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.

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.

Japan offers tremendous value opportunities with one-third of companies trading below book value. Corporate governance reforms, record shareholder returns, and structural changes like unwinding cross-holdings are unlocking value. The investment opportunity is in early innings and could last several years. Japanese companies paid record dividends of ¥18 trillion for fiscal year ending March 2025, a 13.8% year-over-year increase. Many major firms have adopted progressive dividend policies guaranteeing dividends will never be cut, only maintained or increased. Share repurchases in 2024 and 2025 hit consecutive records as companies raced to meet Tokyo Stock Exchange capital efficiency mandates. Buybacks were a primary driver of the market's 20% climb in the first half of FY2025. Approximately 33-44% of companies on Tokyo Stock Exchange still trade below book value, compared to only 3-5% in the US. The portfolio focuses on profitable companies with attractive valuations, net cash positions, and growing dividends.

The letter emphasizes the importance of long-term investing and staying invested despite volatility. The manager discusses how distance from markets and structural design matter more than temperament for successful long-term investing. Examples include Berkshire Hathaway shareholders who stayed invested for decades and achieved compounding returns. The firm focuses on building long-term relationships with investment managers rather than transactional approaches. They maintain relationships averaging 7.1 years with current managers and emphasize investing in people rather than just businesses. The letter details their process for both building and terminating manager relationships. The firm is increasing exposure to Asian markets as part of geographic diversification away from Americas where valuations are viewed as frothy. The team conducted extensive travel across China, Indonesia, and other Asian markets for research and relationship building. The firm is expanding European relationships and published research on European shareholder activism. They view Europe as an attractive alternative to expensive American markets and are building manager relationships in the region.

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.

AI continues to assert itself across markets and the real economy in ways that demand to be addressed. The race is for AGI, with wealth accruing to whoever reaches it first. Big Tech's AI spending accounts for roughly 90% of corporate capex and contributes an estimated half of total U.S. GDP growth in 2025. TSMC represents a durable bottleneck in the infrastructure layer—the point of least slack in the global silicon supply chain. All roads lead to TSMC, with approximately 67% share of global foundry revenue and roughly 90% share of leading-edge nodes. Alphabet's cloud business made meaningful progress with revenue expected to reach approximately $57 billion (+32% YoY), while operating profit is projected to nearly double. Revenue backlog is growing faster than reported revenue, underscoring the persistent supply-demand imbalance. By designing proprietary silicon and committing to capital outlays for data centers on a financial scale attainable by only a handful of nation-states, these firms have constructed a physical moat that is, for all practical purposes, unreplicable. On Holding represents a play on the growing scarcity of the real. As digital marketing becomes commoditized and AI floods the world with generic content, value migrates toward physical community and technical prestige. On is selling membership in a curated, physical ecosystem that AI cannot replicate.

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.

Alphabet released Gemini 3 model that soared to top of AI leaderboards, demonstrating the company's full-stack AI capabilities. Google is successfully integrating AI into Search with AI Overviews and AI Mode, showing increased user satisfaction. Accenture faces questions about whether generative AI might upend the IT services industry, though the company's moats remain intact. UnitedHealth and Elevance faced multi-year fundamental pain from rising healthcare utilization and volatile medical costs. The managed care industry is under-earning across most business lines due to repricing challenges and regulatory constraints. Policy risk has increased with renewed scrutiny of industry business practices including prior authorizations and pharmacy benefit management. Rolls-Royce's Defense segment is benefiting from the new threat environment in Europe and resulting surge in defense spending. The company is the sole producer of nuclear power plants for new Dreadnought-class submarines and is developing systems for the Global Combat Air Programme next-generation stealth fighter. Universal Music Group's paid streaming revenue grew at high-single-digit rates driven entirely by subscriber growth. The company signed new agreements with streaming platforms that include wholesale price step-ups, providing incentive for retail price increases. UMG continues acquiring catalogs in developing markets to secure future growth drivers. MSA Safety benefits from growing focus on safety as regulation and employer behavior trend toward higher standards. The company is transitioning to technology-enabled safety equipment with connected portable gas detectors moving to subscription models. MSA is developing connected SCBA solutions for firefighters that should drive significant revenue growth over 5-10 years.

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.

The letter argues that the unwind of AI-driven mega-cap excess has created significant valuation dislocations in high-quality small-cap companies unfairly punished by broad tech multiple compression. Immersion emphasizes differentiated valuation work, variant perception, and patience in concentrated positions where fundamentals, unit economics, and long-term growth remain intact despite weak sentiment. The strategy focuses on exploiting mispricing created by narrative-driven selling, favoring businesses with durable economics, strong management, and asymmetric upside as earnings reassert themselves.

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.

The US dollar declined over 9% in 2025 yet remains expensive on a historical basis and could be vulnerable to further decline, particularly if US growth slows. Downward pressure is likely to continue as economic outcomes and policy decisions diverge across regions. The Fed cut the federal funds rate by 0.50% and signaled more data-dependence going forward. Emerging market central banks largely continued their easing cycles, though more conservatively amid better-than-expected growth, with improving inflation leaving the door open for further cuts in 2026. Emerging markets (excluding China) have been seeing momentum, with solid growth in India and South Africa, while Eastern European economies have been bolstered by Europe's upswing. Emerging market central banks largely continued their easing cycles with improving inflation outlook.

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.

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.

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.

Gold allocations reached their highest level since 1979-81, a rational response to the high probability of a USG default via inflation. The Fund's GMEs remain far more attractive than gold bullion due to their low valuations and fixed costs. If gold continues to rise, the Fund's GMEs should continue to outperform by a wide margin. The Fund's gold mining equities appreciated following positive feasibility studies, new management securing relationships, prioritizing permitted projects, record production, and acquisition activity. GMEs should more than triple over the next few years as they converge with their intrinsic values, cushioned by minimal debt and low production costs. Since 1825, all 55 net debtor countries with gross government debt exceeding 120% of GDP ultimately defaulted through restructuring, devaluation, high inflation, or outright nonpayment. The US has already crossed the critical 120% threshold and should be far beyond it after the next recession. The probability of a sovereign debt crisis is extremely high, with the US government effectively defaulting via high inflation similar to 1980. Gold allocations have historically risen during periods of heightened concern about sovereign default, whether outright or via inflation.

Geopolitical events and government incentives like the U.S. CHIPS Act are driving monumental investment to localize advanced semiconductor manufacturing in the U.S. and allied nations. This builds resilience and meets future demand from AI, 5G/6G, and advanced auto. The fund seeks direct beneficiaries of this capital expenditure cycle. Focus expands beyond Generative AI and LLMs to Physical AI—the integration of AI/ML into autonomous physical systems and advanced robotics. The next wave of productivity will come from intelligent machines executing complex real-world tasks. This includes foundational AI infrastructure, Edge AI hardware, and advanced Industrial/Service Robotics. The fund is positioned around the thesis that the U.S. Government will spend whatever amount necessary to assist the government-private industry partnership to reshore the semiconductor industry. Companies like Applied Materials dominate wafer fabrication equipment as AI, advanced packaging, and memory capex ramp globally. Broader echo of the semiconductor trend covering other critical industries like rare earth metals, batteries, and pharmaceuticals where focus is shifting from lowest-cost sourcing to supply chain resilience. The fund targets companies establishing highly automated, next-generation domestic production capabilities.

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.

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.

Manager extensively discusses liquidity challenges in African frontier markets, explaining how tight ownership structures and limited foreign participation restrict trading volumes. Notes that liquidity varies cyclically and structurally, with potential improvement expected as bull market develops and more investor categories participate. Fund focuses exclusively on sub-Saharan African frontier markets including Kenya, Nigeria, Tanzania, Cote d'Ivoire, and Ghana. Manager highlights Africa's young demographics driving pension savings growth and structural equity demand, positioning it as an exciting long-term driver of market appreciation.

The fund focuses on US small-cap equities, which rose over the quarter but lagged broader US equities. The manager emphasizes higher-quality small-cap businesses that offer resilience against macroeconomic headwinds while benefiting from secular trends. The manager sees compelling opportunities from increased infrastructure investment as a secular trend. New position AZZ is positioned to benefit from grid modernization and domestic manufacturing reshoring. Reshoring of supply chains presents compelling opportunities for smaller companies. AZZ is positioned to benefit from domestic manufacturing reshoring trends, while the broader strategy targets companies that can capitalize on this shift. The fund initiated a position in AZZ, which is positioned to benefit from accelerating data-center development. This reflects the manager's view on the growth potential in data center infrastructure.

Dollar General delivered strong same-store sales and margin improvement as customers traded down from grocery and pharmacy channels. This trade-down behavior provided a tailwind to margins that are expected to persist into 2026. Knight-Swift operates in a prolonged freight downturn with excess capacity added during the 2021 profit peak persisting despite weaker demand, pressuring rates and earnings. The company's scale and network efficiency should drive profitability recovery as conditions normalize. Citigroup rose amid strong capital markets activity and benign credit conditions. The company continued to repurchase stock and return capital to shareholders while transformation-related expenses are expected to decline next year.

The portfolio remains attractively valued and is currently among the most inexpensive across the geographies and market cap ranges managed by Pzena. Small-cap stocks remain particularly depressed relative to larger companies. Small-cap stocks remain particularly depressed relative to larger companies, with the portfolio's relative performance being challenged. U.S. small caps modestly underperformed large caps during the quarter.

The artificial intelligence infrastructure trade took a breather after a red-hot summer. Google's Gemini AI surpassed expectations with performance moving to the front of the pack according to respected industry benchmarks, helping Alphabet solidify its spot as an AI leader.

Materials sector experienced sharp turnaround in 2025 with 32.3% returns, driven by unstoppable gold price and precious metals boom. Platinum group metals prices materially higher than incentive prices after years of low investment. Gold reached unprecedented inflation-adjusted levels, driven by geopolitical concerns, government debt fears, and record central bank purchases. Currently trading at all-time highs versus copper and production costs, appearing extraordinarily expensive on long-term value measures. 2025 marked the launch of the greatest trade war in modern times, yet global equity markets still delivered strong returns around 20%, demonstrating short-term market unpredictability despite major policy disruptions. Bayer showed positive developments with new drug sales growing strongly and favorable litigation judgments in agriculture business. Patent cliff concerns in pharmaceutical business showed improvement with pipeline developments. JD.com faced challenges from heavy investment in new food delivery venture competing against well-capitalized incumbents like Meituan and Alibaba. Core retail business showed strong revenue and profitability growth despite share price decline.

Fund focuses on elevated carry in high yield credit markets with spreads remaining range bound below 300 basis points. Manager believes high yield credit is fundamentally strong but valuations are tight, particularly in higher quality BBs. Strategy emphasizes sourcing positions with higher income levels given limited price appreciation opportunities. Fed delivered additional 50 basis points of rate cuts during the quarter including a 25 bp December cut. Manager expects continued easing cycle with several rate cuts priced in for 2026. Current macro environment is favorable for CCCs given context of further interest rate cuts.

The fund discusses high-profile defaults in the private market and cautious Fed commentary that dampened sentiment. Lower quality C and CC rated securities were notable underperformers during the quarter, while the fund's positioning away from the lowest echelons of credit quality was positive for performance. Cautious sentiment around the future of the artificial intelligence driven data-center buildout weighed on risk appetite during the quarter. The fund expects financial market volatility could be elevated around AI sentiment going forward. The Fed delivered two 25 basis-point interest-rate cuts during the quarter but indicated a more wait-and-see approach to further monetary easing. The fund anticipates some additional interest-rate cuts but expects long-term yields to remain anchored, which may limit the extent to which rate cuts support high yield returns.

Technology companies continued to advance due to optimism about artificial intelligence despite some volatility linked to concerns about valuations. Continued investment in AI remains a key driver of market support. Chenbro performed well due to surging client demand for AI applications. Government-led infrastructure and defence spending in several developed economies is complementing market support. Renk, the German provider of mission critical drive train components for combat vehicles and marine vessels, was mentioned as a holding. Government-led infrastructure and defence spending in several developed economies is providing market support as we enter 2026. This represents a key driver alongside AI investment.

Gold has reached unprecedented inflation-adjusted levels and appears extraordinarily expensive relative to historical measures. The manager believes there is a fair price for every asset including gold, and current prices don't make sense despite gold's value as an alternative currency and tail risk hedge. The precious metals sector experienced dramatic outperformance in 2025, with the FTSE/JSE Precious Metals and Mining index more than tripling. This was the primary driver of South African equity market returns and the main reason for the Hedge Fund's underperformance relative to its benchmark. The Materials sector experienced a sharp turnaround in 2025 with 32.3% returns, fueled by the unstoppable gold price. This represented diametrically opposite fortunes compared to the preceding decade when Materials underperformed significantly. The manager's investment philosophy centers on exploiting myopia through long-term value investing. Research shows stocks with less shareholder turnover deliver excess returns, particularly those uncomfortable for myopic shareholders to hold due to volatility or poor recent performance.

The market's continued enthusiasm for AI potential led semiconductor stocks materially higher, with Taiwanese and Korean markets recording further highs. While Aikya believes in the long-term potential of AI, they maintain that both quality and valuation discipline remain paramount. Aikya's investment approach relies on two key pillars: Quality and Valuation. They invest exclusively in high-quality companies when available at sensible valuations, with the fund objective being to invest in high quality companies that make a positive contribution to sustainable development.

International value equities benefited from easing trade tensions, improved investor risk appetite, and strong performance across European cyclical sectors. Financials, materials, and selected industrials drove returns as valuation gaps narrowed and earnings expectations improved. The manager continues to exploit market volatility and exaggerated disruption fears, particularly around artificial intelligence, to accumulate high quality international franchises at attractive prices.

AI-driven tech rally continued in Taiwan, lifting local tech stocks at the epicenter of US AI infrastructure buildout. Memory chip producers benefited from confirmed chip shortages and price increases for DRAM and HBM chips. AI delivery has become a critical component of the US economy, with Beijing expected to build a rival AI ecosystem. Technology stocks rallied driven by semiconductors, specifically memory stocks, as confirmed chip shortages resulted in noticeable price increases for DRAM and HBM chips. This proved particularly beneficial for South Korean heavyweights and leading memory chip producers like SK Hynix and Samsung Electronics. China and Hong Kong were detractors as markets sold off amid softer growth and underwhelming government response. Despite deflation concerns, southbound flows have accelerated in 2025, suggesting greater risk appetite among Chinese investors that could drive a wealth effect supporting consumption. Trump's tariffs suggest goals of shifting manufacturing and raising revenue for tax cuts are prime. Market consensus sees a move towards breakdown in China-US trade, though pace and extent of decoupling remain uncertain. Trump has extended tariff pressure to India and Brazil, but agreements to reduce tariffs are expected. Copper miner Grupo Mexico rallied on rising copper demand driven by electrification and data center growth. The miner, with access to low-cost reserves, remains a long-term beneficiary. Copper and other minerals have gained from AI infrastructure development and energy transition.

The fund emphasizes being value aware, focusing on cases where both quality and value intersect. They avoid speculative areas where reward for taking risks is insufficient relative to potential returns. The strategy has generated equity-like returns while placing equal importance on capital preservation and appreciation over 30 years. The fund is actively investing in small to mid-cap global securities, believing the investment community is casting its gaze away from these market constituents that offer asymmetric risk-reward for those willing to look forward three to five years. Recent purchases demonstrate their commitment to this thesis. The fund discusses AI extensively through Microsoft's transformation and growth prospects. They analyze how AI/cloud developments transformed Microsoft's business model and examine the massive revenue growth required for current AI valuations to make sense, questioning whether Microsoft can add revenue equivalent to multiple major software companies combined.

AI was a dominant market driver of U.S. stocks and continues to influence market leadership. Strong AI-related investment was the backbone of U.S. growth in 2025. The AI-driven rally led to historic levels of market concentration with just five stocks accounting for nearly 45% of the S&P 500's total return. The Federal Reserve has cut interest rates 1.75% since 2024, easing financial conditions and supporting markets. The Fed resumed rate cuts in September, delivering three reductions by year-end as labor market risks rose. Markets expect continued, though slower, easing into 2026. The U.S. dollar fell more than 9% during 2025, supporting international markets. The dollar was pressured by high starting valuation and mounting concerns about global investor concentration in U.S. assets. Narrowing interest rate differentials may drive further decline. Value rebounded relative to Growth in Q4 2025, reflecting a clear shift toward balance after years of Growth dominance. Leadership broadened meaningfully into other sectors and stocks compared with earlier phases of the bull market, marking a meaningful transition in market dynamics.

Value is currently going through one of its worst performance periods in history, with the value-growth spread at -9.0% for 2025. The fund maintains a value-oriented approach despite persistent headwinds over the last three years. Momentum factor is in the midst of one of its strongest three-year runs in history, creating headwinds for the fund. The manager believes momentum is historically mean-reverting and expects a sizable rotation. The fund has a small-cap bias given willingness to buy smaller companies rather than short them. Large-caps have meaningfully outperformed small-caps by over 1000 basis points, creating persistent headwinds since inception.

The portfolio trades at 13x forward earnings and less than 10x normal earnings, representing attractive valuations relative to the broad market. The fund focuses on opportunities outside the Magnificent 7 where overall valuations remain near average despite elevated market multiples. The fund views AI as more likely to be a tailwind for application software vendors like Workday as they incorporate AI-powered features into their software suites. Google delivered strong new AI products that appear to be taking material share of Consumer Chatbot activity from OpenAI's ChatGPT. The fund has significant exposure to cloud-based enterprise software companies like Workday and Salesforce, which provide human capital management, financial management, and analytics solutions. These companies benefit from sticky customer bases and recurring revenue models.

Gold prices increased 65% in 2025, significantly benefiting Kingsgate's mining operations and cash flow generation. The rising gold price was a major tailwind for the fund's performance, though the manager acknowledges dependence on sustained high gold prices as a risk factor. Silicon Motion continues gaining market share across PC SSD controllers and mobile segments with new product launches. The company has the strongest product lineup in over 12 years, with management expressing unprecedented confidence in their pipeline of design wins and opportunities. AI data center boom creates both opportunities and challenges for Silicon Motion. While AI applications drive demand for high-performance SSDs, the massive AI-driven purchases of NAND storage are creating unprecedented shortages and tripling prices, potentially hurting core PC and smartphone markets. Oil prices dropped approximately 20% in 2025 from $75 to $60 per barrel, weighing on Valeura Energy's profitability. Despite lower prices, Valeura remains highly profitable with breakeven in the mid-40s and continues generating substantial cash flow.

Cannabis investing offers tremendous alpha due to structural inefficiencies including minimal institutional participation, limited quality research, and lack of focus on unit-level economics. The fund has generated 200% returns since 2023 by focusing on companies with durable cost advantages. Federal rescheduling to Schedule III is expected in the first half of 2026, marking the beginning rather than end of opportunities. The cannabis industry is experiencing widespread distress driven by oversupply, falling prices, and capital scarcity. This creates opportunities for operators with cost advantages to acquire distressed assets and restart defunct facilities at substantially lower capital expenditures with materially higher returns on invested capital.

Curreen Capital has been particularly successful with spinoff investments since launch, with 2025's three biggest winners all being spinoffs. The manager views ugly duckling spinoffs as the best investment opportunities when they combine good businesses, capable management, and attractive pricing. The fund focuses on 'ugly ducklings' - good businesses run by capable managers bought at attractive prices with upside-to-downside ratios of at least 5:1. They target companies earning above 20% after-tax returns on capital over time. Siemens Energy benefited from the end of decade-long stagnation in global electricity demand, driven by deferred infrastructure maintenance, continued electrification, and rapid rise of AI spurring a new demand cycle.

The manager discusses whether AI represents a bubble, comparing current valuations to traditional retailers like Costco and Walmart trading at higher forward P/E multiples than NVIDIA. He argues that we cannot be in an AI bubble when defensive stocks trade at higher multiples than leading AI companies. The discussion emphasizes that AI-driven demand is creating structural changes in memory and semiconductor markets. Memory semiconductors are highlighted as no longer being a commodity business driven by PC cycles, but rather a strategic input for AI, cloud infrastructure, and data-intensive workloads. The supply side has consolidated with fewer rational players, higher capital intensity, and better pricing discipline. Micron is positioned to benefit from AI-driven demand and improved industry structure. The manager emphasizes owning high-quality U.S. businesses that compound intrinsic value over time. He argues that obvious, high-quality businesses are not a failure of imagination but recognition of reality, as the modern internet economy rewards scale and dominant positions. Quality businesses can deliver asymmetric returns through duration of dominance. Valuation discipline is emphasized as critical to long-term success, with the manager noting that overpaying can cause long-term returns to go sideways. The portfolio deliberately avoided chasing narrow market leadership at elevated valuations, accepting short-term underperformance to preserve long-term risk-adjusted outcomes. Value creation comes from buying quality businesses at rational prices.

Manager maintains 22% AI exposure through GOOG, MSFT, and AMZN, though feels this is large but remains underweight relative to the S&P 500 where Magnificent Seven account for 34%. Acknowledges elevated S&P returns were concentrated among largest AI-exposed companies. Built position in Ascent Industries, a specialty chemicals company transforming from over-levered conglomerate to pure-play with pristine balance sheet. New management from Dow Chemical and turnaround experience addressing poor operations, with facilities at 50% utilization offering significant operating leverage potential. Butler National showed strong performance with EBITDA increasing from $6.5m to $8.8m, with aerospace revenue, margins, and backlog all moving up meaningfully. Company, management, and board continue buying stock despite higher share price.

The portfolio trades at 11x forward earnings and close to 6x normal earnings, both in line with historical averages, while the broad market trades at elevated valuations with the Russell Midcap's forward P/E at nearly 21x. The fund focuses on attractively valued companies with single digit earnings multiples and strong free cash flow yields. The fund maintains notable overweight exposure to oil & gas exploration/production companies that produce free cash flow yields well into the double digits. The managers view the oil market as having structural supply constraints and believe these companies represent a rare opportunity despite temporary oversupply concerns. The portfolio has notable overweight exposure to banks that exhibit attractive valuations, particularly considering their scale advantages and healthy capital ratios. Traditional/regional banks and trust banks performed well during the quarter, helping relative performance.

The portfolio trades at 13x forward earnings and less than 10x normal earnings, both in line with historical averages. The manager emphasizes attractive valuations outside the Magnificent 7, with the S&P 500 excluding these stocks trading at 18x forward P/E versus a 35-year average of 17.4x. The fund focuses on undervalued quality businesses with strong fundamentals. Software is the portfolio's largest industry exposure on both absolute and relative basis. The manager views prospects of select software companies as highly compelling, citing sticky customer bases, recurring revenues, and predictable businesses. Major purchases included Workday and Salesforce, which trade at discounts to their own history despite being higher quality businesses. The portfolio's banks returned 13% compared to 6% for the index in Q4, with an average weight of 12% that returned nearly 40% for the year. The manager took capital out of the group as valuations increased. Banks were the top contributing industry to relative performance both quarterly and annually. The portfolio remains overweight in healthcare, noting the sector's return is about half that of the rest of the market over the past decade. Healthcare's P/E ratio is less than 80% of the broad market's P/E, trading at a deeper discount only 8% of the time since 1990. The manager views this as an attractive opportunity given the quality of businesses and growth prospects. Energy exposure spans both exploration & production companies as well as oilfield services. While these businesses are not as structurally attractive as software or healthcare, energy remains among the most attractively valued areas of the portfolio. The group trades at less than 7x normal earnings and offers an expected free cash flow yield of 11%.

Warner Bros. Discovery represents a special situation investment driven by CEO David Zaslav's shift toward shareholder value creation and aggressive debt paydown. The company announced plans to split into two entities and received multiple takeover bids, with Netflix ultimately winning the bidding war. The market fears AI will disrupt vertical market software by eliminating switching costs and seat-based pricing. However, AI agents will likely increase demand for systems of record and control point software rather than replace them, as enterprises need guardrails for non-deterministic AI outputs. Constellation Software and Topicus represent the core thesis of acquiring mission-critical vertical market software businesses with high switching costs, recurring revenue, and defensive moats. These businesses serve niche markets where switching is painful and alternatives offer minimal benefits. The fund employs covered call strategies to generate income and reduce cost basis while building positions. This options-based approach allows for larger position sizing in balance sheet challenged businesses while providing downside protection. HEICO represents an antifragile business model in aftermarket aerospace components that gains market share during economic stress as airlines extend fleet life. The company demonstrates seamless leadership transition and decentralized operations that thrive on adversity. RH under Gary Friedman exemplifies exceptional leadership combining capital allocation with creative genius, transforming the company from near-bankruptcy into a luxury lifestyle brand with galleries that redefine retail and 30% EBITDA margins.

Manager focuses on concentrated investments in companies that are typically inexpensive, well-run, with little to no leverage. Portfolio demonstrates asymmetric risk/reward profiles with limited downside and meaningful upside potential. Examples include Clarus trading at 0.35x revenue and CTT achieving 21% CAGR despite remaining cheap. Turning Point Brands represents a major success story with nicotine pouch market explosion driving dramatic growth. TPB initially guided 2025 nicotine pouch sales to $60-80 million, then raised guidance multiple times to $125-130 million. The company could generate over $5 per share in earnings this year and $6+ next year as market continues growing. Pure Cycle Corporation is a Colorado-based real estate developer and water company holding approximately 30,000 acre-feet of water rights in the Denver metro region. The company represents an inflation beneficiary holding given the long-lived, hard asset nature of its water rights and real estate assets. Correios de Portugal owns a pan-Iberian logistics business that has compounded at approximately 21% CAGR since 2019. The company achieved its 2021-2025 goal of growing EBIT at better than 15% CAGR and guided for similar growth through 2028, taking EBIT from ~€100 million to €175-195 million.

The fund maintains a value-oriented approach focused on profitable companies with strong fundamentals. They have limited exposure to unprofitable companies, which historically has been a performance tailwind but became a headwind in 2025 as low-quality stocks dominated returns. The managers believe economic fundamentals and rational pricing will reassert themselves over time. The Russell 2000 Index returned 12.8% for the full year 2025, with companies with negative earnings dominating performance at +26% versus +7% for profitable companies. The fund's limited exposure to unprofitable small-cap companies weighed on relative performance during this period of speculative excess. The managers identify extreme speculative behavior in small-cap markets, with meaningful portions concentrated in highly speculative segments like space/satellite, AI, next-generation energy, rare earth materials, and quantum computing. They view current conditions as similar to the dot-com bubble and expect a meaningful correction as fundamentals reassert themselves.