Investment Pitches

Pitch Summary:
Our two most impacted holdings during this recent crisis were Zions Bancorporation and discount broker Charles Schwab. We believe both have sticky deposit bases, best-in-class management teams, conservative balance sheets, and attractive valuations. In both cases, outside of absolute contagion/panic resulting in a run on their deposits (a very low probability tail risk), we view the impact on the businesses as more of an "earnings" event, not a "balance sheet" event. Zions and Schwab got caught up in the contagious fear around SVB's collapse due to some optical similarities between their balance sheets (namely bonds carried at mark-to-market losses), and Zions being a West Coast regional bank. We believe the similarities largely end there. Zions has a much more diverse deposit base than SVB. We estimate that half of Zions' deposit base are small and medium-sized business operating deposits, which have historically been quite stable and a competitive advantage. Nearly half of Zions' deposits are FDIC-insured, and the bank has ample liquidity to meet outflows without selling its securities portfolio. Although there will likely be some profit headwinds that stem from this crisis, we viewed the large declines in these shares as overly punitive, and thus believe the risk/reward for each is increasingly attractive. We have added to both positions.

BSD Analysis:
FMI maintains a bullish stance on Zions Bancorporation despite the regional banking crisis that impacted the stock. The manager emphasizes Zions' differentiated deposit profile compared to failed Silicon Valley Bank, highlighting that approximately 50% of deposits come from stable small and medium-sized business operating accounts. With nearly half of deposits FDIC-insured and sufficient liquidity to avoid forced asset sales, FMI views recent weakness as an earnings impact rather than a balance sheet threat. The fund added to the position, viewing the sell-off as creating an attractive risk/reward opportunity. Management quality and conservative balance sheet positioning support the investment thesis during this period of sector volatility.

Pitch Summary:
Booking Holdings (BKNG) is the world's largest online travel agency. It has a network effect business model, where Booking acts as an aggregator of supply (independent hotels) on one side and demand (leisure travelers) on the other. This aggregation of fragmented supply and demand allows them to charge a healthy 15% commission when a user books a room. It also allows them to outspend all other players on customer acquisition while still earning good returns on ad spend. Given Booking has to invest very little tangible capital, ROIC is over 80%. Booking has tremendous scale as the global number one. Booking is a capital-light business in a secularly growing industry, has a net cash balance sheet, and a solid management team. Travel continues to recover, with particular improvement in Europe (over 70% of sales), and Booking is taking market share from competitors. We find ~17 times normalized earnings (2024E) to be a punitive valuation. We believe Booking has a long runway for growth when the dust fully settles after COVID and the Ukraine war.

BSD Analysis:
FMI presents a strong bull case for Booking Holdings based on its dominant network effects and exceptional capital efficiency. The company's position as the world's largest online travel agency creates powerful competitive advantages through scale economics in customer acquisition and supplier relationships. The ability to charge 15% commissions while maintaining superior returns on advertising spend demonstrates significant pricing power and market leadership. Booking's asset-light model generates exceptional returns on invested capital exceeding 80%, highlighting the quality of the business franchise. The company's geographic diversification with over 70% European exposure positions it well for continued travel recovery. FMI views the 17x normalized earnings multiple as attractive given the secular growth in online travel penetration and Booking's market share gains. The net cash balance sheet provides financial flexibility during the recovery period while positioning the company for potential acquisitions or increased capital returns.

Pitch Summary:
Fortune Brands (FBIN) has one of the highest quality portfolios of branded building products in the world. Recognizable brands include Moen, Therma-Tru, Larson, Master Lock, and Sentry Safe. The stock traded down on housing-related macro concerns, along with an overhang from the company's now-completed spinoff of its lower-quality cabinetry business. Brand, innovation, and distribution strength are key differentiators, as the company has a leading market position in the attractive and consolidated global plumbing market. R&R accounts for over two thirds of the revenue mix, which should perform more defensively given the lower-ticket nature of the products. The company has a strong track record of organic growth, margin expansion, and a strong (mid-teens) return on invested capital (ROIC). Organic sales growth averaged 7% annually over the last decade, approximately 2-3% above estimated end-market growth. The company is embracing simplification and capital returns, which should be accretive to shareholder value. On 2024 estimates, the stock trades at only 14 times earnings per share (EPS).

BSD Analysis:
FMI presents a compelling value opportunity in Fortune Brands following housing-related market pessimism and portfolio simplification. The company's portfolio of leading brands including Moen and Therma-Tru provides strong competitive positioning in consolidated markets with significant barriers to entry. The defensive nature of the business is highlighted by over two-thirds revenue exposure to repair and remodel markets, which typically demonstrate resilience during economic downturns due to lower ticket sizes. Fortune Brands' historical outperformance of end-markets by 2-3% annually demonstrates pricing power and market share gains. Strong capital allocation discipline is evidenced by mid-teens ROIC and management's focus on simplification following the cabinetry spinoff. The 14x 2024 earnings multiple appears attractive given the quality of the franchise and long-term secular growth drivers in housing renovation markets.

Pitch Summary:
UnitedHealth Group (UNH) is the largest, best-managed, and most-diversified managed care organization in the U.S. and is among the largest providers of health services and technology through its fast-growing Optum businesses. In managed care (health insurance), UNH is the number one national provider in the rapidly expanding Medicare Advantage market, in addition to the number one or number two positions in most other sub-segments. Today, scale is more important than ever in delivering top benefits at competitive prices. Scaled buying power (and network building) ensures the most visibility into medical costs at a given site-of-care and scaled investment gives UNH the most enhanced capabilities (tools and technology, typically from Optum) that nudge participants towards lower cost sites-of-care. We view the forward valuation (17 times 2024E EPS) and long-term growth algorithm as attractive.

BSD Analysis:
FMI presents a strong bull thesis for UnitedHealth Group based on its dominant market position and diversified business model. The company's leadership in Medicare Advantage, a rapidly growing segment, provides significant competitive advantages through scale economics in both cost management and network development. The integration of Optum's health services and technology platforms creates unique capabilities to direct patients toward lower-cost care settings while improving outcomes. UNH's market-leading positions across multiple managed care segments demonstrate the sustainability of its competitive moat. The forward valuation of 17x 2024 estimated earnings appears attractive given the company's growth prospects and defensive characteristics. FMI emphasizes the increasing importance of scale in healthcare, positioning UNH to benefit from industry consolidation trends and regulatory changes favoring larger, more efficient operators.

Pitch Summary:
Our two most impacted holdings during this recent crisis were Zions Bancorporation and discount broker Charles Schwab. We believe both have sticky deposit bases, best-in-class management teams, conservative balance sheets, and attractive valuations. In both cases, outside of absolute contagion/panic resulting in a run on their deposits (a very low probability tail risk), we view the impact on the businesses as more of an "earnings" event, not a "balance sheet" event. Zions and Schwab got caught up in the contagious fear around SVB's collapse due to some optical similarities between their balance sheets (namely bonds carried at mark-to-market losses), and Zions being a West Coast regional bank. Similarly, Schwab's retail deposit base is very sticky. Over 80% of their customers' cash is FDIC-insured, and the cash is spread across approximately 34 million brokerage accounts (average ~$10,000 in bank cash per account). Schwab has more balance sheet liquidity than deposits. In both cases, there appears to be a low risk of correlation among their respective client bases. Although there will likely be some profit headwinds that stem from this crisis, we viewed the large declines in these shares as overly punitive, and thus believe the risk/reward for each is increasingly attractive. We have added to both positions.

BSD Analysis:
FMI presents a compelling bull case for Charles Schwab following the banking sector volatility. The manager emphasizes Schwab's differentiated business model with a highly diversified retail deposit base spread across 34 million brokerage accounts averaging $10,000 each. The sticky nature of these deposits is reinforced by over 80% FDIC insurance coverage, providing significant stability during market stress. Schwab maintains superior balance sheet liquidity exceeding total deposits, offering substantial protection against potential outflows. FMI characterizes the market selloff as creating an attractive risk-reward opportunity, viewing the impact as temporary earnings pressure rather than structural balance sheet concerns. The firm has increased position size, demonstrating confidence in management quality and the long-term competitive positioning of the discount brokerage franchise.

Pitch Summary:
Our two most impacted holdings during this recent crisis were Zions Bancorporation and discount broker Charles Schwab. We believe both have sticky deposit bases, best-in-class management teams, conservative balance sheets, and attractive valuations. In both cases, outside of absolute contagion/panic resulting in a run on their deposits (a very low probability tail risk), we view the impact on the businesses as more of an "earnings" event, not a "balance sheet" event. Zions and Schwab got caught up in the contagious fear around SVB's collapse due to some optical similarities between their balance sheets (namely bonds carried at mark-to-market losses), and Zions being a West Coast regional bank. We believe the similarities largely end there. Zions has a much more diverse deposit base than SVB. We estimate that half of Zions' deposit base are small and medium-sized business operating deposits, which have historically been quite stable and a competitive advantage. Nearly half of Zions' deposits are FDIC-insured, and the bank has ample liquidity to meet outflows without selling its securities portfolio. Although there will likely be some profit headwinds that stem from this crisis, we viewed the large declines in these shares as overly punitive, and thus believe the risk/reward for each is increasingly attractive. We have added to both positions.

BSD Analysis:
FMI maintains a bullish stance on Zions Bancorporation despite the regional banking crisis that impacted the stock. The manager emphasizes Zions' differentiated deposit profile compared to failed Silicon Valley Bank, highlighting that approximately 50% of deposits come from stable small and medium-sized business operating accounts. The bank maintains strong liquidity with nearly half of deposits FDIC-insured and sufficient balance sheet liquidity to handle outflows without forced asset sales. FMI views the market selloff as creating an attractive entry point, characterizing the impact as an earnings headwind rather than a fundamental balance sheet issue. The firm has increased its position size, demonstrating conviction in the investment thesis. Management quality and conservative balance sheet management are cited as key differentiators that should support long-term value creation.

Pitch Summary:
Our only sizable addition in the quarter was a position established in Kato Works, a maker of heavy construction equipment, which is up 31% from our average purchase price of ¥789 and contributed 0.65% to overall fund performance. I continue to hold Kato Works in our portfolio as it trades well below its intrinsic value of ¥2,000 per share.

BSD Analysis:
The manager established a new position in Kato Works, a Japanese heavy construction equipment manufacturer, at an average price of ¥789 per share. The position has already generated strong returns, appreciating 31% and contributing 0.65% to fund performance in the quarter. The manager maintains a bullish stance with a target intrinsic value of ¥2,000 per share, representing significant upside potential of approximately 153% from the purchase price. This investment aligns with the fund's strategy of targeting undervalued Japanese companies trading below intrinsic value. The position benefits from the broader thesis that Japanese companies are trading at unjustifiably low valuations despite improved operational efficiency and capital allocation. The manager continues to hold the position, suggesting confidence in further appreciation toward the calculated intrinsic value.

Pitch Summary:
Medmix (Switzerland) is a business we know well as it was formerly Sulzer's applicators business and spun out as a standalone company in September 2021. We held Medmix shares briefly following the spin-off, but exited the position above CHF 40 per share in the fourth calendar quarter of 2021 as it was near our estimate of intrinsic value. Medmix manufactures high-precision delivery devices for the mixing, application and injection of liquids serving the dental, construction, chemical and the health care markets. The products Medmix sells typically represent 1-2% of the end market cost of its customers' products and are considered mission critical to its customers, leading to stable growth and attractive high-teens EBITA margins. Medmix's share price declined more than 60% in 2022, mostly due to Victor Vekelsberg, a Russian oligarch, who is Medmix's largest shareholder (40% stake) and has also been personally sanctioned by both the EU and the U.S. These sanctions had no material impact on Medmix's operations, but in May 2022 the Polish government deemed Medmix to be "Russian controlled" and forced it to cease operations in the country, which resulted in the closure of a plant that accounted for approximately 15% of group revenues. This had an adverse impact on profitability in 2022 and will have more limited impact on 2023 results. By 2024, the Polish capacity should be completely moved to Spain. We estimate that the loss of the Polish plant will reduce group-wide EBIT by 5-7% over the mid term, compared to a 60% decline in share price last year. This situation provided us with a compelling opportunity to invest in a high-quality, niche business.

BSD Analysis:
The manager identifies a compelling value opportunity in Medmix following geopolitical-driven selling pressure that created a significant disconnect between fundamental impact and share price decline. The company operates in an attractive niche with mission-critical products representing only 1-2% of customer costs, enabling pricing power and defensive demand characteristics. High-teens EBITA margins reflect the specialized nature and value-add of the precision delivery devices across dental, healthcare, construction, and chemical end markets. While the Russian oligarch ownership and Polish plant closure created operational disruption, the manager estimates only 5-7% mid-term EBIT impact versus a 60% share price decline. The planned capacity relocation to Spain by 2024 should restore operational efficiency. This temporary dislocation in a high-quality, niche industrial business with stable end markets presents an attractive risk-reward opportunity for patient capital.

Pitch Summary:
Kansai Paint (Japan) is the market leader and largest paint and coatings manufacturer in Japan. Its products are used primarily for automobiles, construction and ships along with bridges and residential housing. The majority of the company's business comes from Japan, but it also has customers in Europe, the U.S., China and India. We view the paint industry as attractive due to its consistent profitability across both industry participants and time. While each segment of the industry is different, the business is characterized by high technological barriers to entry, strong brand recognition, strong customer relationships, healthy degrees of maintenance revenue, and moderate to low capital requirements. In addition, globally the industry is consolidated, so pricing tends to be rational. We like that Kansai Paint has strong market positions in emerging markets as the majority of operating profit comes from these areas. The company has leading market positions in India and South Africa as well as good exposure throughout emerging Asia. Lastly, we are pleased with Kansai's management team, which has kept costs under control while successfully expanding outside of the company's home market, and we appreciate its focus on operating margins and return on equity.

BSD Analysis:
The manager presents Kansai Paint as an attractive play on the structurally appealing paint and coatings industry. The company benefits from classic defensive industry characteristics including high barriers to entry, strong customer relationships, and rational pricing dynamics in a consolidated global market. Kansai's market leadership position in Japan provides a stable foundation, while emerging market exposure offers superior growth potential. The strategic focus on India and South Africa, where the company holds leading positions, capitalizes on faster-growing economies with expanding infrastructure and automotive markets. Management's demonstrated ability to expand internationally while maintaining cost discipline and focus on profitability metrics suggests strong capital allocation and operational execution. The combination of defensive industry dynamics, emerging market growth exposure, and quality management creates an attractive risk-adjusted return profile.

Pitch Summary:
Colliers International Group (Canada) was established in 2004 as the commercial property services division of the residential real estate services firm FirstService before it was spun off in 2015. The company is the fourth-largest global diversified real estate services firm. In our view, Colliers is a leader in commercial real estate (CRE) services, sustaining a long history of through-cycle, double-digit growth and increasing profitability. Over time, the company has grown at or ahead of peers on an organic basis, and its asset management business reached around $98 billion in assets under management at the end of 2022. In addition to organic growth, Colliers's management team is also supplementing growth through mergers and acquisitions with a proven and highly repeatable approach, which they have successfully used across different end markets and locations. We believe Colliers's unique equity-retention approach allows the company to successfully diversify its service offerings more rapidly than its competitors, which typically target scale-driven acquisitions. We also appreciate that Colliers's business mix is shifting toward what we view as higher margin and more recurring activities with less cyclicity, such as asset management and outsourcing and advisory. Recent macroeconomic concerns have caused a sell-off in all CRE firms, which gave us an attractive opportunity to invest in Colliers.

BSD Analysis:
The manager identifies Colliers as an attractively valued leader in commercial real estate services following sector-wide selling pressure. The company's track record of through-cycle double-digit growth and peer-leading organic expansion demonstrates operational excellence and market share gains. The $98 billion asset management platform provides high-quality recurring fee income with attractive margins. Management's proven M&A strategy, utilizing unique equity-retention structures, enables faster service diversification compared to competitors focused on scale acquisitions. The strategic shift toward higher-margin, recurring revenue streams like asset management and advisory services should improve earnings quality and reduce cyclical exposure. The recent CRE sector selloff created an opportunistic entry point for a quality franchise with defensive characteristics and long-term growth potential.

Pitch Summary:
Software AG, an enterprise software company based in Germany, was a top detractor for the period. The share price of Software AG fell after the company released full-year results in January. For the fourth calendar quarter, revenue outpaced market expectations, while margins in the Digital Business Platform (DBP) business came in shy of forecasts. However, the company's results for the full year were solid, from our perspective, and overall performance exceeded our estimates. Excluding the impact from its recent acquisition of StreamSets, Software AG's total product revenue rose 7% year-over-year and its bookings advanced 15%, while its adjusted operating profit margin gained 160 basis points and finished 2022 at 21.2%. By segment, DBP revenues and bookings grew 7% and 12%, respectively. Concurrently, A&N (Adabas & Natural) segment revenues increased by 8%, and bookings rose 23% from the prior year. Furthermore, annual recurring revenue grew 10% on an organic basis. However, we were somewhat disappointed by management's 2023 guidance of total product revenue growth of 6-10% for the full year and an operating profit margin range of 16-18%, which were below the original levels aimed for in Software AG's strategic plan known as Helix. When we spoke with CEO Sanjay Brahmawar and CFO Daniela Bunger, they explained that the margin compression was due to both a faster than expected SaaS transition as well as standard cost inflation on salaries and other expenses. Although the SaaS transition should ultimately add value to the company, to address near-term concerns, management is implementing a cost-efficiency program that includes a 4% headcount reduction, process simplification and discretionary expense cuts. We believe these steps will benefit Software AG and significantly improve its results going forward.

BSD Analysis:
Despite near-term headwinds, the manager maintains conviction in Software AG's long-term value proposition. The company delivered solid fundamentals with 7% organic revenue growth, 15% bookings growth, and 160 basis points of margin expansion to 21.2%. Both Digital Business Platform and legacy A&N segments showed healthy growth momentum, with 10% organic ARR growth demonstrating recurring revenue strength. While 2023 guidance disappointed relative to the Helix strategic plan, management's explanation of SaaS transition timing and cost inflation appears credible. The proactive cost-efficiency program, including 4% headcount reduction and process optimization, should restore margin trajectory. The faster-than-expected SaaS transition, while pressuring near-term margins, positions the company for higher-quality recurring revenue streams and improved long-term valuation multiples.

Pitch Summary:
TeamViewer, a German remote access and remote-control computer software company, was a top contributor to the Fund's performance for the quarter. During the quarter, TeamViewer released results for fiscal-year 2022 that slightly exceeded billings guidance and came in at the high end of the guided profitability range, thereby surpassing both our and the market's expectations. TeamViewer's core SMB business demonstrated accelerated growth of 18% in the fourth quarter thanks to successful upsell campaigns and strong pricing. At the same time, the company's burgeoning Enterprise offering continued to demonstrate strong progress, and its billings grew by 42% for the fiscal year. The company's adjusted EBITDA margin hit the upper end of guidance at 47% in 2022, reflecting stable margins year over year despite a significant increase in marketing expenditure related to agreements with Manchester United and Mercedes Formula 1. Looking ahead, management anticipates stable margins in 2023 despite an increase in R&D spending. There is also significant margin upside potential if the company is able to successfully downgrade its sponsorship with Manchester United, as stipulated in a recently reached agreement. The company announced it will be shifting to a revenue-based guidance framework and provide more disclosure around its annual recurring revenue to increase transparency. We view this change positively. Finally, TeamViewer bought back roughly EUR 300 million of shares in 2022 (over 10% of outstanding shares) at an average price of around EUR 12.50 per share. The company simultaneously paid down significant net debt during the fiscal year, which brought its leverage in line with mid-term targets, providing the opportunity for a new share buyback program of up to EUR 150 million in 2023. We believe management is taking the right steps to continue to improve TeamViewer's financial performance and that it remains an attractive investment.

BSD Analysis:
The manager presents a compelling bull case for TeamViewer based on strong operational execution and financial performance. The company exceeded expectations across key metrics, with SMB business accelerating to 18% growth and Enterprise billings surging 42% annually. The 47% adjusted EBITDA margin demonstrates operational efficiency despite increased marketing spend on high-profile sponsorships. Management's shift to revenue-based guidance and enhanced ARR disclosure signals improved transparency and confidence. The aggressive capital allocation strategy, including EUR 300 million in buybacks (10%+ of shares) and debt reduction, reflects strong cash generation and shareholder-friendly management. The potential margin upside from reducing Manchester United sponsorship costs provides additional value creation opportunity.

Pitch Summary:
Envista Holdings is a leading dental products manufacturer. You may recall this was a successful investment dating back to 2020 that we sold less than a year ago. During the tumult in smaller capitalization companies in the first quarter, the share price once again met our criteria for investment, and its strong fundamentals matched our expectations. Unfortunately, the market began to agree with our assessment of attractiveness before we could build a full position. This is both a high-quality problem and a reality for investors as value conscious as we are.

BSD Analysis:
Oakmark re-entered Envista Holdings, a leading dental products manufacturer, after previously holding it successfully from 2020 until selling less than a year ago. The small-cap market volatility in Q1 2023 created another attractive entry opportunity when shares met their investment criteria. The managers confirm that Envista's strong fundamentals aligned with their expectations, validating their previous analysis. However, they note the challenge of building a full position as the market quickly recognized the company's attractiveness, driving prices higher. This demonstrates both the quality of their investment selection process and the competitive nature of value investing in efficiently priced markets. The brief commentary suggests confidence in Envista's business model and management execution within the dental products industry.

Pitch Summary:
Intercontinental Exchange is one of the largest and most successful financial exchange operators. The company was created through a series of shrewd acquisitions under founder and CEO Jeff Sprecher. We believe Sprecher is an excellent CEO with a history of astute capital allocation and an ability to adapt to opportunities and competitive threats. Today, Intercontinental Exchange competes in three primary segments: exchanges, fixed income/data services and mortgage technology. We believe each of these businesses exhibits attractive economic characteristics and will grow earnings faster than GDP over time. Investors today are concerned about Intercontinental Exchange's mortgage segment as rising interest rates have depressed origination volumes. We agree that this segment will be pressured in the near term. However, only 7% of trailing 12-month revenues are sensitive to mortgage volumes, and we believe they will eventually revert to historical norms. Today, however, Intercontinental Exchange sells for what we believe is an underserved discount to its exchange peers and private market valuations.

BSD Analysis:
Oakmark views Intercontinental Exchange as a premier financial infrastructure company built through strategic acquisitions under founder-CEO Jeff Sprecher's leadership. The managers praise Sprecher's capital allocation track record and adaptability to market opportunities and threats. ICE operates across three segments: exchanges, fixed income/data services, and mortgage technology, each exhibiting attractive economic characteristics with above-GDP growth potential. While acknowledging near-term pressure on the mortgage segment due to rising interest rates, they note this represents only 7% of revenues and expect normalization over time. The current valuation represents an undeserved discount to exchange peers and private market valuations, creating an attractive entry opportunity. The investment thesis combines high-quality business economics, proven management execution, and temporary valuation dislocation due to cyclical mortgage market concerns.

Pitch Summary:
ConocoPhillips is one of the largest and lowest cost U.S. exploration and production companies in the country, led by CEO Ryan Lance—in our view one of the best value creators in the industry. ConocoPhillips's share prices fell in the first quarter as oil prices receded, which is not atypical. We were buying the company at prices where it could generate its entire market cap in free cash flow over the next decade while growing the production such that at the end of that time, the base of production would be one-third higher. This sort of reinvestment opportunity is unique to ConocoPhillips and clearly not reflected in the current share price.

BSD Analysis:
Oakmark highlights ConocoPhillips as a premier low-cost energy producer under exceptional leadership from CEO Ryan Lance, whom they consider among the industry's best value creators. The investment thesis centers on extraordinary free cash flow generation potential, with the company capable of generating its entire market capitalization in cash flow over the next decade. Simultaneously, ConocoPhillips can grow production by one-third during this period, demonstrating unique reinvestment opportunities within the energy sector. The recent oil price decline created an attractive entry point that doesn't reflect the company's fundamental value creation capabilities. This represents a compelling combination of immediate cash generation and long-term production growth at current valuations. The managers emphasize the company's cost leadership position and management quality as key differentiators in the cyclical energy sector.

Pitch Summary:
Capital One Financial is another long-term Oakmark holding where the stock was dragged into the banking controversy despite not sharing the balance sheet risks (neither securities' losses nor uninsured deposits) of the failed banks. Capital One has a terrific track record of both growth and risk management under founder CEO Richard Fairbank. We were buying Capital One at roughly 6x this year's consensus EPS and a discount to tangible book value. Furthermore, we believe long-term earnings power is well above what we will see this year.

BSD Analysis:
Oakmark views Capital One as unfairly penalized during the banking sector turmoil despite having a fundamentally different risk profile than failed institutions. The company lacks the securities losses and uninsured deposit concentrations that plagued Silicon Valley Bank and Signature Bank. Under founder-CEO Richard Fairbank's leadership, Capital One has demonstrated strong growth and risk management capabilities over time. The attractive entry valuation of approximately 6x consensus earnings and a discount to tangible book value provides compelling risk-adjusted returns. The managers believe current earnings understate the company's long-term earning power, suggesting significant upside potential. This represents a classic contrarian investment where sector-wide fears created an opportunity to acquire a quality financial institution at depressed valuations.

Pitch Summary:
Capgemini has also been a long-term holding across other Oakmark Funds and in fact was held in the Oakmark Global Fund as recently as 2021. As we commented in our fourth calendar quarter 2021 letter, we exited Capgemini as the shares approached our estimate of fair value and redeployed the funds into holdings that possessed more attractive return profiles. While we exited Capgemini due to valuation, we continued to follow the business given its high-quality franchise, its very attractive financial model and its strong leadership team. As Europe's largest IT consulting firm with expertise in digital transformation, Capgemini benefits from strong secular growth tailwinds while its scale enables it to generate high returns on capital with excellent free cash flow conversion. Despite this favorable long-term backdrop, Capgemini's shares fell significantly from our 2021 exit price on the back of the broad tech sell off as well as shorter term macro concerns, providing us with another opportunity to own this high-quality business at a substantial discount to our estimate of fair value.

BSD Analysis:
Oakmark re-entered Capgemini after previously selling in 2021 when shares reached fair value, demonstrating disciplined value investing. As Europe's largest IT consulting firm specializing in digital transformation, Capgemini benefits from secular growth trends and maintains competitive advantages through scale. The company generates high returns on capital with excellent free cash flow conversion, indicating strong operational efficiency. The recent tech selloff and macro concerns created a buying opportunity at a substantial discount to fair value. The managers emphasize the high-quality franchise, attractive financial model, and strong leadership team as key investment merits. This represents a classic value play where temporary market pessimism created an entry point into a fundamentally sound business with long-term growth drivers.

Pitch Summary:
American International Group (AIG) has been a long-term holding across other Oakmark Funds. As we referenced above, the market was painting financials with too broad a brush, and AIG is a great example. There are two primary businesses at AIG: commercial insurance (80% of our estimate of value) and life insurance and annuities (20% of our estimate of value). The latter, now named Corebridge, trades publicly, and AIG owns ~78% of the shares. We expect that AIG will reduce its ownership at appropriate prices over time, leaving the commercial insurance operations on its own. Under the strong leadership of CEO Peter Zaffino, underwriting profits in the commercial insurance operations have improved $7B since 2016 and are now competitive with the broader industry, though AIG's valuation is not. At $50, AIG sells for less than 8x this year's consensus earnings and 57% of our estimate of economic tangible book value.

BSD Analysis:
Oakmark views AIG as an undervalued financial benefiting from improved operational performance under CEO Peter Zaffino. The fund highlights that underwriting profits have improved by $7 billion since 2016, bringing them to industry-competitive levels. AIG's structure includes 80% commercial insurance and 20% life insurance/annuities (Corebridge), with the latter trading publicly and providing optionality for value realization. At $50 per share, the stock trades at less than 8x consensus earnings and 57% of estimated economic tangible book value. The managers believe the market is unfairly penalizing AIG alongside problematic regional banks despite its different risk profile. The investment thesis centers on operational improvements, attractive valuation metrics, and potential value unlock through the Corebridge stake monetization.

Pitch Summary:
Our investment in First Citizens is one such example. We initially purchased shares in First Citizens in the first quarter of 2021 after we came to appreciate the quality of the franchise and management team. Over the subsequent years, our estimate of intrinsic value increased, but the stock price did not keep up with the growth in intrinsic value. The disconnect widened further this quarter as the Silicon Valley Bank crisis unfolded. As a result, we added to our position. As long-term value investors, we are used to deferred gratification – but, in this case, our decision was quickly rewarded. Not only did First Citizens avoid most of the mistakes made by the troubled banks, but it took advantage of the crisis by striking a deal to buy the majority of Silicon Valley's assets and liabilities from the FDIC just as the quarter came to a close. We believe this transaction added hundreds of dollars per share to the intrinsic value of the business in one fell swoop, the equivalent of many years of business value growth under more normal conditions. Stepping back, First Citizens has many of the attributes we look for in an investment, including high stock ownership by management, recent insider purchases and – particularly relevant in the current environment – trust from regulators.

BSD Analysis:
Oakmark's investment in First Citizens exemplifies their patient value approach, having initially invested in Q1 2021 based on franchise quality and management excellence. The fund increased their position during the banking crisis as the stock price lagged their rising intrinsic value estimates, creating a widening discount. First Citizens distinguished itself by avoiding the operational mistakes that plagued troubled banks while opportunistically acquiring Silicon Valley Bank's assets from the FDIC. This transformative transaction added what Oakmark estimates as hundreds of dollars per share in intrinsic value, equivalent to years of normal business growth compressed into a single deal. The investment thesis is strengthened by key qualitative factors including high management ownership, recent insider buying, and regulatory trust - attributes that may be difficult to quantify but prove crucial during crisis periods. The Silicon Valley Bank acquisition demonstrates management's ability to capitalize on market dislocations while maintaining conservative risk management. This combination of defensive positioning and opportunistic growth represents an ideal outcome for Oakmark's value-oriented strategy.

Pitch Summary:
Charles Schwab is a company that we have followed closely for some time and that has been a holding in the Oakmark Fund since the third quarter of 2018. As the largest discount brokerage platform, Schwab has large scale advantages and a strong competitive position. The shares sold off significantly this quarter in the wake of the Silicon Valley Bank collapse as investors became concerned about mark-to-market losses on Schwab's securities portfolio. We believe these concerns are overstated and that the risk-reward now justifies holding Schwab shares in the more concentrated Oakmark Select Fund. While there are parallels to Silicon Valley Bank, we believe Schwab has a much higher quality deposit franchise, with deposit balances spread across more than 34 million accounts, the vast majority of which are FDIC insured. Schwab also has significantly positive book value after mark-to-market losses, unlike Silicon Valley Bank's negative book value. Finally, Schwab's far superior liquidity profile should allow it to absorb any deposit outflows with minimal long-term business impact. The recent price decline gave us the opportunity to buy shares in this industry leader at a low double-digit multiple of normalized earnings.

BSD Analysis:
Oakmark initiated a position in Charles Schwab following the banking sector sell-off triggered by Silicon Valley Bank's collapse, viewing the indiscriminate selling as creating an attractive entry point. The managers emphasize Schwab's competitive advantages as the largest discount brokerage platform, highlighting its scale benefits and strong market position. They differentiate Schwab from troubled banks by pointing to its higher quality deposit franchise with over 34 million FDIC-insured accounts and positive book value even after mark-to-market losses. The fund sees the market's concerns about securities portfolio losses as overblown, believing Schwab's superior liquidity profile positions it to weather deposit outflows without significant business impact. The recent price decline allowed them to acquire shares at what they consider an attractive low double-digit multiple of normalized earnings. This represents a classic value opportunity where temporary market fears have created a disconnect between price and intrinsic value for a quality franchise. The investment aligns with Oakmark's strategy of buying industry leaders during periods of market stress.