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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Extreme equity market concentration around artificial intelligence has created historic valuation dispersion, opening compelling entry points in cash-generative enterprise software, European industrials."
During the third quarter of 2026, global financial markets navigated heightened geopolitical tensions, surging energy prices linked to the Middle East conflict, and climbing bond yields, while equity indices remained buoyant on artificial intelligence capital spending. Active value strategies delivered strong relative results, with the Pzena International Small Cap Focused Value Composite returning 6.0% net of fees compared to 2.9% for the MSCI World ex USA Small Cap Index, while the U.S. Small Cap Focused Value Composite declined 5.3% net of fees versus a 4.9% decline for the Russell 2000 Value Index. Relative outperformance was primarily led by durable industrial and technology holdings that recovered from earlier overblown fears of artificial intelligence disruption.\n\nPzena's macroeconomic analysis highlights historic index concentration where global indices behave like narrow portfolios tied to a single artificial intelligence theme. The effective number of stocks in global, U.S., and emerging market indices has dropped significantly, with the top ten companies comprising roughly 41% of the S&P 500. This structural concentration has created broad valuation dispersion, leaving global equities trading at elevated forward multiples above 19x while value universes offer normalized price-to-earnings multiples between 6.5x and 8.7x. The manager's investment philosophy focuses on exploiting this dispersion by rotating out of sentiment-driven beneficiaries into overlooked franchises trading at deep discounts to their sustainable earnings power.\n\nPortfolio activity reflected disciplined capital redeployment into controversies where negative sentiment outran fundamentals. In international small caps, the manager initiated new positions in British property portal Rightmove and U.K. lender Metro Bank, funding them through sales of Nokian Renkaat, Tokai Carbon, and Kanto Denka Kogyo. Across firm-wide mandates, capital was aggressively deployed into sentiment-battered enterprise software franchises like SAP, Amdocs, and SS&C Technologies, while trimming positions in Japanese AI component suppliers such as Murata, TDK, and MinebeaMitsumi, as well as recovering U.S. managed care insurers.
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