Volatility Cuts Both Ways

From the Portfolio Manager

Staying Engaged Through the Turn

April marked a meaningful recovery for the portfolio. The preceding months brought their share of challenges. Months like April are precisely why we remain invested and committed to our strategy. The same volatility that weighed on the portfolio through the winter has been its ally this spring. Volatility cuts both ways. Ultimately, investors are compensated for enduring it — though acknowledging that is considerably easier than living through it.

The software industry's ongoing assimilation of artificial intelligence continues to present challenges, even as the broader AI infrastructure build-out advances at a rapid pace. Geopolitical tensions remain elevated across multiple regions. The rate of change across industries and economies continues to accelerate. As I noted in last month's update, the most important work — and the hardest — remains staying engaged through uncertainty.

"The same volatility that made for a difficult winter has been the portfolio's ally this spring. Volatility cuts both ways. Investors are compensated for enduring it."

The Investment Case

On AI Valuations: Scarcity Matters

Looking ahead to the summer, the first large-scale IPOs of the AI era are entering the pipeline. Much has been written about an "AI Bubble." Most of that commentary misses a critical point: there are still very few pure-play AI names available in the public markets. Current valuations reflect both the scarcity of investable AI positions and the scale of demand for them. This is a fundamental component of any sound valuation framework.

Every valuation has both a mathematical dimension and a scarcity dimension. Distinguishing between the two — and weighting each appropriately — is where active judgment matters most. Opportunities to invest at low valuations on both measures simultaneously are rare. We apply disciplined judgment in the areas where the math alone does not provide a clear answer.

The market is always giving feedback, but it is not always telling the truth. The essential part is having a well-thought-out methodology and applying it strategically and consistently over significant time periods. This is the challenge in investment management. It is very gratifying when it works.

An Uncomfortable Yet Vaguely Familiar Feeling

From the Portfolio Manager

We Have Been Here Before.

The opening three months of 2026 bear an uncomfortable resemblance to the same period a year ago and similar scenarios years ago. Asset prices are under pressure. Sentiment is moving toward extremes. The 'flight or fight' instinct to reduce risk is growing louder within the space between our ears. Twelve months ago, the "Tariff Tantrum" drove the S&P 500 sharply lower, pushed bearish sentiment to levels last seen in early 2020, and generated a cascade of downside earnings revisions. By year-end, markets recovered fully and set new highs. What changed was not the tariff regime. It remains elevated and unpredictable. The big change was the market's ability to price a new equilibrium, and the valuation compression that accompanied the tantrum created the launching pad for that recovery.

Today's composition of headwinds is different. The escalating conflict involving Iran has introduced a genuine geopolitical risk premium: energy price volatility, widened credit spreads, and multiple compression in rate-sensitive sectors are all real and measurable. We acknowledge them plainly. However, the architecture of the moment — a geopolitical shock, compressed valuations, elevated fear, a narrative that extrapolates the worst-case scenario — sounds quite familiar, and the historical record on what follows the doomscroll is not very ambiguous.

"The question is not whether the geopolitical risk is real — it is — but whether it is permanent. History is fairly consistent on this point: it is not."

The Investment Case

Optimism Is Not Magic Thinking. It Is a Data-Driven Recipe for Future Returns.

A brief review of four comparable geopolitical or policy shocks of the past fifty-three years clearly makes the case for a constructive outlook on asset prices. In each instance, equities recovered and the investor who held through was rewarded. The market reaction has consistently overshot the fundamental damage to the economy.

Persistent pessimism is not a conservative strategy, but it can be an expensive one. The companies we own do not necessarily cease to be profitable because of the news cycle. Their earnings power, pricing power, and long-term competitive position remain intact. What is temporarily impaired is the multiple the market is willing to pay for those earnings because of the fog of war. Optimism, defined this way, is not an emotional posture. It is the posture that long-run data supports.

Portfolio Positioning

How We Are Positioned

Our portfolios enter this period of uncertainty without leverage and without speculative positions on geopolitical outcomes or commodities. We hold a portfolio of high-quality businesses we know well and own at valuations we find attractive given the growth opportunity laid out in the coming years. On the fixed income side, high-quality bonds are providing the ballast they were purchased to provide.

However, we are, and will remain, deficit hawks with concerns about the global rise in interest rates. It is worth noting that energy supply shocks do not necessarily lead to persistent inflation — it takes the coincidence of major policy blunders to bring that to the forefront. When valuations become genuinely attractive, we are prepared to add selectively. We cannot reliably time the bottom during adverse environments. We look for valuation opportunities and remain optimistic.

As always, I am available to discuss any of these topics in greater detail. Please reach out to discuss your concerns, your portfolio, or the broader environment.

Digging In, Digging Out

From the Portfolio Manager

Crack That Whip.

There is an ancient annual spring festival celebrated in the Swiss valleys primarily where the tiny language of Romansh is still spoken by the locals. Calandamarz is celebrated on the first day of March. The tradition features the children of each village coming together in traditional costumes and making a huge racket clanging huge cowbells and singing while parading in the town squares. The villagers use it as an excuse to have a traditional meal and quaff a few beers. The boys crack long whips — a difficult and dangerous skill to master, especially for a boy. They do this to scare off winter so that spring will come at last.

In the old days, before ski tourism, winter was a test of survival for the farm animals and the people who lived in isolation in these remote valleys. It is a celebration. The little village where I take my annual ski holiday celebrates this holiday enthusiastically. I think we all should crack the whip this year to scare off this winter as well. The winter has been challenging for investors as the AI boogeyman has been stalking one industry after another, testing valuations and investor nerves.

"Challenging times are the best of times with this mindset. Challenges endured lead to satisfaction. Winter is ending. Spring is coming."

Portfolio Positioning

Resilience Through the Drawdown

Despite repeated avalanches of rather dire predictions of the longer-term effects of AI on various industries, the portfolio has fared well. The portfolio has not been unscathed, but the drawdown in valuations has enabled access to some new names that have been too expensive in the recent past. It ought not to be a news item to investors that the stock market is volatile. This should be a given. We build portfolios with this as the starting point.

It is still unnerving to have the market question the very tenets of so many business models. Ultimately, the market is doing what the market does best — allocate capital through the collective wisdom of the crowd. This process is the part of that I find most fascinating. Challenging times are the best of times with this mindset.

Winter's Chill

From the Portfolio Manager

The AI Moment and Your Portfolio

The last few months have been challenging for a few of the software companies that have played an important role in the portfolio for the past several years. Technological advancement involves disruption of incumbent players by newer, more efficient solutions. The AI Moment we are living in is accelerating the pace of change. We embrace and depend on that phenomenon. It is an advantage for active management of the portfolio.

While I try to avoid using wonky tradecraft and calling out individual companies in these monthly updates, I am diving in with both feet here because it speaks directly to the performance of your portfolio. The agent of change in the software industry is a private company with technology that is demonstrably good at writing computer code — heretofore the domain of very smart engineers. You may have heard it referred to as "Vibe Coding."

"The near-term result is a reduction in the expense of creating and maintaining software because AI makes engineers more efficient — lowering costs and increasing profits. The effects appear to cancel each other out."

Portfolio Positioning

Holding Through the Rough Patch

Software stocks have been under pressure for the past three months as market participants have questioned the viability of their cash flows in a world where anyone can effectively write their own programs instead of paying for the use of someone else's proprietary code. I do not think that is a near-term reality, but I acknowledge it is a legitimate longer-term concern that could affect the terminal value of the valuation.

It is my belief that the near-term result is a reduction in the expense of creating and maintaining software because the AI technology makes engineers more efficient, lowering costs and increasing profits. The effects appear to cancel each other out. This is why we have held on through the current rough patch in the sector and are looking to the current quarter for signs this trend is abating.