Fundamental Investors Seeking Exceptional Businesses

Key Takeaways

» We actively seek out exceptional businesses supported by powerful secular tailwinds, with durable competitive moats, talented management teams, and reasonable valuations.

» To capture the AI buildout, we are focused on physical infrastructure providers, and fundamentally insulated businesses, which possess strong economic moats.

» During the quarter, we sold RELX and CDW Corp. and trimmed Shenandoah Telecommunications.

» High vehicle costs and elevated interest rates forcing consumers to keep their vehicles longer could be an accelerant to market share gains for O’Reilly Automotive.

» Our outlook remains highly constructive, driven by the conviction that robust corporate profitability will drive equity performance.

What were notable developments in the equity market during the third quarter?

During the third quarter, U.S. equity market performance was defined by extreme top-heavy concentration in a narrow set of mega-cap technology names, leaving the broader market behind. Adding to macroeconomic headwinds was a rapid surge in long-term interest rates, driven by a “higher for longer” Federal Reserve stance, alongside a sharp spike in crude oil prices triggered by continuing conflict with Iran. Together, rising borrowing costs, elevated energy prices, and narrow market breadth stoked investor uncertainty, placing downward pressure on valuations across most sectors outside the dominant tech cohort as multiples compressed across long-duration assets.

As long-term fundamental investors, we do not attempt to forecast commodity swings or central bank maneuvers. On the contrary, we actively seek out exceptional businesses supported by powerful secular tailwinds, provided they meet our criteria for durable competitive moats, talented management teams, and reasonable valuations. We view macro-driven volatility as fertile ground for our strategy, allowing us to selectively deploy capital into these high-quality enterprises when market dislocations create attractive discounts to their intrinsic value.

Would you please discuss how the Fund’s positioning evolved during the third quarter?

We continued to refine our barbelled portfolio, which seeks to capture the massive, multi-year secular tailwinds of the global AI infrastructure buildout while simultaneously owning competitively advantaged businesses that operate entirely independent of this theme. The evolution of our positioning reflects our rigorous, ongoing evaluation of businesses potentially vulnerable to shifting competitive landscapes.

Specifically, during the quarter, we sold two positions and reduced the size of a third. We exited CDW, which was about a 3% position at the beginning of the quarter. The company has begun pivoting to higher value services, which makes some strategic sense, but is a departure from its core competency as a world class sales organization. We are reluctant to go along on this journey, and have also come to view CDW as a good but not great business. So, we exited the position and will await better opportunity elsewhere.

We also exited RELX plc., which was just a 0.4% position. We have concerns about several of its’ core businesses facing potential erosion from the emergence of AI based capabilities and tools. It was always a lower conviction starter position, and never exceeded 1% of assets.

Finally, we reduced our position in Shenandoah Telecommunications. Shenandoah faces ongoing competition from fiber overbuilders and emerging competition from satellite-based broadband connectivity providers (Starlink and Blue Origin). The competitive environment has been more difficult than we expected, and the future looks like it will be even more challenging with exponential growth in launch capacity over the next several years.

Exiting and reducing these positions allowed us to migrate capital away from businesses facing potential disintermediation/emerging competition and concentrate it into our highest-conviction ideas.

Moving forward, we remain confident in the durability of our core holdings to sustain long-term value creation. To capture the AI buildout, we are focused on the “picks and shovels” physical infrastructure providers, such as Applied Materials and Brookfield, that supply the critical hardware, chips, data centers, and power necessary to energize this transformation. The other side of our barbell is reserved for fundamentally insulated businesses, like O’Reilly Automotive, which possess strong economic moats based on acyclical, everyday physical demand. We believe this disciplined concentration will reward Fund shareholders over time.

Key Investment Criteria

The Portfolio Managers employ independent, fundamental research, with a primary focus on:

1. High-Quality Businesses
2. A Large Growth Opportunity
3. Excellent Management
4. A Low “Tail Risk”
5. A Discount Valuation

With the Fed hiking rates for the first time in three years, would you discuss the potential impact to the Fund’s holdings?

The direct and immediate impact is to increase the borrowing costs of businesses with drawn revolving debt. Much of this debt is priced off of SOFR (secured overnight financing rates) or other indices that are based on three-, six- or nine-month floating rates terms. Indirectly, due to the underlying pickup in inflation that precipitated the Fed’s action, long term rates are up over 100bps since the beginning of the year. These long-term rates serve as the base rates used to refinance five- and ten-year corporate paper and will push up refi rates in the next few years if they persist. And of course, overall, equity discount rates rise (again a function of the 10yr Treasury), impacting company multiples and nominal equity values in the short-term. In summary, the inflation and rising rates produce a stronger wind in our face.

On the positive side, a financial institution like Markel Group, with significant investment allocations to T bills and money market instruments will see growing net interest income (NII) almost immediately from very short-term maturities and further benefits as short duration bonds are reinvested at higher levels in the coming year. On the flip side, a name like American Tower, that uses a substantial amount of mid and long duration debt in their capital structure will see higher refinance rates as term debt matures in the coming years.

What common themes are you are seeing in companies moving higher on your watch list?

There were not any common themes among companies moving higher on our watch list this quarter. Our areas of interest were driven by company specific dynamics. We are always sorting and sifting through our watch list, looking for emerging investment opportunities, and this quarter was no different, though the bifurcated market performance (strength in mega cap companies and weakness in much of the rest of the market) is beginning to present some more interesting opportunities.

This quarter, we spent time on a specialty auto insurer, two different payments processing companies, a newly public rocket and space technology company, a specialty investment manager, and a leading commercial real estate (CRE) data provider.

How does the current economic environment affect your long-term growth outlook for O’Reilly Automotive?

We view the current macroeconomic environment, where high vehicle costs and elevated interest rates are forcing consumers to keep their vehicles longer, as an accelerant to market share gains for O’Reilly Automotive. The U.S. car park now sits at a record 293 million light-duty vehicles with an average age of 12.8 years. When consumers defer new car purchases to manage their household budgets, they are economically incentivized to invest in maintaining their aging daily drivers rather than taking on new debt. This dynamic elongates the product lifecycle for aftermarket parts and directly feeds into O’Reilly’s core business of supplying non-discretionary repair components. Furthermore, with total vehicle miles driven topping 3.3 trillion annually, the fundamental usage metrics underlying the industry’s demand remain incredibly robust.

In a highly fragmented, $175 billion U.S. addressable market, this sustained maintenance demand disproportionately benefits O’Reilly due to its formidable competitive moat and historical ability to compound operating profit dollars. Their multi-echelon supply chain, anchored by 32 regional distribution centers and nearly 400 hub stores, provides unmatched inventory availability for the hard-to-find components required by older and increasingly complex vehicles, such as hybrids. Smaller independent competitors, which make up nearly half of the professional market, simply cannot match this working capital depth or time-definite delivery. We believe this environment accelerates O’Reilly’s ability to consolidate market share, drive high returns on invested capital, and successfully scale its proven model into new international territories like Mexico, where the vehicle base is even older at 16.5 years.

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

Leading contributors during the quarter were Danaher (up 17%), CarMax (up 4%), and American Tower (up 1%). Leading detractors during the quarter were AST Space Mobile (down 34%), Applied Materials (down 29%), and Brookfield Corporation (down 14%). Despite the price performance of these detractors during the quarter, we continue to have a very positive outlook on the businesses and their investment outlook.

Would you please comment on AST SpaceMobile’s quarterly performance?

Space related stocks were under pressure in 2Q and 3Q 2026 for a number of reasons. Space stocks were used to hedge private SpaceX positions prior to the IPO. Large broker dealers launched proprietary thematic ‘baskets’ across a number of the high beta, long duration industries including space and AI. Space is one of the industries that attracts significant hedge fund trading volume, both long and short, due to its high capital intensity, late revenue ramps and the propensity for very visible equipment failures. There was also considerable chatter around the delayed unfurling of B2BB 11 and the 45-day shipping delay of B2BBs 14-16 for reasons not yet publicly addressed.

What is your outlook for the U.S. equity market and the portfolio?

Our outlook for the remainder of 2026 and into 2027 remains highly constructive, driven by the conviction that robust corporate profitability will ultimately drive equity performance. While macro noise (ranging from shifting interest rate expectations to geopolitical headlines) will inevitably cause bouts of volatility, we remain steadfast in our focus on companies’ long term future earnings power. The consensus forecast is for S&P 500 earnings to increase at a healthy mid-teens rate in 2027, and we expect look-through earnings for our portfolio to grow in the high-teens. Rather than trying to predict the broader indices, we view periodic price swings simply as opportunities to selectively allocate capital to durable, well-run businesses we believe are capable of compounding their intrinsic value over time.

Our high-level strategy remains unchanged: we seek to own a small, concentrated collection of truly great businesses. We are resolutely focused on identifying and owning businesses with excellent management teams, large growth opportunities, low tail risk, and discounted valuations. By holding resilient businesses capable of mid-teens compounded earnings growth, we believe the portfolio is well-positioned to deliver strong absolute performance for our shareholders over a five-to-ten-year horizon.