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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"FMI sees an AI bubble with semiconductor valuations over four standard deviations above historical norms while quality businesses trade at dot-com-era discounts. They are avoiding AI infrastructure stocks and buying traditional businesses like FTI Consulting, Capital One, and Fluidra that will benefit from AI on the cost side."
Fiduciary Management believes the market is experiencing an AI-driven speculative bubble reminiscent of the dot-com era. Semiconductor stocks posted their best quarter ever with the Philadelphia Stock Exchange Semiconductor Index gaining 88%, while valuations reached over four standard deviations above historical averages. The five largest cloud and AI infrastructure giants are projected to spend over $725 billion on capex in 2026, nearly double last year's levels, yet the math for generating adequate returns is challenging. Hyperscalers would collectively need to generate $2 to $5 trillion of incremental annual revenue to earn a 10% return on capital. Meanwhile, quality businesses with durable competitive advantages are being priced as AI losers, creating compelling value opportunities. The manager is positioning in traditional businesses that could benefit from AI on the cost side, including consulting firms like FTI Consulting, banks like Capital One, and industrial companies like Fluidra. These holdings trade at meaningful discounts to intrinsic value with strong balance sheets and high returns on invested capital. The valuation gap between the AI complex and the rest of the market now rivals levels last seen at the height of the dot-com bubble. On a 3- to 5-year horizon, the manager believes the setup is the strongest they have seen in many years.
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