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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"FMI navigated rising interest rates and extreme market sentiment in Q3 2026 by capitalizing on the indiscriminate sell-off in resilient franchises unfairly labeled as 'AI At Risk,' adding high-conviction positions in Jack Henry & Associates, CDW Corp., and RELX at substantial valuation discounts."
During the third quarter of 2026, global financial markets displayed stark divergences as large-cap benchmarks posted modest gains while U.S. small-cap equities experienced sharp declines, exemplified by the Russell 2000 falling 7.23%. Small-cap underperformance was primarily driven by financing vulnerabilities rather than technological headwinds, as smaller businesses carry more than double the leverage of large caps and hold 32% floating-rate debt compared to just 6% for the S&P 500. Portfolio cash and allocation frameworks remain positioned at substantial valuation discounts relative to broad benchmarks, exercising disciplined capital preservation amid excessive market exuberance. The macroeconomic landscape tightened noticeably following the Federal Reserve's 25-basis-point rate hike to 3.75-4.00% alongside 10-year Treasury yields surpassing 5% for the first time since 2007. Concurrently, investor sentiment indicators have reached extreme greed readings previously observed only prior to the 2000 and 2008 downturns. Economic expansion and index concentration remain overwhelmingly dependent on artificial intelligence capital expenditures, with non-tech investment and standard domestic economic consumption contracting by 0.7% year-over-year when stripping away AI-linked wealth effects and infrastructure buildouts. In response to wholesale market dislocations, portfolio activity focused on exploiting the indiscriminate sell-off in high-quality enterprises categorized under the 'AI At Risk' umbrella. The strategy initiated and expanded positions into resilient franchises trading at historic valuation discounts of two to three standard deviations. Key long investments built into recent weakness include core enterprise banking software provider Jack Henry & Associates, technology procurement orchestrator CDW Corp., and specialized data and analytics compounder RELX PLC.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
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