Investment Pitches

Pitch Summary:
nVent (NVT) is another example of a company that is benefiting from the market's enthusiasm around AI adoption. Based primarily in Minneapolis, nVent was spun off from Pentair in 2018. The company is a large supplier of system protection, fastener, and thermal wiring solutions with a dominant position in electronic protection equipment. Management has done a remarkable job revitalizing innovation and reinvigorating organic growth and has invested heavily in liquid cooling. The process involves servers being cooled via water rather than air like with more traditional datacenter systems. Given the extreme heat generated by AI datacenters, future datacenters will need this new technology to cool their servers, providing a promising growth opportunity for nVent.

BSD Analysis:
The manager presents a strong bull case for nVent as an AI infrastructure beneficiary through its liquid cooling solutions. The company, spun off from Pentair in 2018, has established a dominant position in electronic protection equipment and thermal management solutions. Management's strategic focus on innovation and organic growth has positioned nVent well for the AI datacenter boom. The investment thesis centers on the critical need for liquid cooling technology in AI datacenters, which generate extreme heat that traditional air cooling cannot handle effectively. This creates a compelling growth opportunity as AI adoption accelerates and datacenter infrastructure requirements evolve. The manager emphasizes management's execution capabilities and the company's strategic investments in this emerging technology segment. nVent's Minneapolis-based operations and specialized expertise in thermal solutions provide competitive advantages in this high-growth market.

Pitch Summary:
One great example of this is Qualcomm (QCOM), which is a long-term holding of the Fund. While it may not be a household name, chances are high that you use their technology multiple times a day, since the company's modems and chipsets are vital to cellular communications. In fact, Qualcomm has a near monopoly on cellular modems. The company's competitive position has been built through more than $60 billion in research and development (R&D) over the last 10 years, leading to a portfolio of more than 164,000 active patents. Qualcomm is up nicely this year as its technology will likely play a big role in the AI market, as devices such as smartphones become key to delivering AI inferencing.

BSD Analysis:
The manager presents a compelling bull case for Qualcomm based on its dominant market position and AI exposure. The fund views QCOM as having a near-monopoly in cellular modems, supported by massive R&D investment of $60 billion over the past decade and an extensive patent portfolio of 164,000 active patents. This creates substantial competitive moats and barriers to entry. The investment thesis centers on Qualcomm's strategic positioning for the AI revolution, particularly as smartphones and mobile devices become critical for AI inferencing capabilities. The manager emphasizes this as a long-term holding, suggesting confidence in the company's durable competitive advantages. The stock has already delivered strong performance year-to-date, validating the manager's thesis about AI-driven demand for Qualcomm's technology.

Pitch Summary:
While staying on the resource conversion theme, it was interesting to see Jardine Matheson, the controlling shareholder of Fund investment Mandarin Oriental (Asian luxury hotels), increase its shareholding during the quarter by buying an additional 5% stake and taking ownership to over 85%. As outlined in recent letters, Fund management has recently been impressed with Mandarin's resource conversion activities, selling assets to realize significant value. With Jardine's ownership increase, it seems plausible that Jardine could look to privatize the remaining public stake. While shares trade at US$1.73 per share, Fund Management estimates a US$4.25 NAV when valuing the hotels at market value, attributing value to Mandarin's rapidly growing management platform, and a discounted value for the Hong Kong office and retail development project. While Jardine's purchase of an additional 5% stake may have just been opportunistic, Fund Management prophesizes that the probability of privatization of the remaining public equity stub is considerably more likely.

BSD Analysis:
Third Avenue identifies Mandarin Oriental as an attractive resource conversion opportunity trading at a substantial discount to net asset value. The luxury hotel operator trades at US$1.73 per share versus the manager's US$4.25 NAV estimate, representing approximately 145% upside potential. The investment thesis is strengthened by controlling shareholder Jardine Matheson's recent acquisition of an additional 5% stake, bringing total ownership above 85% and increasing privatization probability. Mandarin Oriental has demonstrated effective capital allocation through asset sales that realize significant value, while simultaneously growing its higher-margin management platform business. The NAV calculation incorporates market-value hotel assets, the expanding management platform, and a discounted valuation for Hong Kong office and retail development projects. The manager views Jardine's increased ownership as more than opportunistic, suggesting strategic intent to potentially privatize the remaining public float. This special situation benefits from both asset value realization and potential privatization premium, fitting Third Avenue's resource conversion investment theme. The luxury hotel sector's recovery trajectory and Mandarin's premium positioning provide additional fundamental support for the valuation gap closure.

Pitch Summary:
Like many real estate companies listed in Asia (ex-Japan), ESR's share price has been under pressure over the past few years. Taking advantage of deeply discounted values, despite a compelling growth outlook, US-based private equity firms Starwood Capital, Sixth Street Partners, and SSW Partners presented a non-binding and conditional proposal for the possible privatization of ESR. This private equity consortium sees some of the value that Fund Management does—namely, a leading pan-Asia logistics and datacenter platform with key exposures to Japan, South Korea, Australia, India, and Southeast Asia more broadly. ESR has over US$80 billion of assets under management and a development pipeline of high-quality logistics and data center assets totaling US$14 billion, funded primarily through equity already raised in the fund platform. With the 'booming' demand for new data center space, ESR is set to benefit from a vast 1+ Gigawatt (GW) pipeline of data center projects, recently raising a data center development fund with external capital to take advantage of this opportunity. In addition, ESR has several components of hidden value that are not factored into the current share price. For example, ESR owns a 30% stake in Japanese real estate fund manager Kenedix. Held at about US$430 million on ESR's balance sheet, this stake could be worth over US$1 billion based on recent asset manager transactions in Japan. Despite these developments, the current ESR share price seems to be factoring in a low probability of a successful privatization as there is no certainty of a successful transaction given Hong Kong Merger & Acquisition rules require that 75% of non-interested shareholders would have to vote to approve any privatization, and no more than 10% can vote against the offer. As such, we contend that an offer would need to be made at a significant premium to the current share price to obtain the necessary level of shareholder acceptance. Fund Management's net asset value ("NAV") assessment for ESR Group is approximately HK$20 per share or almost double the current share price. The late 2019 initial public offering of ESR shares was executed at just under HK$17 per share, and a merger with ARA Asset Management in 2021 was conducted at HK$27 per share. Fund Management believes the probability of a successful merger is higher than market expectations; as such, Fund Management increased the Fund's position in ESR during the quarter.

BSD Analysis:
Third Avenue presents a compelling special situation investment in ESR Group, a pan-Asian logistics and data center platform trading at a significant discount to intrinsic value. The manager's HK$20 NAV target represents nearly 100% upside from current levels, supported by ESR's substantial US$80 billion AUM and US$14 billion development pipeline. The investment thesis centers on a potential privatization by a consortium of US private equity firms (Starwood Capital, Sixth Street Partners, and SSW Partners), though Hong Kong M&A rules requiring 75% shareholder approval create execution risk. ESR's hidden value includes a 30% stake in Japanese fund manager Kenedix, conservatively valued at US$430 million on the balance sheet but potentially worth over US$1 billion based on recent asset manager transactions. The company is well-positioned to capitalize on booming data center demand with a 1+ Gigawatt pipeline of projects and recently raised external capital for development. Historical precedent supports the valuation framework, with ESR's 2019 IPO priced at HK$17 and the 2021 ARA merger at HK$27 per share. The manager increased the position during the quarter, demonstrating conviction in the privatization probability exceeding market expectations.

Pitch Summary:
The Fund also initiated a new position in Close Brothers, a U.K. banking and financial services business. Through its banking business, Close Brothers is a specialty lender with a diversified loan book of commercial and retail customers. Separately, the company operates an asset and wealth management business, Close Brothers Asset Management, and a U.K. small-cap equity market-making business under the name Winterflood. The motor finance division of the bank, which makes auto loans to retail clients, garnered negative attention in January when the UK's Financial Conduct Authority ("FCA") announced it was reviewing the activities of all lenders who had, in earlier years, participated in a since banned form of commission arrangement between auto lenders and auto dealers, who receive compensation for originating loans. The FCA is currently evaluating the scope of the review and whether retail customers were harmed. The potential actions that lenders like Close Brothers would need to take if their customers were determined to have been treated unfairly remain unclear today. Close Brothers' share price fell more than 60% following the news of the FCA opening its review, compounding an already significant decline in recent years. While there is a great deal of uncertainty surrounding the magnitude of any redress to compensate motor finance customers, the adverse share price reaction at Close Brothers appears to be an excessive reaction to even conservative estimates of the potential impact to the company's capital position. As it relates to capital position, Close Brothers has laid out a suite of actions it could take to strengthen capital if needed, without permanently impairing the company's capital base or its long-term earnings power. While Close Brothers itself has not yet made any reserve for potential redress losses, multiple other lenders have taken reserves which appear to strongly corroborate the idea that Close Brother's share price reaction has been quite excessive, and its capital position and business operations are not likely to be materially impaired. Finally, several forms of resource conversion could also be pursued to both create value and increase the company's capital base. For example, multiple recent press articles have mentioned the potential sale of Close Brothers Asset Management at prices which would represent a substantial portion of the company's market cap today, despite contributing only a small fraction of company profits. Historically, Close Brothers has had a conservative underwriting culture, which, along with its strategy of lending in niche business lines, has led to quite high net interest margins and returns on equity. Today, there is little to indicate that the current uncertainties will change the company's ability to earn attractive rates of return on its capital and, today, the company's shares are trading at prices that appear deeply discounted relative to that capital.

BSD Analysis:
Third Avenue initiated a position in Close Brothers following a severe 60%+ share price decline triggered by an FCA review of historical motor finance commission arrangements. The manager believes the market reaction has been excessive relative to the likely financial impact, creating an attractive contrarian opportunity. Close Brothers operates a diversified financial services model including specialty lending, asset management (Close Brothers Asset Management), and market-making (Winterflood), with historically conservative underwriting and high returns on equity. The company has multiple options to strengthen its capital position if needed without permanently impairing earnings power, and other lenders' reserve levels suggest the market fears are overblown. A significant catalyst exists through the potential sale of Close Brothers Asset Management, which could generate proceeds representing a substantial portion of current market cap despite contributing minimal profits. The manager emphasizes the company's niche lending strategy and conservative culture have historically generated attractive net interest margins and returns on equity. With shares trading at deeply discounted valuations relative to capital, Third Avenue views this as an opportunity to own a quality financial services franchise at distressed prices.

Pitch Summary:
Paltac is Japan's largest distributor of health and beauty products, daily necessities, and over-the-counter pharmaceuticals. Operating a nationwide network of highly sophisticated logistics facilities, Paltac serves as a value-adding middleman between myriad consumer product manufacturers and the points of sale through which their products are ultimately sold, primarily drugstores, convenience stores, and other retailers in Japan. Already the most dominant operator in this space, Paltac has steadily added to its market share over the past several years as drugstore chains have increasingly consolidated and increasingly outsourced distribution functions to independent wholesalers, such as Paltac. Paltac's best-in-class technology and extremely difficult to replicate network of facilities enable it to provide low-cost nationwide distribution services to its customers, while also providing value-adding inventory management and data services. Paltac's scale and efficiency have led to industry-leading operating margins, even while it offers its services to customers at highly competitive rates. Paltac has no debt and its balance sheet cash, which has more than tripled over the past five years, today amounts to about 20% of its current market cap. Paltac's long-term success has generated an admirable record of moderate but steady growth of revenues and earnings. However, its success has not translated into a higher valuation, as trading multiples on both book value and earnings have been roughly cut in half over the past five years. Tangentially, our team has taken great interest in the rapidly mounting pressure being applied to a great many publicly traded Japanese companies to improve corporate governance and shareholder returns. For example, directives from the Tokyo Stock Exchange request that all companies on the Prime and Standard Markets take "action to implement management that is conscious of cost of capital and stock price." Paltac itself has recently adjusted its capitalization and capital allocation policies to address its patently overcapitalized balance sheet by increasing shareholder returns. Already on its 15th consecutive annual dividend per share increase, Paltac aims to continue boosting dividends, though going forward at a pace faster than its earnings growth. Paltac has also recently committed to initiate share buybacks, a tactic it has rarely used in the past. While not central to our investment thesis, the looming possibility of Paltac being taken over by its controlling shareholder is also worth mentioning. MediPal Holdings Corporation, a publicly traded prescription drug wholesaler, owns more than 50% of Paltac stock today and sports its own overcapitalized balance sheet. MediPal, which benefits operationally from the technology and automation expertise of its subsidiary Paltac, could at some point offer to acquire Paltac in an effort to improve its own capital efficiency. In the meantime, we intend to own Paltac as an inexpensive, well-run, well-capitalized, going-concern.

BSD Analysis:
Third Avenue initiated a position in Paltac, Japan's dominant health and beauty products distributor, viewing it as an undervalued market leader with strong competitive moats. The manager highlights Paltac's best-in-class technology platform and difficult-to-replicate nationwide logistics network that enables industry-leading operating margins while offering competitive pricing to customers. The company's financial position is exceptionally strong with zero debt and cash representing 20% of market cap, having tripled over five years. Despite consistent revenue and earnings growth, valuation multiples have compressed by roughly 50% over the past five years, creating an attractive entry point. The investment thesis is further supported by improving capital allocation policies, including accelerating dividend growth (15 consecutive years of increases) and new share buyback programs in response to Tokyo Stock Exchange governance directives. A potential catalyst exists through majority owner MediPal Holdings potentially acquiring the remaining shares to improve capital efficiency. The manager views Paltac as an inexpensive, well-capitalized going concern with sustainable competitive advantages in a consolidating market.

Pitch Summary:
The Fund also added to its investment in the common stock of Prologis, Inc. ("Prologis") during the quarter. Held in the portfolio in its current iteration since 2020, the company is the largest owner of modern industrial and logistic facilities globally with approximately 1.2 billion square feet of space (on a pro-rata basis) that is 97.0% leased and generating nearly $6.0 billion of recurring cash flow each year—placing the value of its stabilized portfolio at more than $100 billion, by Fund Management's estimates. With such a valuable platform, Prologis is now the largest listed Real Estate Investment Trust ("REIT") by equity market capitalization—and one that is well followed with nearly thirty "sell-side" analysts covering the company and multiples more on the "buy-side". To some, such wide coverage may suggest a lack of opportunity with more "efficient" pricing. However, Fund Management would argue that most of these market participants are only focused on the near-term outlook and would submit the company's most recent earnings results as "Exhibit A" in that regard (i.e., Prologis reduced its guidance by 3% for the year but the stock price declined by nearly 20% in the ensuing days). To the contrary, Fund Management is much more focused on a company's financial position, the price of its securities, and the issuer's prospects for long-term wealth creation. Through this lens, Prologis remains one of the most compelling opportunities in listed real estate in our opinion. That is to say, not only does Prologis have an irreplaceable portfolio that essentially acts as a "toll booth" on the flow of goods globally with approximately 3% of worldwide Gross Domestic Product ("GDP") traveling through its facilities, but the company also has incredibly attractive access to the capital markets with conservative amounts of debt locked in at an average rate of 3.0% for a term exceeding 9 years—a capital structure that would be considered an asset in the private markets. In addition, the company's stock traded at a meaningful discount to NAV during the quarter, in Fund Management's view, with prices at one point implying less than $160 per square foot for the stabilized portfolio, which represents a 7.5% cap rate (i.e., initial yield) on "market" rental rates and more than a 20% discount to estimates of replacement cost. Prologis also has several drivers to potentially increase the underlying NAV over time, including: (i) realizing the significant gap between its "in-place" rental rates and "market" rates which could yield an additional $2.0 billion of recurring cash flow annually, (ii) further establishing its Essentials platform, primarily by adding "rooftop" solar to its facilities with the potential for 7 GW of capacity relative to the 511 MW of installed capacity today, and (iii) developing out its well-located landbank, which has the potential to accommodate more than 200 million square feet of additional space and is increasingly being utilized to deliver hyperscale data centers given the power access and premium capital values relative to traditional industrial properties.

BSD Analysis:
Third Avenue views Prologis as one of the most compelling opportunities in listed real estate, emphasizing the company's irreplaceable global logistics platform that acts as a "toll booth" on worldwide commerce. With 1.2 billion square feet of space that is 97% leased and generates $6 billion in annual recurring cash flow, Prologis controls approximately 3% of global GDP flow through its facilities. The fund manager sees significant value in the company's conservative capital structure, with debt locked at 3.0% average rates for over 9 years. Despite recent market volatility that saw the stock decline 20% on modest guidance reduction, Third Avenue believes shares trade at a substantial discount to net asset value, implying less than $160 per square foot versus replacement costs. The investment thesis centers on three key value drivers: capturing $2 billion in additional annual cash flow from rent roll-ups to market rates, expanding the Essentials platform with 7 GW of solar capacity potential, and developing 200+ million square feet of additional space increasingly focused on high-value data center projects.

Pitch Summary:
Founded more than a century ago, Wesco is a leading provider of commercial distribution, logistics services, and supply chain solutions on a global basis. Originally formed as a subsidiary of Westinghouse Electric, Wesco has now operated independently for the past 30 years and is recognized for its leading positions in the distribution of parts and components underpinning electrical, communications, and utility-related property and infrastructure—a network that was bolstered further through its acquisition of wire and cable distributor Anixter International in 2020. The distribution business is like most though—it has its tradeoffs. On one hand, a well-established network can act as a "quasi tax" on goods as they move throughout the supply chain, without the distributor having to take on manufacturing or development risk. On the other hand, the distribution of parts, components, and materials tied to discretionary investments can often be quite cyclical, leading to significant "swings" in working capital as well as obsolete inventories. Therefore, Third Avenue has always favored industry players with (i) entrenched positions within specific product categories, (ii) super-strong financial positions, and (iii) appropriate scale to "cross sell" products and services to enhance returns in what is otherwise a "low margin" business. Insofar as Fund Management is concerned, Wesco scores well on all three fronts. Put otherwise, the company has a nearly unmatched portfolio of products and services across its business-to-business distribution network with more than 50,000 suppliers (70% of which provide exclusive product offerings through Wesco) and 150,000 customers (including 90% of Fortune 100 companies). The company is also well-capitalized with a loan-to-value ratio of approximately 30% and a fixed-charge coverage ratio of more than 4.0 times. In addition, Wesco has leading positions in North America within its Electrical, Communications, and Utility segments in terms of overall market share. That said, Wesco has yet to realize the full efficiencies it gained through the Anixter acquisition in 2020, in our view, as the company has been operating with excess capital tied up in inventories following the supply chain disruptions stemming from the Covid-19 pandemic. Further, the Anixter transaction was financed amidst extreme volatility in the capital markets in mid-2020, leaving Wesco with debt and preferred equity that is now perceived to be at "above market" rates. In Fund Management's view both issues seem likely to be addressed over time though, and in combination would (i) release more than $500 million of working capital and (ii) increase Wesco's free cash flow by nearly 10%, without factoring in any fundamental improvement in the operations or further margin expansion, despite management's plans to boost operating margins by 300 basis points. Such developments could also improve the company's cost of capital as Wesco common currently trades at a double-digit free cash flow yield (when factoring in the anticipated refinancing transactions) as well as a significant discount to its Net-Asset Value ("NAV") when considering transaction multiples in the distribution space—a disconnect that is unlikely to persist, in our opinion, given the durability of Wesco's network and the secular drivers behind its key segments (e.g., grid upgrades, nearshoring, automation, data center investment, et al).

BSD Analysis:
Third Avenue presents a compelling bull case for Wesco International, viewing it as a beneficiary of the massive electrical grid infrastructure investment cycle ahead. The fund manager highlights Wesco's dominant market position with over 50,000 suppliers and 150,000 customers, including 90% of Fortune 100 companies, creating a quasi-monopolistic distribution network. The company's conservative 30% loan-to-value ratio and 4.0x fixed-charge coverage ratio provide financial stability during the current transition period. Management identifies two key value catalysts: releasing over $500 million in excess working capital tied up in post-pandemic inventory and refinancing above-market debt from the 2020 Anixter acquisition. These operational improvements alone could boost free cash flow by nearly 10% before considering management's target of 300 basis points in margin expansion. The fund sees significant valuation upside, noting Wesco trades at a double-digit free cash flow yield and substantial discount to net asset value despite secular tailwinds from grid modernization, data center buildout, and industrial automation trends.

Pitch Summary:
During the quarter we added one new holding, Teledyne Technologies. Teledyne is a very well managed sensor and instrumentation manufacturer. It is especially strong in digital imaging technology, across various light spectrums. Its products are used in a wide variety of applications, including aerospace and defense, environmental monitoring, telecommunications, and energy markets. We believe the company derives a competitive advantage from its technical know-how and deep customer relationships. Further, the segments that it participates in tend to be oligopolistic in nature. It has a unique management culture developed over decades, with an emphasis on rational, shareholder-oriented decision-making. Its stock price has been weak for a few years due to what we believe will prove to be a temporary slowdown in sales.

BSD Analysis:
Madison initiated a position in Teledyne Technologies, viewing it as a well-managed sensor and instrumentation manufacturer with competitive advantages in digital imaging technology across various light spectrums. The fund managers believe the company benefits from technical expertise, deep customer relationships, and participation in oligopolistic market segments. They highlight Teledyne's unique management culture focused on rational, shareholder-oriented decision-making developed over decades. The investment thesis centers on the belief that recent stock weakness reflects a temporary sales slowdown rather than fundamental deterioration. Madison sees this as an opportunistic entry point into a high-quality business with diversified end markets including aerospace, defense, environmental monitoring, telecommunications, and energy. The managers appear confident in the company's long-term prospects despite near-term headwinds.

Pitch Summary:
CoStar Group showed strong momentum across all segments. Its core business, the CoStar Suite, continued to grow at double-digit rates, driven by multiple factors, including CoStar's upsell program, high renewal rates and new product capabilities. Contract renewal rates remained firm at 90%-plus, implying a very healthy and consistent customer life of ten-plus years. Even more impressive is that for customers who've been subscribers for five years or longer, this renewal rate ticks up further to 95%-plus. Turning to CoStar's online marketplaces, namely Apartments.com and LoopNet, core metrics were resilient and both platforms continued to cement their leadership positions. Apartments.com was particularly strong with 20%-plus growth as rising vacancy rates in the US multifamily market continued to provide a tailwind for advertising. Despite these positive results, CoStar's share price languished as investors remain sceptical of the company's entry into the residential marketplace business. For this initiative, CoStar is on track to spend almost $1 billion on Homes.com in 2024. Some initial signs suggest the investments are bearing fruit. Homes.com monthly unique visitors (MUVs) were up 386% year-on-year to 110 million and the platform has demonstrated good initial traction with agents, with nearly $40 million in net new bookings closed in the first two months of selling. That said, they are still some ways from the entrenched incumbent, being Zillow in this instance, which still has roughly double the number of MUVs. For our part, we take comfort in the fact that management has an exceptional track record of successfully acquiring, integrating and scaling numerous properties over the last 10 years, but also acknowledge that the residential bet does meaningfully widen the potential range of outcomes. As such, whilst we believe CoStar still has a bright future, we used strength to modestly reduce our position and will closely monitor the progress of Homes.com going forward.

BSD Analysis:
Lakehouse presents a balanced view of CoStar Group, acknowledging strong core business fundamentals while expressing caution about the residential expansion strategy. The fund highlights impressive customer retention metrics with 90%+ renewal rates extending to 95%+ for long-term subscribers, indicating strong competitive moats in commercial real estate data. Core segments including CoStar Suite, Apartments.com, and LoopNet continue showing robust growth and market leadership. However, the manager expresses concern about the $1 billion investment in Homes.com to compete with Zillow in residential real estate. While early metrics show promise with 386% growth in monthly unique visitors and $40 million in new bookings, Zillow maintains a significant lead with double the traffic. Lakehouse acknowledges management's strong acquisition track record but notes the residential bet significantly widens outcome ranges, prompting a modest position reduction pending further progress monitoring.

Pitch Summary:
Buenos Aires based e-commerce leader MercadoLibre, was another strong performer this year as the company extended its long track record of impressive growth. The business has been consistently gaining share of the rapidly growing Latin American e-commerce market and also fast emerging as a leading financial services provider in the region via its Fintech platform Mercado Pago. Over the last year, net revenues grew 36% year-on-year in U.S. dollar terms to $15.6 billion while operating margins came in at a healthy 14.6%, up from 11.5% in the previous corresponding period. The business was not without its challenges, though, as the ongoing macro-economic turmoil and election of libertarian president Javier Milei in Argentina raised investor concerns about their exposure to the country. Whilst this was a headwind, MercadoLibre's marketplace business proved resilient, with strength in Brazil and Mexico more than enough to offset weakness in Argentina. Overall gross merchandise value (GMV) still grew at 20% year-on-year in the most recent quarter, which will likely prove to be to worst impacted as it captured the full impact of the 50%-plus devaluation of the Argentine Peso in December 2023. Whilst the economic situation in Argentia remains severe, we are comfortable with the risk as not only has management proved very adept at handling the challenges to date, but post the devaluation, the risk is meaningfully reduced as Argentina now only contributes 13% of the company's total operating income. Bigger picture, despite the scale of their success to date, we believe there is still a long runway for future growth due to the combination of a relatively nascent penetration of e-commerce and a large underbanked population in Latin America. For a network-driven model such as this one, where success breeds success and creates additional optionality, we remain optimistic and of the view that MercadoLibre's best days lay ahead.

BSD Analysis:
Lakehouse maintains a strong bull thesis on MercadoLibre despite Argentine political and economic headwinds. The fund highlights impressive financial performance with 36% revenue growth to $15.6 billion and operating margin expansion from 11.5% to 14.6%. While Argentina's peso devaluation and political uncertainty created near-term challenges, the manager emphasizes the company's geographic diversification, with Brazil and Mexico strength offsetting Argentine weakness. Post-devaluation, Argentina now represents only 13% of operating income, meaningfully reducing country-specific risk. The fund sees significant long-term growth potential driven by low e-commerce penetration and large underbanked populations across Latin America. Lakehouse particularly values MercadoLibre's dual platform strategy, combining marketplace leadership with emerging fintech dominance through Mercado Pago. The network effects inherent in the business model create sustainable competitive advantages and additional growth optionality.

Pitch Summary:
Our second largest contributor was Spotify, which had a transformative year as the company made a significant positive shift towards optimising its cost base. Revenue increased 17% year-on-year and new user acquisition remained robust with the audio streaming platform now boasting over 600 million monthly active users (MAUs) globally. This was encouraging, as healthy MAU growth continues to suggest that Spotify's market is far from saturated, even though the product has been well known for many years now. For many investors who are also Spotify users, you have likely experienced first-hand how deeply ingrained the platform has become in the lifestyle of its users, making it ubiquitous for consuming audio content. The strength of Spotify's value proposition is something we believe has been underappreciated by the market and was in fact tested over the twelve months as Spotify put through multiple price increases. Notably, the company was able to do this with minimal impact on customer churn or new user growth. Away from the core music streaming business, the company is still innovating with new products like the recently launched audiobooks, further improving the customer value proposition and creating new upsell opportunities across its growing customer base. As noted, Spotify also took meaningful steps to manage its cost base, which only increased by 11% year-over-year and is still trending downwards. Previously critiqued for overspending and struggling to achieve profitability, the company responded to changing economic conditions by implementing three rounds of redundancies over 12 months, with the most significant impacting nearly 20% of its workforce. With marketing expenses also reduced, this rigorous cost management has led to Spotify's first period of positive free cash flow – a significant milestone that demonstrates its capability to be profitable, silencing its doubters.

BSD Analysis:
Lakehouse highlights Spotify's transformative year focused on cost optimization and profitability achievement. The fund emphasizes the platform's pricing power, successfully implementing multiple price increases with minimal churn impact, demonstrating strong customer loyalty among 600+ million monthly active users. Revenue growth of 17% year-over-year combined with disciplined cost management (costs up only 11%) resulted in Spotify's first positive free cash flow period, a significant milestone for the previously unprofitable company. The manager notes three rounds of workforce reductions totaling nearly 20% of employees, along with reduced marketing expenses, as evidence of management's commitment to operational efficiency. Lakehouse sees continued growth opportunities through product innovation like audiobooks, creating new upsell opportunities while the core music streaming market remains far from saturated. The fund views Spotify's value proposition as underappreciated by the market.

Pitch Summary:
The Funds top performer was our largest position, Amazon, which handily beat analysts' expectations throughout the year as it delivered robust double-digit revenue growth along with significant improvements in profitability. As we noted in past letters, we firmly believed the inflationary cost pressures and overcapacity issues that dented Amazon's margins post pandemic were manageable and would prove to be transient issues. As such, it has been pleasing to see the progress they have made optimising their cost structure over the last 12 months with operating margins expanding almost three-fold from 3.7% to 10.7%. Despite the progress made to date, we still think many investors are underestimating the opportunity to improve margins further in the years ahead. This is because we see four powerful forces working in tandem to drive operating leverage, being (i) moderating inflation helping ease cost pressures on the logistics front (ii) normalisation as they continue to grow into their logistics footprint (iii) management (finally) getting disciplined on costs, and (iv) the ongoing mix shift as the highest margin segments of the business (3P e-commerce, subscriptions, advertising and AWS) grow faster and become a larger part of the overall pie. It's also worth noting that whilst the stock has more than doubled over the last 18 months, it is still cheap. At current levels, it's valuation of 16x EBITDA is the most attractive it's been since the Global Financial Crisis, and hence, we continue to believe it's a compelling asymmetric setup. We remain confident that patient shareholders will be treated well as the company is set to deliver many years of solid revenue growth and margin expansion.

BSD Analysis:
Lakehouse presents a compelling bull case for Amazon centered on operational leverage and margin expansion. The fund highlights Amazon's remarkable operating margin improvement from 3.7% to 10.7% over 12 months, driven by cost optimization following pandemic-related inefficiencies. The manager identifies four key margin expansion drivers: moderating inflation reducing logistics costs, normalization as Amazon grows into its logistics footprint, improved cost discipline from management, and favorable business mix shift toward higher-margin segments like third-party e-commerce, subscriptions, advertising, and AWS. Despite the stock doubling over 18 months, Lakehouse argues the valuation remains attractive at 16x EBITDA, the cheapest since the Global Financial Crisis. The fund maintains high conviction in Amazon as their largest position, expecting continued revenue growth and margin expansion to drive long-term outperformance.

Pitch Summary:
Cogstate is a new and previously undisclosed position which dragged Fund performance down by -1.1%. The business is a leading provider of computerised cognitive tests used as key measurement endpoints in clinical trials for Alzheimer's disease. Put very simply, Cogstate are a provider of 'picks and shovels' for Alzheimer's treatment research. Alzheimer's disease is a neurodegenerative condition currently affecting over 55 million people worldwide, the number of people impacted expected to roughly double every 20 years. It remains a significant cause of death, and only recently have there been US FDA-approved treatments that have proven to slow the rate of cognitive decline in patients. But the disease remains an unmet medical need, and the aging population will only increase the patient pool, presenting a significant challenge for society and an opportunity for pharmaceutical companies. We expect the recent breakthrough drug discovery to act as a catalyst for further investment into research. This has been the case for other conditions such as multiple sclerosis, and we see no reason why history will not repeat itself with Alzheimer's disease as well, particularly given the growing scale of the problem. Back to the earlier analogy of viewing an investment in Cogstate as a 'picks and shovels' approach; it offers a means of gaining exposure to this growing thematic without the binary risks of drug development. Cogstate is a company we have followed for several years, but held off on investing until more concrete developments in regulatory and reimbursement pathways were clearly defined. With these hurdles now resolved and two approved drugs from different pharmaceutical companies on the market, we believe this creates a favourable environment that supports a pipeline of continual drug development. The lack of uptake in clinical trial contracts for now, coupled with lower levels of liquidity, has resulted in it being a main detractor for the Fund. However, this investment thesis is still in its early stages for the Fund, we believe the company has a bright future in the years ahead as it helps to solve a generational societal problem.

BSD Analysis:
The manager presents Cogstate as a strategic 'picks and shovels' play on the expanding Alzheimer's research market, avoiding binary drug development risks while gaining exposure to the growing therapeutic area. The investment thesis is anchored on compelling demographics, with Alzheimer's affecting 55+ million people globally and expected to double every 20 years due to aging populations. Recent FDA approvals of Alzheimer's treatments from multiple pharmaceutical companies validate the therapeutic pathway and should catalyze increased R&D investment, similar to historical patterns in multiple sclerosis. Cogstate's computerized cognitive testing platform serves as essential infrastructure for clinical trials, positioning the company to benefit from expanded research activity regardless of individual drug success or failure. The manager demonstrates patience and discipline, having monitored the company for years before investing once regulatory and reimbursement pathways were established. While acknowledging near-term headwinds from slow clinical trial contract uptake and liquidity constraints, the manager maintains conviction in the long-term opportunity. The position represents early-stage exposure to addressing a generational healthcare challenge with significant societal impact and commercial potential.

Pitch Summary:
Impedimed had a bumpy year as the company endured a shareholder-led overhaul of the board and management team. The net impact of the share price decline was -3.2% at the Fund level. The board and management changes were a very big distraction for the business, and sales efforts suffered. The company is young, not yet cash flow positive, and its thin balance sheet has put it in a race against time to accelerate topline growth to cover costs and avoid (another) highly dilutive capital raise. On a more pleasing note, the business continues to make progress building out its sales ecosystem. Despite facing challenges, the company's highly effective solution, boasting a 97% device retention rate, allowed them to persevere. As of the end of the third quarter, the company had signed up private payors covering 42% of the U.S. population, including over 80% coverage in 16 states. We remain comfortable with the progress to be added to reimbursement policies and are excited that the payor landscape could look very different for the company at the end of calendar 2024, which should serve to accelerate sales growth. The opportunity for Impedimed is attractive, with execution being a key determinant of success from here, but a wide range of outcomes remain, and the position is sized accordingly.

BSD Analysis:
The manager presents a balanced view of Impedimed, acknowledging significant execution challenges while maintaining cautious optimism about the underlying opportunity. The company faced substantial disruption from shareholder-led board and management overhaul, creating operational distractions that impacted sales performance. Financial pressures are mounting as the pre-profitability company races to achieve cash flow positive status before requiring another dilutive capital raise. However, the fundamental value proposition remains compelling with 97% device retention rates demonstrating strong customer satisfaction and product efficacy. Reimbursement progress continues with private payors now covering 42% of the U.S. population and over 80% coverage in 16 states. The manager expects the payor landscape to improve significantly by end of 2024, which could serve as a major catalyst for sales acceleration. While acknowledging the attractive market opportunity, the manager appropriately sizes the position to reflect execution risks and wide range of potential outcomes. The investment represents a high-risk, high-reward opportunity dependent on management's ability to execute commercial strategy while managing cash burn.

Pitch Summary:
Nanosonics stands as another reminder of the volatility that can persist in listed markets over short periods; it swung from being a top contributor to a top detraction in 12 months. The share price declined -36.9% in fiscal 2024 resulting in a -3.3% drag on Fund returns. We don't believe the long-term fundamentals, nor the intrinsic value, have moved to the extent of the share price. Revenue fell -2% in the first half of the financial year as the business faced a tougher selling environment with hospitals running tighter budgets and delaying equipment upgrades. Following a recent update, conditions look to have meaningfully improved in the second half. Moving forward, the opportunity for the company is to further penetrate its customer base, expanding use of the Trophon across hospital departments and completing the upgrade cycle to the new generation machines. Further, geographic expansion in Europe, the Middle East and throughout the Asia Pacific markets are still in its early stages, offering further growth for the Trophon platform. Management had to navigate alternate ways to sell in a more budget-constrained environment, whilst also investing in the platform to commercialise their long-anticipated CORIS product. This automated endoscope cleaning system tackles a significant challenge and based on studies to date, has the potential to unlock a substantial market opportunity for the business.

BSD Analysis:
Despite a challenging year with 37% share price decline, the manager maintains conviction that Nanosonics' intrinsic value remains intact. The company faced temporary headwinds from hospital budget constraints and delayed equipment upgrades, resulting in modest 2% revenue decline in the first half. However, conditions appear to be improving in the second half, suggesting the weakness was cyclical rather than structural. The investment thesis centers on significant penetration opportunities within existing customers, expanding Trophon usage across hospital departments and completing upgrade cycles to newer generation machines. Geographic expansion across Europe, Middle East, and Asia Pacific markets remains in early stages, providing substantial growth runway. The upcoming CORIS automated endoscope cleaning system represents a major catalyst, addressing significant market needs and potentially unlocking substantial new revenue streams. Management's ability to adapt sales strategies during budget-constrained periods while continuing platform investments demonstrates operational resilience. The manager views current weakness as temporary market volatility rather than fundamental deterioration, maintaining long-term conviction in the infection prevention growth story.

Pitch Summary:
In third place was Audinate, which frequent readers may have noticed has been a top detractor in our recent monthly updates. Nonetheless, the business remained a top 3 contributor for the year, with shares up 41.1%, contributing 4.8% to the Fund return. Within the year, we capitalised on some strong price movements trimming our stake, but it remains a significant holding for the Fund. Zooming out, Audinate executed well on its long-term growth: continuing to proliferate its Dante network while remaining profitable and positioning the business for future growth. The Dante ecosystem is stronger than ever, with over 4,000 Dante-enabled products available and many more in development. The video segment and software services for AV users are still in their early stages but provide Audinate with significant growth runway. While short-term economic headwinds could dampen demand for AV products, we remain focused on the longer-term industry transition from analogue (copper cables and ponytails) to digital connectivity (ethernet cables and remote cloud management). Although the combined network AV market is estimated to exceed $2 billion, Audinate currently holds a low single-digit market share. Achieving success in the video segments is important, we are particularly excited about the long-term vision of implementing Dante as a software solution as this transition away from single-sale hardware dependency promises higher-quality recurring revenue. Audinate is profitable and well-capitalised after a $70 million capital raise in September 2023, aimed at supporting its next leg of growth. The funds were intended to accelerate development and pursue potential acquisitions to strengthen its position in the video segment. While no acquisitions have been finalised, management has diligently vetted opportunities. We support the strategic direction and commend the board and management on their patience in finding the right opportunity and price. Meanwhile, the search for a replacement CFO continues, but between the company's dominant market position, growth runway, strong balance sheet and standing as an ASX200 company we expect the business will attract a talented, capable individual.

BSD Analysis:
The manager maintains strong conviction in Audinate's long-term digital transformation thesis despite recent volatility. The company delivered 41% share price appreciation and 4.8% fund contribution, demonstrating the strength of the Dante ecosystem with over 4,000 enabled products. Audinate is well-positioned to capitalize on the industry transition from analog to digital audio-visual connectivity, addressing a $2+ billion addressable market where they currently hold low single-digit share. The expansion into video segments and software-as-a-service offerings represents significant growth opportunities beyond the core audio networking business. Management's strategic focus on recurring revenue models through software solutions should improve business quality and predictability. The company maintains profitability while investing for growth, supported by a $70 million capital raise providing strategic flexibility for development and acquisitions. The manager appreciates management's disciplined approach to M&A, waiting for appropriate opportunities and pricing. Despite CFO transition challenges, the company's market-leading position and ASX200 status should attract quality talent to execute the growth strategy.

Pitch Summary:
Altium was subject to a takeover bid by $50+ billion market-cap Japanese semiconductor manufacturer, Renesas Electronics Corporation, which we discussed at some length in our February letter. Lakehouse had owned Altium since launching in 2016 -- and generated compound returns of over 20% per annum -- but those healthy returns were certainly not delivered in a straight line. The stock fell from its highs by more than 25% six times, and by over 40% on three occasions during our investment period. The biggest drawdown was over 44% in the depths of the tech stock selloff in May 2022. Remaining patient and taking a long-term view of the value being created within Altium was, ultimately, handsomely rewarded.

BSD Analysis:
The manager's Altium investment exemplifies successful long-term value creation despite significant volatility. Acquired at fund inception in 2016, the position generated compound annual returns exceeding 20% over nearly eight years before being acquired by Renesas Electronics. The investment thesis was validated through a strategic acquisition by a major semiconductor manufacturer, demonstrating the strategic value of Altium's PCB design software platform. The manager's conviction was tested through multiple severe drawdowns, including six declines exceeding 25% and three surpassing 40%, with the largest being 44% during the 2022 tech selloff. This case study reinforces the importance of maintaining long-term perspective and conviction in quality technology businesses. The successful exit through takeover at attractive valuation provides validation of the underlying business quality and strategic positioning. The manager's patience through volatility cycles ultimately delivered substantial returns, highlighting the benefits of long-term holding periods for quality growth companies.

Pitch Summary:
Pro Medicus delivered another strong year and contributed 5.9% of the Fund's return. It signed a record $245 million in minimum total contract value (TCV) for the year, including a monster $140 million 10-year deal with Baylor Scott & White Health – the largest in the company's history. This compares strongly to the $104 million in minimum TCV signed last fiscal year. A particularly pleasing feature of the contract wins is that most were for the full stack of Visage 7 products, demonstrating strong traction across the product suite and resulting in larger contract sizing, and all are to be implemented in the cloud. Demand for cloud implementations have accelerated in recent years – partly due to pandemic lockdowns, and in part due to the acceptance that cloud is more secure than on premise -- helping extend Pro Medicus' market leadership as its rivals are yet to deliver a full cloud implementation. The business is debt-free and incredibly profitable, with about two-thirds of each incremental dollar of revenue falling to pre-tax profit. This strong profitability has seen the net cash balance swell beyond $130 million, providing it with great optionality including for new product development and M&A. The business has a strong existing competitive position, expanding pipeline beyond its traditional client base, a growing product offering and remains less than 8% penetrated in its core North American market providing a very long runway for growth in the years ahead. The Fund has held Pro Medicus since its inception. We have held firmly as it has steadily grown to become one of the highest quality businesses on the ASX -- and is now priced as such. We continue to manage the position size in light of the elevated market price, balancing it with our mantra to 'let winners run'.

BSD Analysis:
The manager presents a compelling bull case for Pro Medicus, highlighting exceptional contract momentum with record $245 million TCV including a landmark $140 million 10-year deal. The thesis centers on the company's dominant position in cloud-based medical imaging software, where competitors have yet to deliver full cloud implementations. Pro Medicus demonstrates exceptional unit economics with two-thirds of incremental revenue flowing to pre-tax profit, generating a robust $130+ million net cash position. The company operates in a massive addressable market with less than 8% penetration in North America, providing substantial runway for expansion. Management has successfully transitioned customers to their full Visage 7 product stack, driving larger contract values and deeper customer relationships. The debt-free balance sheet provides strategic flexibility for product development and M&A opportunities. While acknowledging elevated valuation, the manager maintains conviction in the long-term growth trajectory of this market-leading healthcare technology platform.

Pitch Summary:
Gerresheimer is a German health care company specializing in pharmaceutical packaging. The company produces vials, syringes, pens, injectors and plastics to deliver therapies to patients. Pharmaceutical packing is designed and implemented during the early stages of drug development and accompanies drugs throughout the approval process. Hence, high-quality, consistent packaging is critical to drug development and approval. Gerresheimer has exposure to some of the fastest-growing pharmaceutical categories, such as biologics, biosimilars and GLP-1s. Additionally, the company has made significant investments in premium products and services, which should improve its margins. We initiated a position in the stock as we believe improving growth and profitability are not yet reflected in the current price.

BSD Analysis:
Diamond Hill initiated Gerresheimer as a play on high-growth pharmaceutical packaging with improving fundamentals. The manager emphasizes the critical nature of pharmaceutical packaging, which is integrated early in drug development and remains throughout the approval process, creating sticky customer relationships. The investment thesis centers on Gerresheimer's exposure to the fastest-growing pharmaceutical segments including biologics, biosimilars, and GLP-1 diabetes/obesity treatments. The company's strategic investments in premium products and services should drive margin expansion over time. With pharmaceutical packaging being mission-critical for drug efficacy and regulatory approval, Gerresheimer benefits from high switching costs and recurring revenue streams. The fund believes the market hasn't yet recognized the improving growth trajectory and profitability enhancements from the company's premium product strategy.