Investment Pitches

Pitch Summary:
Some of our best-performing holdings in Q2 2023 were B3 SA (the Brazilian exchange), Ace Hardware Indonesia (beaten up on long Covid closures in Indonesia and now recovering), and Chroma Ate Inc. (a Taiwanese automated testing company that plays into semiconductor testing for AI-artificial intelligence). We have had an under-to-equal weight to Brazil, and with hindsight, maybe we were wrong, and Brazil does make sense to overweight. The "B" and "I" of BRICS (Brazil, Russia, India, China, and South Africa) is a flight to safety (and inflation does seem to be peaking in both, so that helps support the valuations too). The macroeconomic backdrop for Brazil isn't bad, and Brazil has fairly good companies.

BSD Analysis:
The manager views B3 SA as a strong performer in Q2 2023, representing the Brazilian stock exchange within their emerging markets portfolio. The investment thesis centers on Brazil's improving macroeconomic backdrop and the country's role as a "flight to safety" destination within the BRICS nations. The manager notes that inflation appears to be peaking in Brazil, which supports current valuations. They acknowledge being potentially underweight Brazil historically and suggest the country merits a higher allocation. The exchange benefits from Brazil's overall economic stability and the quality of Brazilian companies. This position aligns with their broader theme of benefiting from the new globalization trends that favor emerging markets outside of China.

Pitch Summary:
One of our favorite names in India is Westlife Foodworld Limited. This is McDonalds in India. It has a multi-decade growth story we adore. We think it will be a much bigger company in the years ahead. India, like Japan, might be due for a pause, but any pause in the market, we see as a buying opportunity. We have a list of follows we have teed up to buy in India.

BSD Analysis:
The manager expresses strong conviction in Westlife Foodworld, the McDonald's franchisee for India, highlighting the company's exceptional long-term growth potential in one of the world's fastest-growing consumer markets. The investment thesis is built on India's demographic dividend and rising disposable incomes driving sustained demand for quick service restaurants. The manager emphasizes the multi-decade growth runway ahead, suggesting significant market share expansion opportunities as Western food concepts penetrate deeper into Indian markets. Despite acknowledging potential near-term market volatility, the manager views any weakness as a buying opportunity, demonstrating high confidence in the structural growth story. The position aligns with the fund's preference for high-quality companies with long-duration growth narratives in emerging markets.

Pitch Summary:
A favorite right now in Japan is Lifull Company. This is basically the Zillow of Japan. Japan still has a lot of development potential in the online marketing and services of real estate. In addition, real estate in Japan is a bargain for foreign investors at present, and Japan has some of the most liberal property ownership laws in the world. We think business will be strong for Lifull and the stock is cheap. It is one of many great niche micro caps on offer in Japan.

BSD Analysis:
The manager presents a compelling bull case for Lifull Company, positioning it as Japan's equivalent to Zillow with significant growth potential in the underdeveloped Japanese online real estate market. The investment thesis centers on structural tailwinds including Japan's nascent digital real estate transformation and attractive property valuations for foreign investors. The manager highlights Japan's liberal property ownership laws as a competitive advantage that should drive platform usage. The valuation appears attractive at current levels, with the stock trading cheaply despite strong business fundamentals. This micro-cap opportunity aligns with the fund's strategy of investing in under-followed, niche market leaders in inefficient international markets.

Pitch Summary:
Fellow healthcare holding Organon lagged due to concerns about long-term revenue drivers. Non-operational factors (currency, interest rates and restructuring charges) have masked growth and solid free cash conversion that have exceeded expectations. Organon, a spinoff from Merck, has a very steady pharmaceutical business and is investing to grow its women's health franchise. Trading at less than 5 times earnings with a greater than 5% dividend yield, the company is growing steadily, investing in its R&D pipeline and generating ample cash flow to repay its debt, almost all of which is due in five years and beyond.

BSD Analysis:
Sound Shore presents Organon as a misunderstood value opportunity where non-operational factors have obscured the underlying business fundamentals. The Merck spinoff trades at an exceptionally attractive valuation of less than 5x earnings with a dividend yield exceeding 5%, suggesting significant market pessimism. Despite investor concerns about long-term revenue drivers, the company has demonstrated steady growth and free cash flow generation that has exceeded expectations. Currency headwinds, interest rate impacts, and restructuring charges have masked the core business performance, creating a temporary valuation disconnect. Organon's focus on women's health represents a growing and underserved market with significant long-term potential. The company's commitment to R&D investment in its pipeline demonstrates management's focus on sustainable growth beyond the current product portfolio. With debt maturities concentrated five years out and strong cash generation, Organon has financial flexibility to execute its growth strategy while maintaining shareholder returns through dividends.

Pitch Summary:
Meanwhile, medical services and products leader Cardinal Health is a classic turnaround story. The company's segments include pharmaceutical that distributes branded and generic drugs and medical, which manufactures and distributes Cardinal Health branded medical, surgical and laboratory products. We were able to purchase the stock at 11 times earnings after the underperforming medical segment weighed on investor confidence. Our research focused on the core pharma distribution business, which is growing and provides stable to improving earnings and cash flow. Management has laid out a detailed improvement plan for the medical segment, which includes growing the Cardinal branded portfolio and accelerating its at-home solutions business. This was well received by the Street and the stock rose on anticipation of improved cost savings and higher volumes.

BSD Analysis:
Sound Shore identifies Cardinal Health as a classic turnaround opportunity where temporary segment underperformance created an attractive entry point at 11x earnings. The investment thesis centers on the stability and growth potential of the core pharmaceutical distribution business, which provides predictable cash flows and earnings growth. The underperforming medical segment, while weighing on investor sentiment, represents an opportunity for operational improvement under management's detailed turnaround plan. The strategy to expand Cardinal-branded products and accelerate at-home healthcare solutions addresses secular trends toward cost-effective care delivery. Management's clear roadmap for the medical segment, including cost savings initiatives and volume growth strategies, has gained market confidence as evidenced by positive stock performance. The pharmaceutical distribution business provides a stable foundation while the medical segment recovery offers additional upside potential. This represents a classic value investment where operational improvements and market recognition should drive multiple expansion from the attractive entry valuation.

Pitch Summary:
Another strong performer was homebuilder Lennar, one of the country's largest. Like the chip industry, housing is going through a mini-cycle that corrected in 2022, and Lennar was not immune. However, the United States is structurally short housing and not all participants are benefitting from that supply/demand imbalance. It's critical to have the right house, at the right price, in the right geography. We believe the company has scale-driven advantages over small and mid-size builders, and also less exposure to slowing premium housing trends versus its competitors. Lennar has simplified its portfolio to focus more as a pure-play builder, with less asset intensity, which has improved returns on capital and cash flow. This increased cash flow has enabled management to aggressively reduce debt and buy back stock.

BSD Analysis:
Sound Shore presents Lennar as a structural beneficiary of the US housing shortage, emphasizing the company's competitive advantages during a cyclical downturn. The managers recognize that while housing experienced a correction in 2022, the fundamental supply-demand imbalance creates long-term opportunities for well-positioned players. Lennar's scale advantages over smaller builders provide cost efficiencies and market access that become more pronounced during challenging periods. The company's strategic focus on mainstream housing rather than premium segments offers better resilience against economic headwinds. Management's portfolio simplification toward pure-play homebuilding has improved capital efficiency and cash generation, enabling aggressive debt reduction and share repurchases. Lennar's ability to offer the right product mix in attractive geographies positions the company to capture disproportionate market share as housing demand recovers. The combination of structural housing shortage, competitive positioning, and improved capital allocation creates a compelling investment thesis for patient capital.

Pitch Summary:
Also benefiting from secular long-term demand was semiconductor capital equipment supplier Applied Materials. AMAT is an example of a company going through a mini-cycle as wafer fabrication equipment (WFE) spend corrected in 2022 and into the first half 2023. Now, business is stabilizing and capital is being deployed to anticipate supply needs from cloud adoption, artificial intelligence, the internet of things, electric vehicles, and other trends. We were able to purchase AMAT during the market selloff in June of 2022 when it was trading below normal at 10 times earnings. A technological winner in its industry, the company has 70%+ share in many of its submarkets and returns 100% of excess cash to shareholders. We believe management will continue building value through market share gains, operating excellence and financial discipline.

BSD Analysis:
Sound Shore identifies Applied Materials as a cyclical recovery play positioned to benefit from multiple secular growth drivers in semiconductor demand. The managers demonstrate excellent timing, purchasing shares during the June 2022 selloff at a compelling 10x P/E multiple when wafer fabrication equipment spending was correcting. AMAT's dominant market position with 70%+ share across multiple submarkets provides pricing power and competitive advantages in a capital-intensive industry. The company is well-positioned to capitalize on emerging technology trends including AI, cloud computing, IoT, and electric vehicles, all of which require advanced semiconductor manufacturing capabilities. Management's disciplined capital allocation, returning 100% of excess cash to shareholders, demonstrates strong financial stewardship. As semiconductor capex normalizes and new technology nodes drive equipment upgrades, AMAT should benefit from both cyclical recovery and structural growth trends. The combination of market leadership, secular tailwinds, and attractive entry valuation creates a compelling investment opportunity.

Pitch Summary:
The largest contributor to performance during the quarter was software maker Oracle. A company we have owned successfully in the past, we were able to purchase the stock again in October of 2019 when it was trading at just 14 times earnings with a 7% free cash flow yield. This "legacy" technology franchise is successfully competing amidst significant industry disruption as it leverages its dominant position in database software. Oracle surged after demonstrating gains in their cloud, infrastructure and applications end markets, which drove a long awaited increase in revenue growth. Looking ahead, our research indicates that the company's cloud and AI efforts could drive sustained growth and more than double earnings per share over the next 5 years. Combined with management's commitment to returning cash to shareholders and Oracle's unrivalled installed customer base, we see continued value creation ahead.

BSD Analysis:
Sound Shore presents a compelling turnaround thesis for Oracle, highlighting the company's successful transition from a legacy database provider to a competitive cloud infrastructure player. The managers demonstrate strong entry timing, purchasing shares at an attractive 14x P/E with a 7% free cash flow yield in October 2019. Oracle's dominant database franchise provides a strong foundation for cloud migration, with recent quarters showing accelerating revenue growth across cloud, infrastructure, and applications segments. The fund's research suggests Oracle's AI and cloud initiatives could more than double earnings per share over five years, supported by the company's unmatched installed customer base and management's shareholder-friendly capital allocation. This represents a classic value investment where patient capital is being rewarded as the market recognizes Oracle's successful digital transformation. The combination of reasonable valuation, strong competitive positioning, and secular growth tailwinds in cloud computing creates an attractive risk-adjusted return profile.

Pitch Summary:
At its core, CoStar Group is an information company. Having started from humble beginnings in an undistinguished basement apartment in Washington D.C., the now $37 billion juggernaut has curated the commercial real estate sector's leading database of proprietary information. Its information and online marketplaces are indispensable to the functioning of this market – a place where industry professionals and other stakeholders continuously interact and facilitate transactions by efficiently accessing and exchanging current, accurate, and standardized real estate-related information. CoStar's proprietary data, analytics, and marketplaces provide insight and services to the entire spectrum of global commercial real estate, from industrial warehouses, hotels and apartment buildings to office towers and beyond. Its granular detail on commercial buildings across this continent and select global markets is unrivalled; the Company has such a large lead over all other data providers that undertaking an effort to develop a comparable database would cost billions of dollars and would be hopelessly time-consuming to pursue. This reality has resulted in no meaningful competition for CoStar's suite of CRE data. Each real estate transaction has multiple participants and multiple information requirements; in order to facilitate each transaction, each participant must have accurate and current data. Sale prices, tenant information, asset values, lease expirations, vacancy rates, absorption rates, and lien assessments are critical pieces of information provided to consumers of CRE data. Many individuals beyond brokers require detailed CRE information – property owners, managers, developers, bankers, insurers, retailers, hospitality owners, government agencies, appraisers, pension fund managers, reporters, asset managers, and others need comprehensive information on commercial properties. With a commercial lease expiring every 7 minutes in the U.S, the demand for CoStar's offerings is colossal. For those outside of the CRE industry, it is possibly a company you've never heard of before, but for those in it, CoStar represents an essential provider of databases and marketplaces that the global real estate industry requires to operate efficiently just as the Buttonwood Agreement served as the basis of trading in basic commodities in the New York region in the late 1700s. In a survey of commercial real estate professionals conducted in 2019, 98% of respondents indicated that they relied on CoStar for CRE data despite its significantly higher cost. It's this sticky subscriber base and hard-to-duplicate depth, breadth, and scope of data coverage that CoStar's economic moat is built upon, providing near impenetrable barriers to entry. (CoStar's only competitor, Xceligent, went bankrupt in 2017, and to this day, there is no real alternative to CoStar's suite of data and analytics.) Perhaps counterintuitively, times of distress in the commercial real estate sector can reinforce the company's value proposition as market participants require more than ever to have actionable and accurate information crucial in decisions of financing, buying & selling, lease information, and extending insurance, among many other important components to the life cycle of CRE. This value proposition has recently been demonstrated by renewal rates of over 95% in the most recent quarter and the company is expecting double-digit revenue growth in 2023, despite turbulent times in the broader sector. Leveraging its industry leading database, CoStar has built dominant listing businesses in both the for-lease multifamily and for-sale residential segments of the real estate market. The company's listing platforms generate a high number of leads for listers when compared to its competitors, which gives CoStar strong pricing power, creating a positive feedback loop that enables the company to increase its investment in data, R&D, and advertisement, resulting in increased traffic and thereby reinforcing their competitive position. For example, the company's flagship Apartments.com brand boasts one of America's largest inventories of rental apartment listings in the country, having delivered over 1.2 billion visits to the platform in 2022. With over 20% revenue growth expected in this segment this year, CoStar says it is still in the early innings of growth with an addressable domestic market still largely untapped, continued above-inflation price increases, upsell opportunities, and new international markets to enter. Likewise, CoStar's residential real estate segment is led by its Homes.com brand. Though a newer entrant in the residential multiple-listing service space and facing strong competition from the likes of Redfin and Zillow, CoStar has shown time and time again that it can allocate capital shrewdly, invest judiciously in marketing, and drive superior returns on capital as the businesses begin to dominate their sectors and boast reinforcing network effects. We look forward to seeing repeated success as CoStar continues to invest heavily into the brand. CoStar is laser-focused on its operational performance. One of the first major publicly-traded companies to require its employees back into the office full-time and also quick to prune underperformers, CoStar is not hesitant to ask of its employees their best effort each and every day. Its driven culture is set at the top, with CEO Andy Florance the captain at the CoStar helm, having founded the company over 30 years ago in his basement. A roommate of Jeff Bezos back at Princeton, Florance has embodied an 'Amazon-like' approach to business building: exceed customers' expectations, plow cash back into the business for reinvestment, and dominate the competition. Winner of numerous awards and accolades including most recently the Globee Visionary and CEO of the Year, there is not a job in CoStar that Andy Florance has not done at one point or another. We like to see competent, honest, and ethical management teams commandeering the businesses we own, and we certainly see these characteristics manifestly displayed throughout the company at CoStar. Despite the cyclical nature of the real estate industry, CoStar's operational stability is derived from recurring revenue representing 75% of total revenue, with renewal rates typically exceeding 95% (which is particularly impressive given that CoStar does not exclude small-scale companies, such as boutique brokerage firms, that ceased their operations). In the height of the Global Financial Crisis in 2008/09, CoStar saw renewal rates dip to 85%, where they hovered for a few quarters before rising again. This resiliency speaks to the embedded high switching costs for a consumer of CoStar data – data which is often integrated in workflows and business processes, meaning that switching to an inferior product could materially affect the information quality and execution capabilities of a client, resulting in tremendous financial and reputational harm. Compounding at a 20% annual growth rate over the past 10 years, it is no surprise that CoStar has reached a formidable market capitalization and has recently been admitted as the S&P 500's newest member. Lastly, management has proven itself to be an excellent allocator of capital; having issued no dividends and not an active repurchaser of its stock, CoStar sees the highest return on its capital from reinvesting into its own business. As interest rates continue to bite into real economic activity and interest-sensitive segments such as commercial real estate continue to be under pressure, CoStar is aptly prepared to take advantage of any opportunities that comes its way. Having abstained from large acquisitions in the past number of years given sky-high valuations in the space, CoStar is patient to wait for the 'fat-pitch'—a well-timed, strategic acquisition to complement and bolster its existing businesses. Sitting on a rock-solid balance sheet of $5 billion in cash and no long-term debt, the company is ready for such an opportunity. We look forward to continuing to own CoStar in client portfolios and to monitor developments as CoStar continues in digitizing the $180 trillion asset class that is commercial real estate.

BSD Analysis:
Rocklinc presents a compelling bull case for CoStar Group, emphasizing the company's dominant position in commercial real estate data and analytics. The manager highlights CoStar's unassailable competitive moat, built on proprietary data that would cost billions and years to replicate, resulting in 98% market penetration despite premium pricing. The thesis centers on the mission-critical nature of CoStar's services, with 95%+ renewal rates demonstrating exceptional customer stickiness even during market stress. Revenue diversification through Apartments.com and Homes.com provides multiple growth vectors, with the multifamily segment expecting 20%+ growth despite sector headwinds. Management quality appears exceptional, with founder-CEO Andy Florance driving an Amazon-like reinvestment culture that has delivered 20% annual growth over the past decade. The company's fortress balance sheet ($5 billion cash, no debt) positions it perfectly for opportunistic acquisitions during the current real estate downturn. Rocklinc views the cyclical real estate pressures as actually reinforcing CoStar's value proposition, as market participants need more data during uncertain times.

Pitch Summary:
We took an initial position in Verisk Analytics (VRSK). VRSK provides critical information to insurance companies for them to run their business and avoid fraud. The company is well entrenched in the industry and there are no substitutes for their products that are as robust.

BSD Analysis:
Fenimore initiated a position in Verisk Analytics, highlighting the company's critical role in providing essential data and analytics to insurance companies for business operations and fraud prevention. The fund manager emphasizes VRSK's strong competitive moat, noting the company is "well entrenched in the industry" with no robust substitutes for their products. This suggests significant barriers to entry and pricing power within the insurance data analytics space. The investment appears to be based on the defensive characteristics of VRSK's business model, where insurance companies rely heavily on their data for underwriting and risk assessment. The timing of the purchase coincided with broader market volatility, potentially allowing Fenimore to acquire shares at attractive valuations. VRSK's mission-critical services to the insurance industry provide recurring revenue streams and high customer retention rates. The company's data moat continues to strengthen as they accumulate more proprietary information over time.

Pitch Summary:
Warner Bros. Discovery. Discovery acquired WarnerMedia from AT&T in 2022, subsequently rebranding to Warner Bros. Discovery (WBD). The combination created one of the largest collections of owned content in the world under multiple iconic brands including Warner Bros., DC Comics, HBO, HGTV, CNN and Food Network. Franchises include Harry Potter, Game of Thrones, The Lord of the Rings, Batman, Superman, Wonder Woman, Looney Tunes, and Hanna-Barbera. Licensed sports rights include NBA, NHL, MLB, and March Madness. Its Networks segment accounted for approximately 50% of 2022 combined sales. The company's Studio segment which includes content licensing and theatrical revenue accounted for around 30% of combined sales. WBD has also had success in video games with the recently released "Hogwarts Legacy" grossing over $1.3b in revenues, their 5th gaming franchise to exceed $1b in sales. The company took on significant debt to finance the WarnerMedia acquisition and currently has $2.6b cash and $49.5b gross debt. However much like Paramount, the debt has a long-dated maturity profile—$27.9 billion is due from 2030 onwards—and the majority is at fixed rates. WBD expects to achieve $4b in cost savings from the WarnerMedia acquisition. Management have a proven track record of extracting cost savings from acquisitions going back to Discovery's 2018 acquisition of Scripps Networks Interactive. They are targeting to have investment grade leverage ratios by the end of next year. Streaming platforms formerly included Discovery+ and HBO Max, both launched in 2020, which had 97.6m global subscribers in aggregate as of Q1 2023. In late May both were consolidated into a single service, rebranded as 'Max', which is believed to have the largest library of owned content amongst streamers. The company generated headlines in 2022 as one of the first to cut content spending, including completed films and shows. It appears their actions are yielding results—management most recently disclosed that US streaming is expected to be profitable this year ahead of their 2024 target, with at least $1b EBITDA targeted for 2025. The legacy studios and networks are very profitable. We believe that WBD offers incredible value. It is currently trading on a single digit multiple of this year's expected free cash flow. And we expect free cash flow to increase considerably over the next few years.

BSD Analysis:
Contrarius views Warner Bros. Discovery as offering "incredible value" following the transformative WarnerMedia acquisition that created one of the world's largest content libraries. The manager emphasizes WBD's unparalleled content assets spanning iconic franchises like Harry Potter, DC Comics, and HBO properties, plus successful gaming ventures with Hogwarts Legacy generating over $1.3 billion. The investment thesis centers on management's proven ability to extract $4 billion in cost savings from the merger, with a track record dating to the Scripps acquisition. Key catalysts include the consolidation of Discovery+ and HBO Max into the unified "Max" platform with the largest owned content library among streamers, and accelerated streaming profitability with US operations expected profitable this year versus 2024 targets. Despite $49.5 billion in debt, the manager highlights the favorable long-dated maturity profile and management's target of investment-grade leverage ratios. Trading at a single-digit free cash flow multiple with expectations for considerable growth, Contrarius sees exceptional value in this media consolidation story.

Pitch Summary:
Paramount Global. The company was rebranded to Paramount in early 2022 following the 2019 merger of Viacom and CBS. Paramount is controlled by Shari Redstone's National Amusements Inc. via a dual share class structure. Paramount is a business we are very familiar with, having previously owned both Viacom and CBS since the inception of the Fund. Paramount derives almost three quarters of its revenue from its TV business which includes CBS—the most watched broadcast network in the US—and a portfolio of cable networks including Nickelodeon, MTV, BET, and Showtime Networks. Licensed sports rights include the NFL, NCAA Men's Basketball, UEFA Champions League, and the PGA Tour. Filmed entertainment primarily consists of Paramount Pictures, an iconic 111-year old movie studio, whose library of over 1,000 films includes Titanic, Forrest Gump, The Godfather, Star Trek, Top Gun and Mission Impossible. A relative latecomer to streaming, Paramount+ has become one of the fastest growing platforms since launching in March 2021, now totaling 60m subscribers. Impressively, Paramount+ has achieved this despite some of their most attractive content being exclusively licensed to competitors (e.g. Yellowstone (in the US) and South Park were both licensed before Paramount+ launched). About half of Paramount+ subscribers access Nickelodeon (including shows such as SpongeBob SquarePants, The Loud House and PAW Patrol). This illustrates the value of children's content as part of a broad content library that appeals to different family members. Showtime, previously its own standalone platform, is in the process of being incorporated into Paramount+. This is expected to result in significant cost savings. Paramount also owns Pluto TV, the leading FAST service globally with 80m Monthly Active Users. Pluto TV generated $1.1b in revenue in 2022 and achieved US profitability in 2021. Paramount has $2.1b cash and $15.9b debt. It is possible that the market may be concerned about the company's financial position, particularly as it recently cut its dividend in anticipation of a weak advertising market. However, we think this may be misguided. Its debt is nearly all at fixed rates with a favorable maturity profile—$12 billion of debt is not due until the next decade. And management expect 2023 to mark peak streaming investment, anticipating returning to positive free cash flow in 2024. And we expect significant earnings and free cash flow growth thereafter. Management also plan to divest valuable noncore assets, including Simon & Schuster. Divestments may also include the cable network BET. Furthermore, Paramount owns very valuable real estate assets, including the CBS Broadcast Center in Manhattan and the 62-acre Paramount Pictures studio lot in Hollywood. We believe the company is very attractively priced, on a low single digit multiple of normalized free cash flow.

BSD Analysis:
Contrarius presents a compelling bull case for Paramount Global, viewing the market's concerns about financial position as misguided. The manager highlights Paramount's transformation from legacy media to streaming leader, with Paramount+ achieving 60 million subscribers despite being a relative latecomer to the space. The thesis centers on the inflection point toward streaming profitability, with management expecting 2023 to mark peak streaming investment and a return to positive free cash flow in 2024. Key value drivers include the integration of Showtime into Paramount+ for cost savings, Pluto TV's profitable FAST platform generating $1.1 billion in revenue, and valuable content assets spanning sports rights, children's programming, and iconic film franchises. The manager emphasizes the company's strong balance sheet with favorable debt maturity profile and valuable real estate holdings. At a low single-digit multiple of normalized free cash flow, Contrarius sees significant upside as streaming reaches profitability while legacy TV businesses continue generating substantial cash flow.

Pitch Summary:
Yet other companies could benefit greatly from self-help measures within their own control. Inpex, for example, is a highly cash generative oil and gas producer whose valuation has languished at 0.5 times book value. Part of the reason for that is its payouts. Although the company has bought back more than 10% of its shares over the past two years and pays out 40% of its earnings to shareholders, it can afford to do much more. Its free cash flow generation is prolific, but payouts are lower than those of international peers. Were Inpex to increase pay-outs in line with peers, it could be rewarded with a far higher valuation.

BSD Analysis:
Orbis presents a compelling value opportunity in Inpex Corporation, highlighting significant potential for valuation re-rating through enhanced capital allocation. The manager emphasizes that despite trading at just 0.5 times book value, Inpex generates prolific free cash flows that support much higher shareholder returns. While the company has demonstrated some capital discipline through 10% share buybacks over two years and a 40% earnings payout ratio, Orbis argues these levels remain conservative relative to international oil and gas peers. The fund's thesis centers on Inpex's ability to self-help through increased dividend payments and buybacks, which could unlock substantial value given the company's strong cash generation capabilities. This positions Inpex as a prime beneficiary of Japan's corporate governance reforms, particularly the Tokyo Stock Exchange's pressure on companies trading below book value to improve shareholder returns. The significant valuation discount provides substantial upside potential if management aligns payout policies with global industry standards.

Pitch Summary:
Some of our holdings have already started to improve. Megabanks like Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group continue to reduce inefficient cross-holdings of other companies' shares, have adopted progressive dividend policies, and increased share buybacks. In this, they are following the model of the trading companies Mitsubishi and Sumitomo, which have improved their capital allocation and been rewarded with much higher valuations.

BSD Analysis:
Orbis maintains a bullish stance on Mitsubishi UFJ Financial Group, emphasizing the bank's strategic transformation through improved capital allocation practices. The manager highlights MUFG's ongoing efforts to reduce inefficient cross-shareholdings, which should enhance return on equity by eliminating non-core investments that dilute shareholder value. The bank's adoption of progressive dividend policies signals management's confidence in sustainable earnings growth and commitment to shareholder returns. Increased share buyback activity further demonstrates capital discipline and provides immediate value to remaining shareholders. The fund notes that MUFG is following the successful playbook of Japanese trading companies that have already achieved significant valuation re-ratings through similar capital allocation improvements. This positions the bank to benefit from Japan's broader corporate governance revolution and the Tokyo Stock Exchange's initiatives to improve valuations for companies trading below book value.

Pitch Summary:
Some of our holdings have already started to improve. Megabanks like Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group continue to reduce inefficient cross-holdings of other companies' shares, have adopted progressive dividend policies, and increased share buybacks. In this, they are following the model of the trading companies Mitsubishi and Sumitomo, which have improved their capital allocation and been rewarded with much higher valuations.

BSD Analysis:
Orbis presents a bullish case for Sumitomo Mitsui Financial Group based on ongoing corporate governance improvements and capital allocation enhancements. The manager highlights the bank's progress in reducing inefficient cross-shareholdings, which should unlock shareholder value by focusing capital on core banking operations. The adoption of progressive dividend policies and increased share buybacks demonstrates management's commitment to returning capital to shareholders. The fund draws parallels to successful trading companies that have already been rewarded with higher valuations for similar capital allocation improvements. This positions SMFG to benefit from Japan's broader corporate governance reforms and the Tokyo Stock Exchange's push for companies trading below book value to improve their valuations. The bank appears well-positioned to capitalize on Japan's evolving investment landscape while offering attractive dividend yields that now rival major western markets.

Pitch Summary:
Danaher is a global leader in life sciences that maintains a portfolio of businesses primarily focused on bioprocessing, life science tools, genomics and diagnostics. In our view, Danaher has an excellent track record of creating shareholder value through smart capital allocation and world-class operational execution. The firm's Danaher Business System employs a rigorous, process-driven approach to operational improvement that's helped accelerate organic growth and expand margins through multiple leadership regimes. Danaher's business mix has shifted dramatically in recent years after a series of transformative acquisitions and divestitures. We believe these portfolio moves leave the company attractively positioned in some of the industry's fastest growing, most profitable niches. The upgraded portfolio contains premiere assets levered to secular growth areas, like biologics, molecular diagnostics, and genomics, that support many years of high-single-digit revenue growth and margin expansion. Near-term headwinds related to the pandemic are overshadowing this attractive long-term outlook. Danaher sells diagnostic tests and critical inputs needed for manufacturing Covid-19 vaccines. Robust demand for these products during the pandemic boosted the stock price in 2020 and 2021. As Covid-19 demand normalized, Danaher experienced sales headwinds and channel destocking on these products, which pressured the stock. We believe these near-term headwinds will ultimately prove short lived. Danaher now trades at a discounted valuation relative to peers and private market transactions, which provided an attractive entry point to invest in this high-quality, resilient business.

BSD Analysis:
The manager initiates a position in Danaher based on the company's transformation into a pure-play life sciences leader with exposure to high-growth secular trends. The investment thesis emphasizes the proven Danaher Business System, which has consistently driven operational improvements and margin expansion across multiple management teams. Recent portfolio optimization through strategic acquisitions and divestitures has positioned the company in attractive niches including biologics, molecular diagnostics, and genomics. The manager projects sustained high-single-digit revenue growth and margin expansion driven by these secular growth areas. Current valuation appears attractive due to temporary COVID-related headwinds from normalized diagnostic demand and channel destocking. The discounted valuation relative to peers and private market transactions provides an opportunistic entry point. The manager views the pandemic-related pressures as transitory, with the underlying business fundamentals and long-term growth trajectory remaining intact.

Pitch Summary:
We purchased a new position in ConocoPhillips (U.S.) and Danaher (U.S.) during the second quarter. ConocoPhillips is one of the largest and most efficient U.S. exploration and production companies in the country. The company has an extensive resource base of high-quality drilling inventory in the U.S. and various international locations as well as a growing liquified natural gas business. In our view, the depth and quality of ConocoPhillips's inventory is a competitive differentiator not fully captured in the current share price. Over the next 10 years, we believe ConocoPhillips will be able to return more than 100% of its current market cap to shareholders via dividends and share repurchases while growing its production at a mid-single-digit annual pace. We believe ConocoPhillips is also among the best managed companies in the oil and gas industry and we are impressed by its history of accretive capital allocation under CEO Ryan Lance. The stock has meaningfully underperformed the broader market year to date and is an attractive addition to our portfolio.

BSD Analysis:
The manager initiates a new position in ConocoPhillips based on superior asset quality and exceptional capital return potential. The investment thesis centers on the company's extensive high-quality drilling inventory across U.S. and international locations, which the manager believes represents an underappreciated competitive advantage. The compelling financial projection of returning over 100% of current market capitalization to shareholders over the next decade through dividends and buybacks, while simultaneously growing production at mid-single-digit rates, suggests exceptional free cash flow generation capabilities. Management quality under CEO Ryan Lance is highlighted as a key differentiator, with a proven track record of accretive capital allocation decisions. The recent underperformance relative to broader markets provides an attractive entry point for this high-quality energy asset. The growing LNG business adds additional diversification and growth optionality to the traditional E&P operations.

Pitch Summary:
Alibaba Group (China) was the top detractor for the quarter. Sentiment in Chinese equities has degraded after the initial excitement from China's reopening earlier in the year. Incremental macroeconomic data coming out of China indicates that the Covid-19 re-opening bounce is fading, and the economy is struggling to sustain healthy growth. Political tensions between the U.S. and China are also further weighing on investor sentiment. As the largest e-commerce platform in China, Alibaba's share price has been caught up in this storm. The company has also continued to face intense competition from the likes of short video players and traditional e-commerce companies. Indeed, Alibaba has lost market share, which we expect will continue. But despite these negative factors, it remains an extremely important platform in China and continues to generate significant free cash flow. In the most recent completed fiscal year, the company generated $25B of free cash flow, which is 12% of the current market capitalization. Today, its core commerce business trades at approximately 5x EBITA, a valuation we deem much too cheap, even with the headwinds noted above. But valuation alone is often not enough to unlock value. Alibaba's management team is proactively working for minority shareholders. The company has been aggressive with share repurchases and with the recent formation of a capital management committee. Our conversations with the company indicate there is a high probability that more shareholder returns will be coming. In addition, the company recently announced a major restructuring that will effectively break up the company and separately list various businesses within Alibaba. Today, the market is assigning little to no value to these businesses and having a market quote may force investors to give Alibaba value for these assets. Whether or not the restructuring works, we appreciate management's efforts to help unlock value in what is clearly an undervalued stock.

BSD Analysis:
The manager maintains a contrarian bull stance on Alibaba despite significant headwinds, focusing on compelling valuation metrics and shareholder-friendly management actions. The investment thesis acknowledges market share losses and competitive pressures but emphasizes the company's dominant platform position and exceptional cash generation capabilities. With $25 billion in free cash flow representing 12% of market capitalization, the valuation appears deeply discounted at 5x EBITDA for the core commerce business. Management's proactive approach through aggressive share repurchases and the formation of a capital management committee demonstrates commitment to minority shareholders. The announced restructuring to separately list various business units could unlock significant hidden value currently unrecognized by the market. While acknowledging continued market share erosion and macroeconomic challenges in China, the manager views the risk-reward profile as attractive given the extreme valuation discount and management's value-unlocking initiatives.

Pitch Summary:
Alphabet (U.S.) was the top contributor to the Fund's performance for the quarter. Alphabet's first-quarter search revenue growth accelerated slightly sequentially, which was notable given that advertising spending has decreased across the board. Management cited the company's travel and retail segments for their strong performance in contrast to the declines experienced in the finance and in the media and entertainment businesses. Advertising spending has also stabilized at YouTube, and the focus on "shorts" has driven strong viewership growth. In the near term, YouTube's investment in shorts may not generate significant revenue, but we believe its profitability will accelerate over time. Alphabet's cloud business reached GAAP profitability this quarter, moving from a -12% margin this quarter last year to a 3% margin this quarter. On the AI front, Alphabet upgraded Bard to run on its more powerful PaLM language model, and Bard can now assist with coding and software development. CEO Sundar Pichai compared AI's evolution to the transition from desktop to mobile computing a decade ago and said there is "a lot more to come" in terms of its consumer AI applications. CFO Ruth Porat revised 2023 capital expenditures guidance due to higher spending on data center construction and servers that will support AI developments in consumer products, advertiser tools and the cloud business. Porat reiterated that the company plans to continue to hold expense growth below revenue growth and that Alphabet's cost-reduction initiatives should bear fruit later this year and into 2024. At Alphabet's annual developer conference in May, the company showcased an impressive array of new AI-powered consumer tools, which will be rolled out over the course of the year. Investors reacted positively to these presentations, which highlighted the extent of AI innovation occurring at Alphabet.

BSD Analysis:
The manager presents a compelling bull case for Alphabet based on multiple growth drivers and operational improvements. The thesis centers on the company's successful navigation of advertising headwinds, with search revenue acceleration and YouTube stabilization demonstrating resilience. The cloud business achieving GAAP profitability represents a significant inflection point, moving from negative 12% margins to positive 3% margins year-over-year. The AI strategy appears well-positioned with Bard upgrades and comprehensive AI tool rollouts planned throughout the year. Management's disciplined approach to capital allocation, maintaining expense growth below revenue growth while investing strategically in AI infrastructure, suggests strong operational execution. The cost-reduction initiatives expected to materialize in late 2023 and 2024 should provide additional margin expansion opportunities. The positive investor reception to AI innovations at the developer conference validates the company's technological leadership in this critical area.

Pitch Summary:
In June, Swiss-based SoftwareOne received an unsolicited offer from Bain Capital. Bain offered to acquire 100% of SoftwareOne at 18.5 CHF per share, which represents an approximately 23% premium to the company's closing price before the offer was announced. SoftwareOne's Board of Directors concluded that the proposal materially undervalues the company and rejected Bain's offer. We agree with SoftwareOne's Board and external industry experts that Bain's offer materially undervalues the company. SoftwareOne is a leading value-added reseller of software and provides software and cloud services. It just focuses on the fast-growing software and cloud markets and we believe it is an attractive acquisition target. If it does not receive a more attractive offer, we believe that SoftwareOne's new management team and its new Chairman of the Board can create significant shareholder value as an independent company. Its end markets are growing in the double-digits and we expect SoftwareONE to continue to generate robust growth and improve its profitability.

BSD Analysis:
Centerstone's bullish stance on SoftwareOne is reinforced by the recent unsolicited takeover bid from Bain Capital, which the fund views as validation of the company's intrinsic value while simultaneously highlighting its undervaluation. The manager agrees with the board's rejection of Bain's 18.5 CHF per share offer, representing a 23% premium, as materially undervaluing the business. SoftwareOne operates in the attractive software and cloud services market as a leading value-added reseller, benefiting from structural growth in enterprise digital transformation. The investment thesis centers on the company's exposure to double-digit growing end markets and its potential for continued robust growth and margin improvement. Centerstone sees multiple paths to value creation, either through a higher takeover bid or through operational improvements under new management leadership. The fund's confidence in the new management team and Chairman suggests potential for significant value creation as a standalone entity. This situation exemplifies a classic value investing opportunity where market recognition lags fundamental business quality and growth prospects.