High Conviction on Companies’ Long-term Future Earnings Power

Key Takeaways

» Over the intermediate and long-term, we believe the portfolio is well positioned to benefit from declining global oil and gas prices as well as a pickup in U.S. economic growth.

» We believe holdings such as AST SpaceMobile, Brookfield, and Applied Materials benefit from powerful, secular growth drivers that remain fundamentally independent of the short-term vicissitudes of oil prices.

» AST is strengthening its competitive position through partnerships with major global wireless carriers as Starlink Mobile shifts from partner to competitor.

» We expect significant value capture will accrue to the companies selling the “picks and shovels” required for the AI buildout.

» We believe our concentrated, high-conviction portfolio is positioned to thrive by capturing the multi-year secular tailwinds of the global AI infrastructure buildout, while owning competitively advantaged businesses that operate independently of this theme.

Would you please summarize the U.S. equity market during the second quarter. What surprised you the most?

In the second quarter of 2026, the small-cap Russell 2000® Index generated a 21.5% total return, outperforming the large-cap S&P 500® Index’s 15.2% return by 6.3 percentage points. The surprisingly strong small-cap rally was the result of improved earnings forecasts, artificial intelligence (AI) related trickle-down and sector rotation as investors sought cheaper alternatives to larger names. After the April ceasefire with Iran, the market began to put aside its near term macro-economic worries and embraced more economically sensitive small-cap stocks. The rotation was fortified as second quarter CPI increases, largely driven by higher food and energy prices due to the war, were deemed likely temporary. In summary, with investors refocused on a more stable and optimistic twelve-to-twenty-four-month economic horizon, prices lifted in the quarter as multiples expanded.

How will higher inflation expectations and the possibility of additional interest rate hikes impact the portfolio?

During the quarter, market sentiment shifted regarding the forward path of rates. We began 2026 with the market expecting one to two Fed Funds rate reductions for the year. by the end of the first quarter, no reductions were forecast and by the end of the second quarter, forecasts were for one rate increase. The shift in Fed policy in response to the recent acceleration of inflation and under new Fed Chairman Kevin Warsh has revealed a more hawkish tone and a corresponding bias toward near-term rate increases to reinforce price stability.

Both rising rates and rising food and energy costs on consumer behavior are akin to an across-the-board tax increase as they take a larger share of disposable income and offer nothing in return. These developments are most impactful on low-, moderate-, and middle- income consumers and on companies whose customers use financing to purchase goods and services.

In the Fund, we continue to have minimal exposure to low- and moderate-income consumers. Over the course of 2026, we believe the Fund’s consumer-facing businesses (such as CarMax, RH and NVR) will continue to see weakened consumer demand driven by reprioritized spending as well as overall demand destruction from higher financing rates used by many of their customers. Over the intermediate and long-term, we believe the portfolio is well positioned to benefit from declining global oil and gas prices as well as a pickup in economic growth inside the U.S.

How has the Middle East conflict affected your outlook for the Fund’s holdings?

Given that the spike in energy prices appears contained as of the end of June and the U.S. economy continues to exhibit persistent strength, we do not view these geopolitical developments as thesis-altering for our portfolio. Furthermore, our investment strategy maintains minimal exposure to consumer discretionary businesses where demand can be sensitive to fluctuations in energy prices and disposable income. Instead, we remain focused on the long-term compounding potential of our core holdings, including AST SpaceMobile, Brookfield, and Applied Materials.

Each of these companies benefits from powerful, secular growth drivers—such as the expansion of global connectivity, the build-out of digital infrastructure, and the scaling of advanced semiconductor manufacturing—that remain fundamentally independent of the short-term vicissitudes of oil prices. We will continue to monitor the U.S.-Iran situation as part of our ongoing risk assessment, but we remain fully confident in the durability of our portfolio companies and their capacity for sustained value creation.

Following SpaceX’s IPO, investor attention has shifted toward the commercial space industry. How is AST SpaceMobile differentiated?

SpaceX runs three separate but interrelated businesses; Launch, Connectivity and xAI. Its Connectivity business is composed of Starlink Fixed and Starlink Mobile. AST competes with Starlink Mobile and is offered to global mobile network operators (MNOs) as a supplemental, broadband service in partnership with their terrestrial operations supporting everyday cell phones. Since its launch in 2025, Starlink Mobile offers a much slower, narrowband service that is technically weaker and offers lower speeds and throughput than what AST has achieved across their first-generation BlueBird satellites. Starlink Mobile is not integrated into the MNO’s core network. It rides on top as a standalone service and requires direct line of sight, often forcing users outdoors.

In both the runup to SpaceX’s IPO and since, Starlink Mobile is increasingly being positioned by SpaceX management as a global standalone competitor, not partner, with existing MNOs. This is an important departure from its early partnership efforts with T-Mobile and others. It is a shift from a supplemental service partner to a direct competitor that owns and operates its own spectrum and is reported to be developing handsets. Starlink Mobile is morphing into a fox in the hen house. Global MNOs are starting to respond to the threat.

For example, in May 2026 AT&T, T-Mobile, and Verizon announced an agreement in principle to form a joint venture (JV) for satellite services. With the new agreement in principle, the Big Three are now working to close coverage gaps, pool limited spectrum and create a unified platform for satellite operators to more efficiently deliver direct-to-direct (D2D) services. It would appear this is the first step in T-Mobile’s exit of its exclusive business relationship with Starlink and a recognition of Starlink’s evolving direct competitive threat to the industry.

What developments have strengthened your conviction in AST despite recent price pressure?

To our thinking, the drawdown in AST’s share price from the May highs appears to be related to two primary events. First, SpaceX holders hedging their stock exposure with a basket of other space related names puts pressure on the entire sector.

Second, AST was scheduled to begin near continuous service by year end 2026 with a fleet of approximately 45 orbiting satellites. This timeline was pushed back in the quarter with two significant mishaps at Blue Origin, an important AST launch partner. First, because of a thrust malfunction, Blue Origin failed to place AST’s BlueBird 7 into its intended orbit in April. Though the satellite powered-on, it was too low and was intentionally deorbited. The second setback occurred when a Blue Origin New Glenn rocket exploded in May during a static fire test at Cape Canaveral. This caused extensive damage to its only working launchpad and surrounding structures. The investigation into the explosion continues, repair work is ongoing, but the net result will be a delay in AST achieving 45 satellites in orbit until mid to late 2027.

This slowdown in launch cadence is a disappointment, but not catastrophic. The company is amply funded with one of the strongest balance sheets in the space industry. Still, progress continues. In mid-June, the company successfully launched a set of three second-generation Block 2 BlueBird satellites on a SpaceX rocket. They are reportedly operating as expected. Looking out two years from now, we expect two to three AST constellations in orbit, with substantial satellites in each, supporting low- and mid-band spectrum operations, sizable global commercial and first responder revenue and a growing defense and intelligence business supported by state-of-the-art communications and non-communications technology circling overhead.

What were the largest contributors and detractors to performance during the quarter?

Key contributors during the quarter were Applied Materials (AMAT), AST Space Mobile (ASTS), and Sunbelt Rentals (SUNB). Key detractors during the quarter were Cogent Communications (CCOI), Altus Group (AIF.CA), and American Tower (AMT).

How is the development of AI influencing your view of the companies you own today as well as your watchlist?

We believe that AI and the related AI infrastructure buildout is going to be massive and transformational for our economy. We think our portfolio is positioned to benefit from this buildout, and well insulated from the risks AI poses to many legacy businesses.

We expect significant value capture will accrue to the companies selling the “picks and shovels” required for this buildout. Brookfield’s projection of a $7 trillion investment in physical infrastructure over the next decade underscores that companies providing chips, hardware, data centers, and the power required to energize them will capture immense value. We are direct beneficiaries of this spending through our investments in Brookfield Corporation, Brookfield Asset Management, and Applied Materials.

Conversely, AI has caused us to re-evaluate our watchlist to avoid the businesses most vulnerable to AI disintermediation. We are actively steering clear of companies whose core value proposition relies on routine human cognitive labor, such as traditional call centers and IT outsourcing businesses. We are also highly skeptical of legacy software businesses, many of which face structural challenges as generative AI lowers the barriers to code creation and transforms software from a high-margin moated business into a competitive space with more alternatives and less pricing power.

We are selectively populating our watchlist with resilient businesses capable of leveraging AI to lower their operating costs without losing their competitive edge. We are hunting for underappreciated, secondary beneficiaries that control the critical choke points of the AI economy.

Looking ahead to the second half of 2026, what gives you confidence in the portfolio’s ability to continue compounding earnings in today’s environment?

While the broader market remains significantly influenced by factor-driven flows and short-term narratives rather than underlying business fundamentals, we believe our concentrated, high-conviction portfolio is positioned to thrive through a barbelled posture: capturing the multi-year secular tailwinds of the global AI infrastructure buildout, while simultaneously owning competitively advantaged businesses that operate independently of this theme. Crucially, these latter holdings possess strong economic moats, face minimal technological obsolescence from the rise of AI, and do not rely on the AI buildout to drive growth.

When short-term noise fades, the market ultimately rewards sustainable cash flow and cash earnings growth. A few examples from our portfolio include:

• AST SpaceMobile (ASTS). The company is building the first and most capable space-based cellular broadband network accessible directly by everyday smartphones. Our confidence in long term earning growth relies to a large extent on AST’s ecosystem of strategic partners—including AT&T, Verizon, Vodafone, and Google—alongside its expanding applications in U.S. defense. Looking ahead, AST’s growing satellite constellation will enable continuous, ubiquitous connectivity—keeping wireless communications and edge AI devices online, and establishing the company as a critical piece of global AI infrastructure. Ultimately, AST is addressing a massive, unserved global market, and it has significant operating leverage and earnings growth ahead as revenue scales on top of a relatively fixed cost satellite constellation.
• O’Reilly Automotive (ORLY). O’Reilly Automotive enjoys acyclical, predictable demand that gives us confidence in future earnings growth, independent of the macroeconomic or political environment. Demand for aftermarket auto parts is driven by basic, everyday needs: consumers must maintain their vehicles to commute to work or elsewhere. O’Reilly’s exceptional management team and structurally advantaged supply chain allow it to steadily gain market share and maintain high margins. It is a quintessential durable business, sometimes even benefitting from macroeconomic surprises to accelerate share gains and earnings growth, including during the recent period of trade policy and tariff uncertainty.

By focusing on finding high-quality, high-conviction businesses rather than trying to time market rotations, we believe the portfolio is well-positioned to drive earnings growth through the remainder of 2026 and beyond.