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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Source Capital is pivoting away from the AI-driven market rally, reducing exposure to semiconductor and data center beneficiaries despite long-term bullish views on the technology. The manager deployed capital into 13 new AI-agnostic mid-cap businesses at 10-15x earnings, creating a portfolio with better growth and valuation characteristics than the index."
Source Capital returned 5.49% in Q2 2026 and 14.70% over the trailing twelve months, capturing 94.7% of its balanced benchmark return. The market has become extremely narrow, with AI-related stocks accounting for 50-75% of S&P 500 gains since late 2022 and semiconductors representing nearly 30% of the index at record levels. The manager questions the sustainability of $2.59 trillion in projected 2026 AI spending and whether massive data center capacity expansion will generate adequate returns. They are scaling back exposure to direct AI beneficiaries despite bullish long-term views on the technology, citing expanded valuations and shrinking margins of safety. Instead, they deployed capital into 13 new AI-agnostic mid-cap businesses at 10-15x NTM earnings, creating a portfolio trading at 16.0x forward P/E with 25% estimated 3-year EPS growth versus 20.4x and 19% for the S&P 500. High yield spreads at the fourth percentile historically led to minimal traditional credit exposure. The manager maintains 26% committed to private credit and 21% in cash, positioning for attractive absolute returns while accepting the risk of looking foolish relative to momentum-driven markets.
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