yield curve steepening through intermediate-term overweights.

Multiple portfolio companies executed significant share repurchase programs in 2025, including Virgin Wines repurchasing 10% of shares, DCC buying back 12% through tender offer, Associated British Foods repurchasing 5%, and Naked Wines retiring 7% of share capital. Manager views these buybacks at low valuations as value-creating for shareholders. Manager emphasizes investing in companies trading below intrinsic value, with several holdings described as net-net situations where market cap trades below cash holdings. Focus on companies with reasonable business models, competitive advantages, and rational management available at reasonable prices. Market concerns about artificial intelligence impact on comparison portal business models led to significant price declines across the sector. Manager believes market is overreacting to AI buzzword and underestimates adaptability of successful platform businesses led by experienced entrepreneurs.

For the past decade, Emerging Markets have been in a relative bear market but have gotten quite cheap from a valuation perspective. The catalyst for unlocking this value is a potential decline in the US Dollar tied to Trump Administration policy changes, as MAGA policies require a weak Dollar policy. A weakening dollar would be a boon to Emerging Markets economies that frequently borrow in US Dollars. In an inflationary world with loss of faith in Central Banks, precious metals tend to do well. The fund owns two companies that should be beneficiaries of precious metals either appreciating or at least staying at elevated prices. Neither company is directly in the mining business, which is risky and capital intensive, though one is a service provider to miners. Refiners have suffered for over a decade but China has chosen to shut teapot refiners and pivot larger refiners to petrochemicals. For the first time in many years, the crack spread has become elevated on a forward basis, indicating market tightness. The position works as a hedge should global economic growth accelerate or if the US Dollar weakens enough that EM energy demand can increase. The fund has a croupier basket focused on transactional and intermediary businesses including brokers, exchanges, and other market intermediaries. These are companies where the wealthy will spend more time as cities devolve into chaos while escaping taxes. In increasingly volatile and financialized markets, CFOs will feel a need to hedge commodity risks, currencies, interest rates, and other derivatives.

The fund benefited from AI infrastructure investment driving demand for optical components and semiconductors. Coherent saw surge in demand for products in advanced semiconductor manufacturing due to AI infrastructure spending. The broader market was supported by ongoing boom in artificial intelligence spending. Strong positioning in aerospace and defense components through ATI and Howmet Aerospace holdings. ATI designs and manufactures components for aerospace and defense firms representing two-thirds of its business, with strong earnings growth projected for 2025 and Q1 2026.

Manager focuses on cyclical businesses emerging from prolonged downturns where consolidation has removed excess capacity and improved capital discipline. Years of underinvestment have shifted many businesses from persistent excess supply to recurring scarcity, creating structural improvements in earnings durability. Following years of underinvestment and restructuring, offshore energy services have experienced sharp supply-demand tightening. Companies like Tidewater emerged from restructuring with improved balance sheets and are positioned to benefit from consolidated fleets and restored pricing power. Building products distribution tied to homebuilders provides historical template for cyclical recovery. Following the 2009 housing collapse, capacity was rationalized and balance sheets repaired, with companies like Builders FirstSource emerging as ultimate winners despite multiple significant drawdowns. Continued rise in gold prices driven by sovereigns and institutions seeking safe allocation as the US increasingly uses dollar position as economic leverage tool. Growing demand for non-fiat monetary assets amid persistent inflation concerns and fiscal discipline challenges globally. Manager focuses on fundamental security analysis in abandoned corners of the market where scarcity of capital has driven consolidation and balance sheet repair. Gap between narrative and reality creates opportunities as entire industries are labeled permanently broken despite improving fundamentals.

Sound Shore specializes in identifying undervalued companies undergoing transformations, focusing on stocks trading at attractive valuations relative to earnings power. The portfolio trades at 13.5 times forward earnings versus S&P 500 at 22 times, providing meaningful discount despite strong balance sheets and free cash flow. Healthcare was the best performing sector in Q4 after lagging earlier in 2025. Portfolio holdings Regeneron and TEVA provided positive pipeline updates and were among largest contributors as regulatory clarity emerged around previously uncertain policies. Huntington Ingalls Industries, the largest US Naval shipbuilder, was a standout 2025 performer after working through post-COVID supply chain issues. The company benefits from US Navy's commitment to rapidly expand the fleet and prospects for further margin gains. FLEX evolved from low-value electronics assembly to high-value specialized manufacturing for medical, industrial, and automotive industries. Under CEO Revathi Advaithi, the company achieved operational discipline and double-digit earnings growth with expanding margins, benefiting from accelerating data center end-markets.

The fund focuses on small and mid-cap financial institutions, particularly regional banks with mutual holding company structures. TFS Financial represents a key investment in this space, offering leveraged exposure to earnings recovery through its unique MHC structure. Significant exposure to mortgage-related businesses through TFS Financial's traditional thrift model and Anywhere Real Estate's real estate services. The fund sees opportunity as the housing market recovers and interest rate environment normalizes. Strong positioning in capital markets through investment platforms like Robinhood Markets and traditional investment management firms. The fund benefited from continued product innovation and growth in retail trading platforms.

Gold miners comprise 21% of portfolio and appreciated 30% as gold rose 17%. Manager continues adding despite 50% gold price appreciation, citing strong production growth and attractive valuations relative to earnings potential. SK Hynix benefits from chip shortages in graphics processors, with 70-100% price hikes in a cyclical market. Company is one of three prominent producers of frontier chips alongside TSMC and Samsung. Gravity produces bestsellers in home markets and benefits from activist pressure on controlling shareholder GungHo Entertainment to increase dividends from Gravity's large cash reserves.

The letter emphasizes Noble’s long-standing focus on high-quality businesses with durable earnings, strong balance sheets, and consistent free cash flow generation. Management highlights cautious portfolio positioning amid elevated valuations and market concentration, preferring companies with predictable fundamentals over speculative growth narratives. The strategy remains anchored in valuation discipline and long-term compounding rather than short-term market momentum.

Eli Lilly & Company contributed to relative performance with shares rising amid continued growth in its GLP-1 drug franchise. Freeport-McMoRan benefited from rising copper and gold prices, contributing to fund performance.

CareCloud helps smaller U.S. health practices manage their data and collect payments through EHR and RCM systems. These practices have thin margins and high switching costs, creating customer lock-in. The RCM industry is consolidating as smaller players struggle with high fixed costs and limited client bases, allowing CareCloud to acquire competitors cheaply and expand services. ICG owns cement plants in Kazakhstan and Tajikistan with significant cost advantages through newer dry-process technology and superior locations. Energy and transport represent 20-30% of costs each, where ICG maintains substantial advantages over competitors. The industry benefits from government demand, high barriers to entry, and rational pricing behavior among producers. CTR Holdings builds structural frames and handles finishing work in Singapore, primarily on public projects. The Singaporean government provides stable cash flows through reliable payment terms. The company had significant net cash position and substantial signed project backlog when purchased.

The partnership focuses on finding exceptional micro-cap opportunities with asymmetric return potential. The manager emphasizes that finding just one or two exceptional ideas each year and sizing them appropriately should be sufficient to generate satisfactory returns. The global investible universe remains vast for finding these opportunities.

Manager believes AI capex is at unsustainable levels and won't generate economic returns unless true AGI emerges imminently. OpenAI's user growth appears to be stalling with weak Q4 traffic growth, while competitors like Gemini continue growing strongly. Model progress may be reaching diminishing returns as current state-of-the-art models are not universally better than previous versions. CRE markets show little major change from previous commentary. Apartments remain soft due to oversupply and weaker sunbelt demand, industrial has picked up slightly, office is weak outside NYC but improving in class A, retail continues doing well due to lack of new supply, and hospitality is softer than expected. Manager invested in uniQure, a biotech with potential groundbreaking gene therapy for Huntington's disease. Initial results showed disease progression slowing by 75% three years after treatment, but FDA rescinded agreement on external control group causing stock to crash. Manager believes therapy will ultimately get approved given strong efficacy data.

TSMC continues exceptional performance with 36% revenue growth driven by AI demand, improving margins, and strong execution across their Trinity of Strengths. Management guided for 30% revenue growth in 2026 and raised 5-year CAGR guidance to 25%. The fund also initiated a position in a leading South Korean memory chip manufacturer benefiting from tight supply conditions. Tencent demonstrated strong execution with improved monetization strategies after management changes in 2024. Domestic games revenue became a strong driver of overall growth, supported by the company's strong moat through WeChat's 1.4 billion users and major gaming titles like Honour of Kings and PUBG Mobile. Apollo and KKR underperformed despite strong underlying fundamentals, with AUM and fee-related earnings growing 15-24% due to industry headwinds around private equity fundraising and private credit concerns. The fund added to positions at attractive valuations, viewing the volatility as opportunity in businesses positioned for long-term growth. Marco Polo Marine transformed from a cyclical shipyard business to a specialized offshore wind vessel provider, securing multi-year service agreements and building sophisticated vessels for the growing Asian offshore wind market. The company partnered with European designers and global players like Vestas and Siemens Gamesa. DBS Bank was added as a new core holding, recognized for converting scale and technology into structural competitive advantages. The bank achieved 18% ROE through growing fee-based businesses like wealth management, reduced cyclicality, and strong capital allocation with progressive dividends and share repurchases. The fund profitably traded a Malaysian gold miner, capitalizing on gold prices rising faster than miners' all-in sustaining costs, creating attractive margin expansion opportunities and potential valuation re-rating if price strength persists. Profitable trades in two Indonesian crude palm oil producers were driven by Indonesia's biodiesel blending mandate increase from B30 to B40, tightening export availability while supply response remained constrained by aging plantation profiles and replanting limitations. Beyond direct AI investments, the fund seeks second-order beneficiaries including data center construction, electrical infrastructure, and semiconductor supply chain opportunities where demand is visible but valuations remain more palatable than pure AI names.

The fund earned returns from boring companies in defensive industries using plain vanilla value investing principles while ignoring the market's shiny objects. The portfolio represents a collection of good quality, deeply undervalued companies trading at significant discounts to intrinsic value. Multiple portfolio companies executed aggressive share repurchase programs including Zegona with €200 million reserved for buybacks, Garrett Motion repurchasing 9% of shares, and McBride implementing an aggressive share repurchase plan. These capital return programs drove significant stock price appreciation. Several holdings initiated or resumed dividend payments as part of capital return strategies. Garrett Motion initiated a dividend and committed to returning 75% of free cash flow to shareholders, while McBride reinitiated its dividend alongside share buybacks. The fund initiated a position in Itafos, a phosphate fertilizer producer, based on structural undersupply dynamics. American phosphate production has declined by more than half since 1980, Florida reserves are dwindling, and China is reducing exports to ensure domestic availability for agriculture and lithium battery production. The fund purchased Sylvamo Corp, a manufacturer of uncoated freesheet paper, facing short-term headwinds from expiring supply agreements and weak European demand. Industry supply reduction from mill conversions and closures should support pricing recovery as the company invests in South Carolina capacity expansion. Net Lease Office Properties continues its liquidation process with multiple property sales and large distributions to shareholders. While recent sale prices have been underwhelming, the current share price represents a large discount to remaining property values with liquidation expected to complete by end of 2026.

YCG focuses on high-quality, recession-resistant toll takers that have historically outperformed over the long term but are currently experiencing underperformance in speculative markets. The firm believes quality stocks are undervalued as investors chase speculative opportunities. TransDigm represents a portfolio of aerospace parts with mission-critical, proprietary characteristics and little competition. The aerospace aftermarket benefits from secular growth in air travel and regulatory barriers that create pricing power for parts suppliers. Linde operates in industrial gases with economies of scale advantages and take-or-pay contracts that provide guaranteed income streams. The business benefits from mission-critical applications across diverse industries and expensive transportation costs that create local monopolies. Meta demonstrates the resilience of large networks through its ability to adapt to competitive threats and regulatory changes. The company's massive user base and AI investments have enabled it to maintain growth in engagement and advertising despite challenges from TikTok and Apple's privacy changes.

The efficacy of AI expenditures started to be questioned during Q4 2025. Companies like Microsoft continue spending aggressively on cloud capacity, but value is now considered in customer context. The increasing competence of AI in performing tasks has begun impacting the software as a service sector, creating temporary losers in what was once an all-winners environment. Bitcoin treasury companies represent an ongoing investor mania that appears to be ending. These companies that turn bitcoin into stocks now trade meaningfully below the value of their bitcoin reserves, having broken the buck. They are trapped, unable to sell bitcoin to buy back shares or sell stock to buy bitcoin without driving down prices. The Small Cap Absolute Growth Strategy vastly exceeded expectations in 2025. Small and micro cap stocks offer potential for high returns for diligent, patient, and active investors. The strategy is concentrated in healthcare sector with 8 of the positions in healthcare, particularly technology, equipment, and tools industries. The manager owns Nvidia Corp and Taiwan Semiconductor Manufacturing Corporation as best in class operators in the process of realizing a double, based on earnings growth due to their ability to extract the last of the rents from the artificial intelligence investment wave.

CLO equity allocation experienced market volatility as secondary prices came under pressure due to softer loan market prices. Credit specific events within the high yield bond allocation were a headwind to returns, though the manager has seen a reversal in those trends early in 2026. The Fund maintained a risk neutral posture during the quarter amid tight credit spreads across sub-investment grade credit. CCC exposure was reduced as part of a broader risk neutral initiative, while single B allocation was increased to preserve yield in a defensive manner. The Fund's syndicated loan allocation outperformed the broader market and was additive to returns during the period. Investment activity was largely based on relative value within respective credit sectors, with emphasis on preserving yield and getting ahead of potential credit issues.

ETFs provided consistent inflows alongside retail investors and separately managed accounts, allowing tax-exempt municipals to outperform U.S. Treasuries during the second half of the year as interest rates declined and technical conditions improved. Yield curve dynamics were mixed during the fourth quarter with front-end yields moving modestly higher while longer maturities rallied, resulting in a flatter curve across intermediate maturities. Rate declines contributed to strong performance in longer-duration exposure. Credit spreads were largely stable with AA and BBB spreads tightening slightly while A-rated spreads widened modestly, reflecting a measured increase in risk premiums for lower investment-grade credits. Overall credit conditions remained stable with continued investor confidence in municipal credit quality.

AI is driving dramatic transformation and propelling stock prices higher. The manager sees AI as creating enormous capital investments in data centers and driving growth in LLM tokens north of 200% per annum. They believe AI will increase cloud computing TAM to $2 trillion per annum over the next 10 years. The manager sees high probability of an impending lithium supply shortage as prices have been too low to incentivize new production capacity. They added Albemarle as an asymmetric value investment, expecting a price squeeze driven by electric vehicle batteries and industrial-scale Battery Energy Storage Systems demand. Enterprise software leaders like ServiceNow and Salesforce have been sold off on AI disruption narratives. The manager believes these companies have scale advantages in R&D, customer distribution, and customer data that favor them in the AI transition, making them significantly undervalued after 2025 declines. Alternative asset managers like Blackstone and KKR declined in 2025 despite strong fundamentals. The manager sees cyclical upswing potential as M&A returns, asset realisations follow, and private wealth channel growth continues. They assess the future looks bright for these businesses.

Federal Reserve continued cutting cycle with three 25-bp cuts in final four months of 2025, bringing federal funds rate to 3.50%-3.75% range. U.S. Treasury yields fell across most of the curve except 30-year which remained elevated due to widening federal deficit. Market expectations for 2026 anticipate further rate cuts amid weakening labor market data. U.S. dollar weakened significantly over 2025, falling 9.37% from $108.49 to $98.32 as measured by the U.S. Dollar Index. Dollar volatility was elevated due to federal government policy uncertainty and tariff regime implementation. Dollar resumed weakening toward end of period after Fed rate cuts in December. 2025 marked elevated volatility from Trump tariff regime unveiled in April, with temporary tariff escalation war with China. Companies heavily frontloaded inventories to mitigate impacts to corporate earnings, leading to whipsawing of quarterly GDP growth projections. Anticipated inflation spike from tariff regime never materialized. Annual inflation remained stubbornly elevated with Consumer Price Index at 2.7% as of November, stickier than hoped for. Despite tariff concerns, anticipated inflation spike never materialized due to corporate inventory frontloading strategies. Breakeven inflation rates compressed further, particularly at front end of Treasury curve. Commercial real estate faced continued challenges with RCA U.S. All-Property Commercial Property Price Index down 2.67% month-over-month and 0.65% year-over-year. Central business district office saw biggest monthly decrease ever at 6.26%. Non-Agency CMBS 30-day-plus delinquency rate ticked up to 7.30% with office segment delinquencies at 11.31%.

The Federal Reserve delivered two additional 25 basis point rate cuts in the final meetings of the year, moving policy closer to neutral amid a weakening employment picture. Expectations for additional rate cuts in 2026, alongside benign long-term inflation expectations, contributed to a steepening yield curve over the quarter. The Fund emphasizes higher-quality businesses with strong returns on capital, pricing power, and meaningful barriers to entry. Fixed income positioning retains a high-quality bias and focuses on selective bottom-up opportunities.

Artificial intelligence continued to drive technology rallies during the quarter, though concerns emerged over stretched AI valuations. AI gains benefited Japan's role in the global technology supply chain.

Companies with stronger valuation metrics outperformed during the quarter. Large-cap growth companies with the highest profitability and book-to-market characteristics were top performers. The portfolio's overweight to companies with the highest book-to-market and profitability characteristics boosted relative results.

The fund has exposure to semiconductors that are building blocks for AI and robotics applications. However, there are growing concerns about AI-related exuberance and potential bubble formation, with investors worried about the pace of AI spending and lack of returns so far. Despite these concerns, the manager notes productivity improvements in companies implementing AI tools. Essex continues to see economic and earnings strength coming from positive themes including infrastructure spending. The portfolio has exposure to stocks involved in the buildout of data centers and power grid infrastructure, though this area experienced some underperformance in Q4 as investors worried about spending pace. The fund benefits from smart defense spending as one of the positive economic themes driving strength. The portfolio has exposure to semiconductors with defense applications and space applications, contributing to performance in the Information Technology sector. Reshoring of manufacturing is identified as one of the positive themes contributing to economic and earnings strength that Essex continues to see. This represents a structural shift in global supply chains that benefits domestic manufacturing capabilities. The portfolio benefited from selective focus on energy service providers with exposure to rare earths and other minerals deemed important to national security. However, the fund does not have direct exposure to precious metals or rare earths, which were strong performers during the period. The manager believes small cap stocks may show more income growth than the S&P 500 in 2026, with sales growth bottoming in Q1 2024 and continuing to improve. Valuations remain very attractive for small cap stocks, particularly microcap stocks, despite increased valuations across all market segments.

Artificial intelligence remained a major investment theme during the quarter, driven by heavy spending from large technology companies. However, concerns emerged around profitability and rising costs associated with AI investments.

AI is expected to have an impact significantly greater than the internet on our lives. Companies involved in AI are spending unprecedented amounts of money, with formerly capital-light businesses becoming among the most capital-intensive in the world as demand for data centers and infrastructure drives capital expenditures to a scale never seen in U.S. economic history. Key uncertainties include the return on this spending, duration of the boom, energy resource adequacy, and financing methods. The manager identifies as value investors at heart and notes that value stocks generally performed well in the first quarter of 2025, underperformed major indices for most of the year after Liberation Day, and finished with solid gains. They continue to find good value outside of major indices and expect to find more opportunities if volatility returns to markets. The manager expects volatility to eventually return to markets as it always does, which would create more value opportunities. They reference volatility around Liberation Day that provided opportunities to add to holdings, and note that savvy investors may have less time than previously thought to prepare and protect portfolios given historical patterns of capital expenditure booms.

AI impacts on productivity should create abundant inflection points across nearly all S&P sectors in profitability and ROIC. When amortizing AI capex over the system that will use it, the returns appear massive and under-reported. S&P margins look structurally too low in most forecasts as labor efficiency gains may likely create an upward drift in margin ceilings. Aerospace is cyclically inflecting ahead of a long duration upcycle supported by secular growth of the global middle class. The Aerospace Normalization theme was the largest positive contributor in 2025 with General Electric, Rolls-Royce and Howmet all making meaningful contributions driven by fundamental strength. Power demand creates new secular growth opportunities, with data centers reaching deep into industrial portfolios. Caterpillar's co-located power capability at data centers represents significant revenue upside potential to the Energy & Transportation segment. Analog Devices represents the premium analog compounder as the cycle turns, with best-in-class economics including 70%+ gross margins and 45-50% EBIT targets. The team believes 2Q25 marked the restart of the semiconductor cycle with pricing and margin inflection underway. De-globalization theme involves redirection of capital on post pandemic priorities for security of energy and reliability of supply chains. Companies like Siemens Energy, GE Vernova, Constellation Energy and Vistra are positioned to benefit from this structural shift. Industrial automation represents a key secular trend with companies like Rockwell Automation positioned to benefit from digitization and AI-enabled transformation of enterprise operations. This includes factory automation and process optimization across manufacturing.

South Korea's market surged nearly 20% on strong demand tied to artificial intelligence, benefiting companies such as Samsung Electronics and SK Hynix. The AI theme drove significant outperformance in Korean technology companies during the quarter. Semiconductor companies, particularly in South Korea, experienced strong performance driven by AI demand. Samsung Electronics and SK Hynix were specifically mentioned as beneficiaries of this trend.

The fund invests primarily in tax-exempt closed-end funds holding municipal bonds, using hedging strategies to isolate credit spreads and CEF discounts. Credit spreads between municipal bonds and Treasuries began to reverse the widening that occurred in the first half of the year. The fund's weighted average discount was -6.62% versus historic average of -5.12%. The Fed followed up its September rate cut with two more 25 basis point cuts during the quarter. The fund uses carefully weighted short positions in US Treasury bond futures contracts to neutralize the impact of changes in risk-free interest rates. The distribution rate advantage should increase with each Fed rate cut. The manager raised concerns about frothy valuations in equity and credit markets, noting they have only gotten frothier. While sharing market euphoria over AI's impact on productivity, concerns exist that the AI revolution could play out similar to the internet revolution with many current winners not surviving.

Artificial intelligence remained a major investment theme, driven by heavy spending from large technology companies, though concerns emerged around profitability and rising costs.

US share markets are trading nearly as expensively as they ever have relative to history. The manager presents extensive analysis showing strong negative correlation between high valuations and future 10-year returns, with current forward P/E of 25.6 suggesting poor long-term prospects. Even using 3-year forward earnings estimates, markets still appear fully valued with limited upside potential. Artificial Intelligence continues to drive investor excitement and market performance. US company earnings are forecast to grow by 44% over the next three years, driven largely by expectations for AI companies to deliver on their lofty targets. The manager acknowledges AI as a key driver but questions whether even exceptional earnings growth can justify current valuations. Early studies show that approximately 90% of tariff costs are being borne by US consumers and companies, contrary to Trump administration narratives. Tariffs added 0.7% to US inflation in 2025, making typical households $600 poorer. The manager views this as a longer-term headwind to the US economy and questions the real negotiating leverage tariffs provide. The manager positions as a value investor focused on building a portfolio where they generate returns by actively unlocking value within holdings rather than relying on market movements. They do not own many assets that investors are most excited about currently, preferring to focus on discount capture strategies and undervalued opportunities.

Portfolio increased exposure to structural investment trends, namely software, while reducing hardware exposure. AMD benefited from landmark agreement with OpenAI to supply 6 gigawatts of high-performance graphics chips and broader investor rotation into AI infrastructure. Barrick Mining rose sharply underpinned by fresh wave of investor enthusiasm for gold, with record bullion prices boosting revenue, margin and earnings estimates. Portfolio reduced exposure to gold via exiting Valterra Platinum following rapid price moves. Amazon's AWS business re-accelerated growth to 20% year-on-year, the fastest pace in several years, as the company sees strong demand. Portfolio increased exposure to Amazon partly based on infrastructure business winning market share. STMicroelectronics detracted with sentiment dented by softer demand in key end markets, notably automotive and industrial chips. AMD surged on chipmaker's landmark agreement with OpenAI and broader AI infrastructure rotation.

Bitcoin functions as scarce, portable, digital gold gaining institutional traction as a hedge against currency debasement. MicroStrategy operates as the leader in pioneering corporate bitcoin strategy with the largest corporate bitcoin stash. The manager views bitcoin's institutional narrative advancing through maturing spot ETFs and growing corporate interest. AI represents a gunpowder moment that is flattening the playing field, allowing solo entrepreneurs to compete with enterprises and small businesses to compete with larger ones. The manager notes institutional investors have zero interest in non-AI deals currently. However, AI may also make people dumber and risks losing habits of attention and deep learning. AST SpaceMobile represents a bet on eliminating cellular dead zones through space-based broadband to unmodified smartphones. The company has partnerships with major carriers and is building what could become a massive subscription business. The space economy narrative is gaining attention with potential SpaceX IPO catalysts. Gold surged 65% in 2025, its best year since 1979, while most people forgot about it. Sprott Physical Gold and Silver Trust provides exposure to physical metals without counterparty risk or financial engineering. The position serves as insurance when fiat currencies inflate over long time horizons.

Portfolio increased exposure to structural investment trends in software while reducing hardware exposure. AMD benefited from landmark agreement with OpenAI for high-performance graphics chips. Meta's AI-driven ad impressions growing at double-digit rates, driving revenue growth. Barrick Mining rose sharply on fresh investor enthusiasm for gold with record bullion prices boosting revenue and margins. Portfolio trimmed gold exposure via Valterra Platinum following rapid price moves and positive sentiment around platinum group metals. Amazon's AWS business re-accelerated growth to 20% year-on-year, the fastest pace in several years, driven by strong demand. Infrastructure and retail businesses both winning market share while valuation hovers around 20-year low. Portfolio rotated to process and industrial automation where greater value is seen. Honeywell positioned as leader in aerospace and industrial automation, focusing on building and process automation after business simplification. Hyundai Motor navigating industry transition to electrification with focus on profitability and capital efficiency. Company prioritizing hybrids over pure battery electric vehicles, aligning with consumer preferences as EV demand has stalled.

AI LLMs are likely to be as revolutionary as the Internet, with massive capital investment by hyperscalers expected to reach $472 billion by 2026. Corporate return-on-capital may be challenged due to large capital investments, though consumers may ultimately benefit the most from AI LLMs. The firm sees AI as useful technology but notes it has not yet helped them become better investors. The S&P 500 cyclically adjusted P/E is at an all-time high of 46.6 with earnings yield at an all-time low of 2.1%. The firm believes today's greatest economic risk is a decline from current elevated P/Es and protects against this by maintaining portfolios with very different valuation characteristics from the market. They define a bubble as when returns implied by valuations are heading in a different direction to returns expected by investors.