Investment Pitches

Pitch Summary:
Global logistics company FedEx was another top contributor for the year, driven by strong performance in the first half of the year. FedEx benefitted from strong pricing power in the face of rising inflation that improved earnings vs. low expectations. Effective cost control at the Ground business helped the company beat guidance in the first half, and margins increased even with weak overall revenues. In the last two weeks of the year, FedEx's share price was punished after F2Q23 results disappointed, driven by revenue and earnings weakness at Express. The company revised revenue guidance down from flat for the fiscal year to down low single-digits. However, Ground and Freight both had strong quarters, and FedEx continued to buy back discounted shares. The Ground business comprises the majority of our appraisal value for FedEx, with Freight and Express comprising smaller but equal values. We added to our position in the fourth quarter after the price declined, and our appraisal remained steady.

BSD Analysis:
Longleaf Partners maintains conviction in FedEx despite recent volatility, viewing the Ground segment as the primary value driver in their appraisal. The fund highlights FedEx's demonstrated pricing power during inflationary periods and effective cost management that drove margin expansion despite revenue headwinds. While Express segment weakness led to revised guidance and late-year stock pressure, the stronger performance of Ground and Freight divisions supports their investment thesis. Management's continued share repurchases at discounted levels demonstrates capital allocation discipline. The fund's decision to add to their position during Q4 weakness, while maintaining steady appraisal values, reflects confidence in the underlying business fundamentals. Their segmented valuation approach (Ground as majority value, with Freight and Express as smaller equal components) suggests a sum-of-the-parts investment case. The logistics giant's ability to generate cash flow and return capital to shareholders remains attractive despite cyclical headwinds.

Pitch Summary:
Apparel company PVH, which owns brands Tommy Hilfiger and Calvin Klein, was the top performer in the fourth quarter and among the top contributors for the year. CEO Stefan Larsson, whom we previously partnered with at Ralph Lauren, has done a great job improving brand power while growing margins and FCF per share in a challenging environment. PVH reported a solid 3Q and is on track to buy back over 10% of shares this year. We expect more repurchases after the sale of its Warners, Olga and True and Co businesses in the period. This sale highlights the company's continued focus on growing its core brands Calvin Klein and Tommy Hilfiger.

BSD Analysis:
Longleaf Partners expresses strong confidence in PVH Corp under CEO Stefan Larsson's leadership, citing their previous successful partnership with him at Ralph Lauren. The fund highlights Larsson's execution in strengthening brand power while expanding margins and free cash flow per share despite challenging market conditions. PVH's aggressive capital allocation strategy includes buying back over 10% of shares in 2023, with additional repurchases expected following asset sales. The divestiture of non-core brands (Warners, Olga, True and Co) demonstrates management's strategic focus on their premium Calvin Klein and Tommy Hilfiger franchises. Strong Q3 results and the stock's position as both a top quarterly and annual performer validate the investment thesis. The combination of brand strength, margin expansion, and shareholder-friendly capital allocation creates a compelling value proposition. Management's portfolio optimization strategy should drive improved returns on invested capital for the core business.

Pitch Summary:
A good example in the portfolio today is Warner Bros Discovery (WBD), a company that we bought too early but that remains a holding in the portfolio. Our average price for the initial WBD investment in 2021 was $26.48, or a P/V ratio in the mid-60s%. However, P/EV on the initial report was 79%. Under the new rules, we would not pay that price for the company today. We most likely would have waited for a mid-60s% P/EV, which would have equated to a $mid-teens entry price. In this case, we would have missed a too-large initial downturn in the stock price. The overweight rule dictated that we trimmed the position after the price ran up in the first half of 2023, which benefitted overall performance as the stock price subsequently fell again. However, even with the new rule lens, we remain confident in our case for the business and management's ability to deliver going forward.

BSD Analysis:
Longleaf Partners acknowledges they entered Warner Bros Discovery too early at $26.48 in 2021, representing a mid-60s% P/V ratio but a concerning 79% P/EV ratio. Under their refined investment rules implemented in 2022, they would have waited for a mid-60s% P/EV entry point around the mid-teens price level. The fund trimmed the position during the first half 2023 rally, which proved beneficial as the stock subsequently declined. Despite the timing issues and volatility, management maintains confidence in WBD's underlying business quality and the management team's ability to execute their strategy. The position serves as a case study for their improved portfolio management process that emphasizes P/EV ratios for leveraged businesses. The fund's continued holding suggests they believe the media conglomerate remains undervalued despite execution challenges. Their willingness to maintain the position through volatility reflects conviction in the long-term value creation potential.

Pitch Summary:
Westrock Coffee, which is the "brand behind the brand" producing and distributing coffee, tea and extracts for larger entities, was another top detractor for the year. Westrock faced a challenging summer with inflation, heat waves making hot coffee less popular and high gas prices negatively impacting traffic at convenience stores and rest stops. 3Q23 also had disappointing results driven by traditional roasted coffee volumes declining materially due to a variety of factors that should not continue, although flavors, ingredients and single serve were strong. The company lowered guidance for the full year and indicated that the expected capacity from its new Conway, Arkansas facility will be delayed, only coming online towards the end of 2024 / early 2025. The company reiterated its expectations for long-term earnings power remain intact, but our appraisal value is down slightly. We think the management and board have learned good lessons this year and still have strong long-term records.

BSD Analysis:
Westrock Coffee faced a confluence of temporary headwinds that pressured near-term performance while the underlying business model remains intact. The company's "brand behind the brand" positioning as a B2B supplier to major retailers and restaurant chains provides defensive characteristics, though cyclical factors like weather, inflation, and gas prices created volume pressures in traditional roasted coffee segments. The strength in flavors, ingredients, and single-serve categories demonstrates portfolio diversification benefits and growth potential in higher-margin segments. The Conway facility delay pushes capacity expansion to late 2024/early 2025, creating near-term growth constraints but preserving capital during challenging market conditions. Management's acknowledgment of lessons learned and their historical track record provide confidence in operational adjustments. The manager's slight reduction in appraisal value reflects current headwinds while maintaining conviction in long-term earnings power, suggesting a measured approach to temporary cyclical pressures.

Pitch Summary:
Global hotel operator Hyatt was another strong contributor in the fourth quarter and for the year, outperforming expectations that the post-COVID travel rebound would ease in 2023. Hyatt consistently reported strong results in the year and guided mid-to-high single-digits of revenue per available room (RevPAR) growth in the back half of the year, driven by a continued recovery in Asia Pacific and ongoing improvements in group and business demand. Hyatt announced the value-additive purchase of UK booking company Mr & Mrs Smith and bought back discounted shares at a steady pace.

BSD Analysis:
Hyatt's performance demonstrates the durability of the travel recovery beyond initial expectations, with the company consistently exceeding forecasts for post-COVID normalization. The guided mid-to-high single-digit RevPAR growth in the back half of 2023 reflects both geographic diversification benefits from Asia Pacific recovery and segment strength in group and business travel. Management's strategic acquisition of Mr & Mrs Smith expands the company's luxury booking capabilities and distribution channels, representing value-additive growth rather than pure scale expansion. The steady pace of share repurchases at discounted levels demonstrates disciplined capital allocation while the business generates strong cash flows. Hyatt's ability to outperform travel rebound expectations suggests the company is well-positioned to benefit from continued normalization in business travel and international markets. The combination of operational execution, strategic acquisitions, and shareholder-friendly capital allocation creates multiple value drivers.

Pitch Summary:
New York commercial real estate and tourism company Empire State Realty Trust (ESRT) was a top contributor in the fourth quarter and for the year, bouncing back from a challenging real estate environment that made it a top detractor last year. After a slow start in 1Q23, ESRT resolved the significant overhang of losing Signature Bank as a flagship tenant, announcing that Flagstar Bank took over the entire 300,000+ square foot lease at 1400 Broadway at a comparable rate. The company reported a solid 2Q and 3Q23, with good operating results for the NYC office business and raising 2023 full year guidance. ESRT outperformed its peer group by 4000bps, highlighting the importance of our great partners. We trimmed our position in the quarter on the back of price strength but think the company provides attractive upside from still depressed levels today.

BSD Analysis:
Empire State Realty Trust exemplifies the value of quality management during real estate market stress, with the company successfully navigating the loss of a major tenant while maintaining rental rates. The replacement of Signature Bank with Flagstar Bank for the entire 300,000+ square foot lease at comparable rates demonstrates the underlying demand for prime NYC office space and management's leasing capabilities. ESRT's 4,000 basis point outperformance versus peers underscores the importance of operational excellence and strategic positioning in challenging markets. The company's ability to raise full-year guidance while reporting solid quarterly results across Q2 and Q3 indicates improving fundamentals despite broader real estate headwinds. Management's track record of value creation through active asset management and strategic initiatives provides confidence in continued execution. The manager's position trimming on strength while maintaining conviction suggests attractive risk-adjusted returns remain available at current levels.

Pitch Summary:
Corn flour and tortilla manufacturing company GRUMA was again a top performer for the year, following on its 2022 strength. GRUMA consistently reported solid results with positive growth ahead of 2023 full year company guidance. 3Q23 saw FCF turning positive, and the company used the cash to pay down debt before likely turning back to share repurchase, as it has done before. This strong performance came despite headwinds such as foreign exchange and geopolitical concerns not specific to GRUMA.

BSD Analysis:
GRUMA demonstrates the resilience of a dominant market position in essential food staples, maintaining consistent operational execution despite macro headwinds. The company's ability to generate positive growth ahead of guidance while navigating foreign exchange volatility and geopolitical pressures highlights the defensive characteristics of its corn flour and tortilla business model. The inflection to positive free cash flow in Q3 2023 enabled disciplined capital allocation, prioritizing debt reduction before returning to historical share repurchase programs. This sequential approach to capital deployment reflects management's commitment to balance sheet strength while positioning for shareholder returns. The sustained performance building on 2022 strength suggests the business model's durability and management's ability to execute consistently across market cycles. GRUMA's global market leadership in corn-based food products provides pricing power and operational scale advantages.

Pitch Summary:
Construction materials and contracting company Knife River was a top contributor for the year and for the quarter. We initiated the position this year after it was spun out of MDU Resources Group, a utility holding company in North Dakota. We were familiar with the business from previous work done on MDU. Knife River was the business that originally attracted us to MDU, and the spin gave us the opportunity to buy the best business as a standalone stock at a discount when utility shareholders focused on a steady dividend dumped it. The business had not been optimized for a long time under MDU but still delivered solid mid-single digit revenue growth over the prior decade. We believe CEO Brian Gray and his plan to improve cash flow represents an improvement over the previous path. Knife River reported strong results in its first two quarters, beating expectations and company guidance.

BSD Analysis:
The manager capitalized on a classic spinoff opportunity where the parent company's utility shareholders discarded the construction materials business due to dividend focus and lack of strategic fit. Knife River represents the crown jewel asset that originally attracted the manager to MDU Resources, now available as a pure-play at a discount. The business demonstrated resilience with mid-single digit revenue growth over the prior decade despite being under-optimized within the utility holding company structure. CEO Brian Gray's cash flow improvement plan suggests meaningful operational upside as the standalone entity can now focus on maximizing returns rather than supporting utility dividend requirements. Early results validate the thesis with two consecutive quarters of beats against both expectations and company guidance. The spinoff structure created a temporary valuation disconnect that the manager exploited effectively.

Pitch Summary:
Health insurance and software platform Oscar Health was the top contributor in the fourth quarter and for the year, after the stock price appreciated over 270% in 2023. Oscar was a top detractor in 2022 and highlights the importance of pragmatically revisiting the case for our decliners and not panic selling or adding too early on price declines. It is also a good reminder that game-changing value creation can come in unexpected ways, as it did with Mark Bertolini joining as CEO at Oscar this year. We couldn't have modeled this as a driver, but we did recognize the stock price had become unduly punished alongside most tech-related businesses in 2022 and had confidence the business would rebound strongly. We remained engaged with management and the board to encourage proactive steps to close the extreme value gap. Oscar did benefit from a general rally in tech businesses coming out of 2022 weakness, but the positive price movement was primarily a direct reflection on the management upgrade and operational execution. Mark Bertolini brings significant operational expertise, as well as a strong endorsement value to the business, given his long-term track record as CEO of Aetna, which he sold to CVS for a great outcome for Aetna shareholders. Bertolini's compensation package aligns his interests with shareholders, and he only really starts getting paid when the stock trades at $11 (vs the still discounted ~$9 level where the stock ended the year). In his first year, he has in quick order improved cost control and operational efficiency that drove EBITDA strength. Oscar reported another great quarter in November, beating expectations across most metrics and increasing 2024 guidance. The original venture investor holders beyond Thrive remain an overhang on the share price, and Oscar still offers significant upside from here.

BSD Analysis:
The manager presents a compelling turnaround story centered on new CEO Mark Bertolini's transformational leadership at Oscar Health. Bertolini's proven track record as former Aetna CEO who delivered strong shareholder returns through the CVS sale provides credibility to the operational improvements already underway. The alignment of his compensation structure, which only pays meaningfully above $11 per share versus the current ~$9 level, demonstrates skin in the game. Operational execution has been swift, with improved cost control and efficiency driving EBITDA strength and consistent quarterly beats with raised 2024 guidance. The 270% stock appreciation in 2023 reflects both the management upgrade and fundamental business improvements rather than just sector rotation. Despite the strong performance, the manager sees continued upside potential as venture capital overhang creates ongoing selling pressure that should dissipate over time.

Pitch Summary:
SGMA is a provider of electronic manufacturing services that was added as a holding during the first half of the year. As a contract manufacturer, Sigmatron is far from a glamorous business with its razor thin margins, capital intensity, and the ability of its customers to delay purchase orders with limited warning. These unattractive attributes along with a heavy debt load, declining earnings, and management's capital allocation checkered past are why SGMA can be purchased for less than one third of book value and 3x normalized earnings. SGMA has been near breakeven through the first two quarters of FY24 and has already indicated that Q3 appears challenging. The consumer products segment of their business appears to be struggling the most as higher interest rates have led to a significant slowdown in large consumer goods purchases. Slowing inflation and Fed rate cuts could provide a tailwind for the consumer products segment to return to growth. On a positive note, the company was able to release nearly $20M from inventory during the first six months. I expect inventory levels to decrease further to more historical levels of revenue, providing an additional $20-30M for debt paydown. The company also announced several large new contracts but are not expected to provide a benefit until FY25. The immediate future looks pessimistic but reduced debt, lower interest rates, and the impact of new contracts will eventually have a positive impact on Sigmatron's fundamentals.

BSD Analysis:
SRK Capital presents a contrarian value play in SGMA, acknowledging the significant challenges facing this electronic manufacturing services provider. The manager recognizes the business's inherent difficulties including razor-thin margins, capital intensity, and customer concentration risks, which combined with heavy debt and poor historical capital allocation have created an extreme valuation discount at less than one-third of book value and 3x normalized earnings. Despite near-term headwinds from higher interest rates impacting consumer products demand, the manager identifies several positive catalysts. The $20M inventory release in six months demonstrates operational improvements, with potential for an additional $20-30M in debt reduction. New contract wins provide FY25 upside, while potential Fed rate cuts could revive the struggling consumer segment. This represents a classic deep value turnaround situation where the manager believes the market has overly discounted the company's prospects relative to its asset base and normalized earning power.

Pitch Summary:
HGBL reported Q3 earnings that failed to meet expectations due to a credit loss reserve that was taken in the specialty lending segment, caused by their largest borrower experiencing slower charged-off collections. I don't believe this is a long-term issue as slower collections are being experienced industry-wide as the level of charge-offs continues to normalize to pre-pandemic trends. This normalization continues to benefit Heritage's brokerage business with operating income growth of 64% year-over-year and 140% for the nine months of 2023. Reports from credit card issuers indicate that net charge-offs continue to increase above 2019 levels. An interesting anecdote driving charge-offs is the millions of Americans whose credit worthiness improved during the pandemic thanks to less spending, government stimulus, and forbearance on some payments. This migration to better risk tiers appears to have deceived many of these lenders as they optimistically lent to this group of individuals who have now seemingly reverted back to their historical credit worthiness and are falling behind on their debt payments. This trend should drive continued growth in revenue and earnings for Heritage Global. The stock sell-off following the Q3 earnings report provided us with an attractive opportunity to add to our position at less than 10x expected earnings.

BSD Analysis:
SRK Capital views HGBL's Q3 earnings disappointment as a temporary setback rather than a fundamental issue. The manager attributes the credit loss reserve to industry-wide normalization of charge-offs returning to pre-pandemic levels, which actually benefits Heritage's core brokerage business. The 64% year-over-year operating income growth in brokerage and 140% growth for nine months demonstrates the underlying business strength. The manager provides insightful analysis on post-pandemic credit dynamics, explaining how temporarily improved credit profiles during COVID led to overlending that is now reverting to historical norms. This credit normalization trend should drive continued growth in Heritage's distressed asset business as charge-offs increase industry-wide. The post-earnings selloff created an attractive entry point at less than 10x expected earnings, representing compelling value for a business benefiting from secular credit trends. The investment thesis centers on the cyclical nature of credit markets and Heritage's positioning to capitalize on increasing distressed opportunities.

Pitch Summary:
VASO reported relatively disappointing earnings for Q3 as revenue decreased 2% year-over-year and net income was impacted as operating expenses increased due to investment in new programs and the impact of inflation on wages. In December, Vaso announced that the company is uplisting from the OTCQX market to the Nasdaq Stock Market via merger with a SPAC. The transaction is expected to be completed by the end of this quarter and values Vaso at a pro forma equity value of approximately $176 million. From the S-4 that was filed by Achari Ventures (AVHI) the pro forma equity value of $176 million is equal to a current value of $0.93/share for VASO. This is a significant discount to the current trading price of $0.28/share. This significant discount exists for several reasons, but mostly because $176M is an arbitrary number that doesn't hold much meaning, it will be up to the market to determine the fair value for the Nasdaq listed VASO. This is a rather odd transaction as SPACs don't typically merge with already publicly traded companies, but I believe a Nasdaq listed Vaso with improved investor relations and governance is worth a premium to its current status. We will receive new shares of the Nasdaq listed Vaso that I believe will initially trade somewhere around $9.31 and will have to decline by approximately 70% for us to lose money from today's market value of VASO. Also, due to a put option provision that the SPAC founders have, Vaso is incentivized to keep the newly traded stock above $8/share for six months following the initial twelve months from the closing of the transaction or they will be required to repurchase shares from the SPAC founders.

BSD Analysis:
SRK Capital identifies a significant arbitrage opportunity in VASO's unusual SPAC merger transaction. Despite disappointing Q3 earnings with declining revenue and margin pressure, the manager focuses on the structural mispricing created by the uplisting process. The pro forma valuation of $176 million implies a value of $0.93 per current share versus the $0.28 trading price, representing a substantial discount. The manager believes the Nasdaq listing will command a premium due to improved liquidity, investor relations, and governance standards. The asymmetric risk profile is compelling, with the manager estimating initial trading around $9.31 for new shares and requiring a 70% decline to break even from current levels. The put option provision creates additional downside protection by incentivizing management to maintain the stock above $8 per share. This represents a classic special situation investment with limited fundamental downside and significant upside potential from market re-rating.

Pitch Summary:
ISSC is a previously undisclosed position operating in the aerospace sector with robust double-digit growth, attractive margins, operating leverage, and an acquisition strategy in place to take advantage of significant incremental margins from increased manufacturing capacity utilization. The company's products are focused within the cockpit and cabin of business, cargo, and military aircraft for OEMs as well as aftermarket retrofits. Products consist of flat panel displays, flight management systems, and proprietary flight control technology such as their utility management system (UMS) and autothrottle which reduce pilot workload and enhance safety. The appealing opportunity with ISSC is for the company to continue growing their existing product lines at historical growth rates of ~20% while bolting on acquisitions and bringing the acquired products into their existing operations to increase capacity utilization. In July, the company announced their first acquisition of inertial, communication, and navigation product lines from Honeywell that produced $9.5M of net income in 2022 for a purchase price of $36M or 4x earnings. The acquisition has the effect of increasing capacity utilization to 50% and nearly doubling earnings for FY24. ISSC was one of seven bidders and were chosen for their expertise and reliability as these products still have decades of life left and Honeywell was interested in finding a buyer who will be able to perform to their standards for large OEMs like Boeing, Airbus, Embraer, and Gulfstream rather than accepting the highest bidder. The acquisition was funded through a combination of cash and debt, which has been rapidly paid down from $18M to under $12M in less than 6 months. The debt paydown is a testament to the high level of cash flow the company generates and has afforded them increased funding from their lenders. Currently the market is valuing ISSC at less than 12x FY24E earnings, a material discount to peers, and is giving zero benefit to the impact additional acquisitions will have on the company's future earnings power. I think it's likely that the company will complete an additional acquisition this year, possibly with Honeywell again.

BSD Analysis:
SRK Capital presents a compelling bull case for ISSC based on a combination of organic growth and strategic acquisitions. The manager highlights the company's strong fundamentals including 20% historical growth rates, attractive margins, and significant operating leverage potential. The July acquisition of Honeywell product lines at 4x earnings appears strategically sound, doubling capacity utilization to 50% and nearly doubling FY24 earnings. The rapid debt paydown from $18M to under $12M in six months demonstrates strong cash generation capabilities. At less than 12x FY24E earnings, ISSC trades at a material discount to aerospace peers despite its growth profile. The manager sees additional acquisition opportunities, particularly with Honeywell, as a key catalyst for future value creation. The investment thesis centers on the market's failure to properly value the company's acquisition-driven growth strategy and operational improvements.

Pitch Summary:
We also purchased John Wiley & Sons (ticker: WLY), one of the world's leading publishers of academic research. Founded in New York City as a small printing shop in 1807, Wiley is one of the oldest independent companies in the U.S. Early in its history, Wiley served legendary American writers including Herman Melville, Edgar Allen Poe, Nathaniel Hawthorne, and James Fenimore Cooper. The firm even supplied books to repopulate the Library of Congress after it was burned in the War of 1812. Today, Wiley is one of the leading global providers of academic journals, and it also sells books and courseware for higher education and professional roles. The company's stock has suffered from quality control issues tied to a 2021 acquisition, and Wiley's CEO was pushed out abruptly in September while the firm works to divest non-core operations. Furthermore, a long-term decline in sales of printed textbooks has weighed on results, but soon this should no longer be a material headwind. The academic journals business at the heart of Wiley has strong profitability and high barriers to entry. The company generates consistent cash flow, and new management may focus more on returning capital to shareholders than value-destructive M&A. We picked up Wiley's stock near multiyear lows when it was selling for 10x trailing free cash flow and at a dividend yield exceeding 4.5%.

BSD Analysis:
Palm Valley Capital acquired Wiley at an attractive 10x trailing free cash flow multiple and 4.5%+ dividend yield near multiyear lows. The investment thesis centers on the high-quality academic journals business, which features strong profitability and significant barriers to entry through established relationships with researchers and institutions. While the company faces headwinds from declining print textbook sales and integration issues from a 2021 acquisition, these appear to be temporary challenges. The recent CEO departure and focus on divesting non-core operations suggests improved capital allocation under new management. The core journals business generates consistent cash flows and should benefit from the secular shift away from print textbooks, positioning Wiley for improved returns to shareholders rather than value-destructive acquisitions.

Pitch Summary:
During the quarter we purchased Monro, Inc. (ticker: MNRO). Founded in 1957, Monro is a leading auto repair and tire sales company in the U.S. The company's stock declined throughout most of the year due to weaker than expected sales. As middle- and lower-income consumers struggled to make ends meet, many of Monro's customers traded down to lower priced tires and delayed auto repairs. Due to these negative trends, the company's stock traded below our valuation based on normalized free cash flow, so we started a position. Shortly after our purchase, the small cap market rose sharply and took Monro's shares along for the ride! In an unusual occurrence for our strategy, we sold Monro's stock during the same quarter it was purchased because its stock price exceeded our calculated valuation.

BSD Analysis:
Palm Valley Capital initiated a position in Monro based on attractive valuation following consumer-driven weakness. The fund identified the stock as trading below normalized free cash flow valuation after customers traded down to lower-priced tires and delayed repairs due to economic pressure on middle and lower-income consumers. This represents a classic value opportunity where temporary headwinds created a discount to intrinsic value. However, the investment thesis played out rapidly as the broader small-cap rally lifted Monro's shares beyond the fund's calculated fair value. The quick exit demonstrates disciplined valuation-driven investing, though it also highlights the challenge of finding sustained value opportunities in the current market environment.

Pitch Summary:
We believe that we are living in the age of biology. Just as a few centuries ago our knowledge of physical processes leapt forward, today we are on the cusp of profound changes in our understanding of biological ones. In recent years advances have accelerated. The large-scale use of mRNA vaccines during the COVID pandemic – the first major application of these vaccines – is just one example. Similar advances in drug development have allowed medicines to be developed for hard-to-treat diseases like Alzheimer's, as well as to treat and perhaps cure diseases that previously eluded treatment. To push innovation forward, researchers need tools to ask the right questions, run experiments to test hypotheses and in turn draw insights. These tools encompass high-specification instruments, high-purity reagents, powerful software and a variety of specialised services. An ecosystem has developed of companies that specialise in providing these tools. We often think of them as providing the 'picks-and-shovels' to researchers who are mining for the gold once obscured by nature. This ecosystem has been fertile hunting ground for Generation. The largest company in this space is Thermo Fisher Scientific, a core portfolio holding in Global Equity for the past seven years. At year-end it accounted for 3.2% of the portfolio. The quality of a business is often linked with the attractiveness of its end markets. Thermo Fisher is exposed to a variety of end markets, with the largest being pharma and biotech. The pharmaceutical industry benefits from the innovation tailwinds mentioned above. Furthermore, to improve efficiency and address a rising regulatory burden, pharma companies have outsourced more of their operations over time to specialised vendors, the largest being Thermo Fisher. To take one notable example: during the COVID pandemic, Moderna entered into an agreement with Thermo Fisher to manufacture and package its vaccine. Thermo Fisher's business has evolved over the past 20 years. The business has leveraged its expertise in high-end research-grade instrumentation, adapting it for the pharmaceutical market. It has also developed, partly via acquisitions, additional capabilities to serve these customers. Today the business generates around 60% of its revenues from its pharmaceutical customers, up from 25% a decade ago. The breadth of competencies available under one roof has allowed these customers to grow their spend with Thermo Fisher. In turn, Thermo Fisher has used that greater scale to innovate and, by solving key customer challenges, deepen its relationships with pharmaceutical customers. In effect, the company has earned a 'trusted partner' status. In our opinion, the management team at Thermo Fisher is excellent. CEO Marc Casper has led the company for the past 13 years, surrounded by a stable and experienced senior leadership team. The company also deploys capital judiciously. Under Marc's leadership the company has redeployed the significant cash generated by its operations into acquisitions to further its strategic objectives. Every dollar retained in the business has proven to be worth more than a dollar for shareholders over time. This track record and the underlying industrial logic regarding potential acquisitions gives us confidence in the company's future opportunities.

BSD Analysis:
Generation presents a compelling bull case for Thermo Fisher Scientific, positioning the company as the dominant player in the life sciences tools ecosystem during what they characterize as the 'age of biology.' The investment thesis centers on four key pillars: attractive end markets driven by pharmaceutical innovation, market leadership across major product segments, strategic business evolution toward higher-value pharma services, and exceptional capital allocation under CEO Marc Casper's 13-year tenure. The fund highlights Thermo Fisher's transformation from a research instrumentation company to a comprehensive pharma services provider, with pharmaceutical revenues growing from 25% to 60% over the past decade. This evolution has created a 'trusted partner' dynamic with customers, enabling deeper relationships and increased wallet share. The company's role as a critical infrastructure provider was exemplified during COVID-19 when it manufactured and packaged Moderna's vaccine, demonstrating its strategic importance to the pharmaceutical supply chain.

Pitch Summary:
Lastly, the share price of American Tower lagged the market significantly in 2023. While it has zero exposure to commercial real estate, American Tower is the largest Real Estate Investment Trust (REIT) in the world. REIT's tend to be viewed as interest rate sensitive vehicles, and though American Tower is not a typical REIT, it is often subject to general perceptions on the outlook for real estate. As American Tower's share price became more attractively priced during the year, we added to existing positions opportunistically where appropriate, and we also began investing in SBA Communications, another tower company we have long admired. The tower business remains one of the best business models we have ever seen, and the build-out of 5G networks both domestically and abroad remains the primary driver of the business. The ever-increasing demand for mobile communications and computing provides an excellent secular growth tailwind that will lead to continued long-term compounding for years.

BSD Analysis:
Avenir maintains strong conviction in American Tower despite significant underperformance in 2023, viewing the weakness as a buying opportunity. The fund emphasizes that American Tower operates a fundamentally different business model from traditional REITs, with zero commercial real estate exposure. Management attributes the underperformance to misplaced market concerns about interest rate sensitivity rather than fundamental business deterioration. Avenir opportunistically added to positions as valuations became more attractive, demonstrating conviction in their thesis. The fund describes the tower business as one of the best business models they've encountered, supported by 5G network buildout globally. Secular growth drivers from increasing mobile communications and computing demand provide long-term tailwinds. This represents a contrarian value opportunity in a high-quality infrastructure business with secular growth characteristics.

Pitch Summary:
Several other core holdings including Copart, Apple and DigitalBridge also enjoyed strong share performance in 2023. Notably, during the year DigitalBridge completed its transition to an asset manager focused on digital infrastructure, principally data centers and cell towers, and thus is also well positioned to benefit from the surging demand for cloud services. We understand the opportunity in front of DigitalBridge and think management is motivated to compound shareholder's capital at attractive rates for many years.

BSD Analysis:
Avenir expresses strong conviction in DigitalBridge following its successful business model transformation to a digital infrastructure asset manager. The fund highlights the company's strategic focus on data centers and cell towers, positioning it to capitalize on surging cloud services demand. Management's completion of this transition demonstrates execution capability and strategic vision in a high-growth sector. Avenir emphasizes their deep understanding of DigitalBridge's opportunity set, suggesting thorough due diligence and conviction in the investment thesis. The fund views management as highly motivated and capable of generating attractive returns through disciplined capital allocation. Strong share performance in 2023 validates the transformation strategy and market positioning. This represents a secular growth play on digital infrastructure demand with experienced management execution.

Pitch Summary:
Similarly, Amazon.com, through its AWS cloud services offering, is very well situated to benefit from the deployment of AI by its customers, and the company will also benefit from the incorporation of AI throughout its e-commerce and related commercial applications. Meanwhile, Amazon's profitability also improved in 2023 due to an aggressive cost cutting program, which coupled with renewed growth in its core businesses resulted in strong share performance during the year. With many growth drivers in place and a focused management team, we believe Amazon will continue compounding shareholders capital for years to come.

BSD Analysis:
Avenir presents a compelling bull case for Amazon centered on its dual AI exposure through AWS cloud services and e-commerce applications. The fund highlights Amazon's strategic positioning to monetize AI deployment across its customer base while simultaneously enhancing internal operations. Management notes significant operational improvements in 2023, with aggressive cost-cutting measures driving profitability gains alongside core business growth acceleration. The combination of expense discipline and revenue growth resulted in strong share performance, demonstrating management's execution capabilities. Avenir emphasizes multiple growth drivers across Amazon's diversified business portfolio, from cloud infrastructure to retail operations. The fund expresses confidence in management's focus and strategic direction for sustained value creation. This represents a long-term compounding story supported by secular technology trends and operational excellence.

Pitch Summary:
Our largest holding, Microsoft, continues to perform well operationally and through its Azure cloud services business, its investment in ChatGPT and its extensive offerings to software developers, is perhaps the most well-situated enterprise software provider to benefit from the emergence of AI. Microsoft's share price appreciated significantly in 2023, reflecting its unique position. Going forward, due to its ability to grow its core franchises as well as management's demonstrated astute capital allocation, we believe Microsoft is well positioned to continue compounding shareholder's capital for the foreseeable future.

BSD Analysis:
Avenir maintains a strong bullish stance on Microsoft, positioning it as their largest holding due to its dominant position in the AI revolution. The fund highlights Microsoft's strategic advantages through Azure cloud services, ChatGPT investment, and comprehensive developer tools ecosystem. Management emphasizes Microsoft's operational excellence and superior capital allocation capabilities as key drivers for sustained growth. The significant share price appreciation in 2023 reflects the market's recognition of Microsoft's unique positioning in the AI landscape. Avenir views Microsoft's diversified franchise portfolio and management execution as sustainable competitive advantages. The fund expects continued capital compounding over the long term, supported by both organic growth in core businesses and strategic AI initiatives. This represents a high-conviction position based on secular technology trends and proven management capabilities.