matejmo/iStock via Getty Images
Introduction
Last quarter we asked the rhetorical question: What will Trump do next?
As if the Ukrainian conflict, tariff uncertainty, and China’s provocative actions did not create enough anxiety, we now have a belligerent US president joining Israeli forces in a hostile attack on Iran with devastating economic consequences.
The victor will not be asked, later on, whether he told the truth or not. In starting and making a war, not the Right is what matters, but Victory. ¹ – Adolf Hitler, August 22, 1939.
Equity markets are proving to be resilient. Share prices have contracted but have not crashed. The Nasdaq was down 7.1% for the quarter, the S&P down 4.6%, and in comparable USD terms, the MSCI World Index was down 3.6%. ²
This timid reaction should not come as a surprise. Markets may well be factoring in a Trump “TACO” moment. Or perhaps they are expecting – like the pandemic of 2020, the European debt wobbles of 2011 and the GFC in 2008, that governments will come to the rescue with a flood of cash. With obscene levels of debt, we are not so sure.
Irrespective, let’s take a step back and look at the broader picture. Driven by AI euphoria, these indices are still up 24.8%, 16.3% and 18.9% over the last year, and have returned an incredible 21.5%, 17.8% and 16.8% each year over the last three years. These numbers are in the order of 2-3 times historic long term equity market returns.
The Fund was down 1.7% in EUR terms, 3.5% in USD and 6.1% in AUD terms – in line with the MSCI World Index. ³, ⁴
Snapshot
- ➤ Two key events affected markets this quarter. On January 30 Anthropic released open source plug-ins for Claude Cowork and on February 28 US and Israel started bombing Iran.
- ➤ There was an additional key event for the Fund. After months of quiet contemplation, we purchased Amazon (AMZN). ⁵
- ➤ The bombing led to Iran’s seizure of the Strait of Hormuz. Whilst being disastrous for the global economy, the impacts appear overwhelmingly positive for LyondellBasell (LYB) (the plastic producer) which returned 88.3%.
- ➤ Lockheed Martin (LMT), the defence contractor, is understandably perceived to benefit from this war. It returned 25.6%.
- ➤ The Anthropic news caused a SAASpocalypse – “a rapid devaluation of traditional software-as-a-service (SaaS) stocks and a shift in the tech landscape caused by autonomous AI agents.” ⁶ H&R Block (HRB)’s business is part SaaS – its share price fell 26.2%.
- ➤ Universal Music (UNVGY) fell 25.2%, and is now down 34.6% over 12 months. The business performance has been respectable, and we can only ascribe the poor sentiment to AI threats and uncertainty about the intentions of major shareholders.
- ➤ Rounding out the other poorest performers, Ryanair (RYAAY) fell 18.7% (presumably due to the oil price spike and poor global outlook), Alibaba (BABA) was down 16.7%, and Visa (V) and Mastercard (MA) both fell markedly (13.6% and 12.3%).
- ➤ In addition to our new Amazon investment, we bought a decent amount of Universal Music, restoring our position to around 7.0%. And we increased our holdings in H&R Block, Visa and Mastercard.
- ➤ On the sell side, we divested almost two thirds of our LyondellBasell investment, and a meaningful amount of Alphabet (GOOGL). We sold a little Liberty Broadband (LBRDK) and Linamar (LIMAF), but only to meet regulatory requirements.
- ➤ We hold a concentrated portfolio of 20 positions and ended the quarter with 16.1% cash.
Contribution
Table 1: Contribution Details
Activity
Table 3: Quarterly Purchases
Table 4: Quarterly Sales
Performance Review
The most significant news from our perspective is the Fund’s latest investment – Amazon (down 9.8%).
We have long admired Amazon. Its “Day 1” philosophy is quite remarkable, with an obsession to satisfy its customers, an eagerness to embrace external trends, and a propensity to make quick decisions. The business has expanded aggressively: CDs, electronics, toys in late 90s; market place in 2000; free 2-day shipping in 2005; AWS cloud in 2006; the Kindle in 2007; physical retail (WholeFoods) in 2017; and media with the acquisition of MGM in 2022. Relentlessly focused on the long-term, Amazon’s growth has been fueled by its “Flywheel” effect: lower prices lead to more customers, which attracts more third-party sellers, allowing for greater economies of scale. It stands today as a serious player in AI and a leader in both logistics and cloud computing. It has far evolved from that humble online bookstore of 30 years ago.
Since we tweaked our quality/value criteria a few years back we have seen it flutter in and out of our quantitative screen depending on its share price. For a few reasons, we think now is an appropriate time to buy. Let us explain.
Our core holding in the technology platform space is Alphabet . It had a poor quarter (down 8.1%), but it has had a stellar run over the last 12 months (it returned 86.6%). A year ago its shares traded at a 12% discount to our valuation. Our valuation has increased since then, but with that share price rise, it now trades at a premium of 43%. On the other hand, Amazon traded at 30% premium to our valuation one year ago. Our valuation has also increased, but with its more modest share price increase (9.5%), that premium is now 17%.
Some may question our buying at a price higher than our valuation. But our reasoning is that all valuations are subjective, and particularly so when it comes to technology businesses pursuing new endeavours with unknown payoffs. At the same time, despite the shares trading at a valuation premium, given their exciting prospects, we feel it makes sense for the Fund to maintain a reasonable (circa 10%) allocation to these types of businesses.
We maintain that Alphabet is very well placed across the AI sphere. But Amazon offers a different base earnings stream and a supporting business with a more direct retail link. Funding an Amazon purchase with the partial sale of a more expensive (on our numbers) position, being Alphabet, enables us to more cheaply capture a broader range of potential AI benefits. Also, by doing so, we reduce the number of “greater than 5%” holdings which providing greater flexibility in managing the portfolio.
Our total position in this bucket of businesses (which absent price movements would have been maintained at over 10%) is 8.7% of the Fund, and is now represented by Alphabet (3.5%), Alibaba (which after being down 16.7% now represents 3.3%) and our new investment in Amazon (1.9%).
Moving on. It is this time of the year we get swamped by full year earnings results and presentations, but they were the back stage to the main event – war. Despite the poor overall performance of the equity markets there were some glimmers.
LyondellBasell, the plastics producer which we have been calling out as cheap for some time, posted an extraordinary 88.3% return. The catalyst was the fortuitous (to the business) and entirely unexpected Strait of Hormuz issues. In a mid March presentation management explained its effects for the polyethylene and polypropylene markets (both in terms of material trapped in the Middle East and feedstock shortages), and outlined the business’s operating leverage to the consequent rising prices. Were we lucky? Yes and no. Although the share price rallied to levels above our valuation, over the years we had misjudged the cyclicality of the business and incrementally lowered our valuation. In January, after its full year results, we reduced it by a further 5% – meaning the valuation is now a third lower than it was three years ago. This is poor judgement not bad luck. Irrespective, over the course of 2025 we were buying at prices which we viewed as depressed. During the early part of the March quarter we sold some in order to meet regulatory requirements, and during the later part we took advantage of the company’s “good fortune”, and sold more at a materially higher price than our recent purchases. As a result, the Fund’s weighting has declined from 4.4% to 3.1%.
Lockheed Martin, the defence contractor was up 25.6%. Lockheed is understandably perceived to be a beneficiary of this war. That being said, it also released solid full year results. Management highlighted its USD 194b backlog, continued expectation of strong cash flow, and significantly upped its 2026 expectations. With revised numbers and assumptions feeding it, our valuation increased by 11.2%. It now trades at a 24% premium to that. But in our view, given its subjectiveness, this is not enough to warrant selling. It represents 2.8% of the Fund.
Anything that posted a positive quarterly return could be considered a half decent performer this quarter, and there were six other positions that did. Both our health care companies, being McKesson, the drug distributor (up 5.6%), and HCA Healthcare, the hospital operator (up 1.5%), posted impressive results. For McKesson, management raised and tightened its full year guidance, completed the divestment of its European business, announced plans to separate its Medical Surgical business, and reiterated its long term growth outlook in the mid teens. Its share price rose 15.7% on the day. For HCA, management announced an increase to its dividend and increased buybacks, and the share price spiked 7.1% on the day. We updated our valuations. In the case of HCA, it increased about 30%, with half being attributable to our revised maintainable earnings estimates and the other half being a result of revisiting our view of its business risks. For McKesson, these were not full year results and we only made a couple of tweaks which increased our valuation by around 5%. Both remain sizeable positions in the Fund, at 6.6% and 6.0% respectively.
Charter Communications and its tracking stock Liberty Broadband returned 3.4% and 4.0%. Charter’s full year results demonstrated strong cash flow growth and management reiterated that, with declining capital expenditure requirements in coming years, this will continue. Despite plans to lower leverage, share repurchases are also expected to continue. The merger with Cox Communications is still pending with no real update. Although the market’s response was favourable (with the share price up 7.6% on the day) as we fed the numbers through our systems the valuation barely changed and the share price continues to sit well below it. The combined positions of these companies accounts for 7.1% of the Fund.
Linamar, the industrial manufacturer, returned 4.2%. We considered its results admirable, but going by the market’s reaction (the share price fell 6.8% on the day), it was less enthused. The highlight was the auto parts business, showing good margin improvement. The industrial side of the business remains weak and is expected to remain so. There was a minor increase in our valuation as we refined some margin assumptions. It now accounts for 4.4% of the Fund.
Dick’s Sporting (DKS), (up 0.1%) posted strong results, with more growth from its core business expected to come. It also re-assessed the number of Foot Locker (FL) stores it intends to close after promising trials of its “Fast Breaker” concept. This is expected to increase long term growth, but comes at the cost of lower short term growth. With little debt, high returns on capital, and trading at acceptable pricing metrics, we remain positive and comfortable with the Fund’s 5.3% position.
Twelve of our holdings posting negative performance. Again far too many on that side of the ledger.
H&R Block, the tax agents, was the worst, falling 26.2%. Over the first 9 trading days of the SAASpocalypse, H&R Block’s share price fell 28.2%. It seems even the release of a pretty decent set of second quarter results on February 4 could not stem the tide. Those results were perfectly in line with our expectations, and management also reaffirmed its FY2026 guidance. We are by no means under the illusion that AI is not a threat to H&R Block’s tax return businesses. But we also feel there is a place for tax specific software backed up by tax professionals. And in any case, H&R Block has a variety of product offerings many of which include AI powered platforms serving not only personal filers but also the professional tax agents. Put simply, it is not clear to us that its business model is impacted to the degree implied by the share price reaction. To the contrary, we sense it more likely not to be the case. Hence, we bought more over the quarter, and this investment now accounts for 3.7% of the Fund.
Universal Music, the owner, publisher, and to a smaller extent, merchandiser of music, was down 25.2%. Its full year results looked pretty good to us, with revenue and earnings higher than expected and a value adding acquisition which fed a small increase in our valuation. The share price fell 8.1% on the day. Market chatter suggests that the threat of AI generated content is to blame – but is this a threat or an opportunity? There may also be uncertainty surrounding the intentions of a major shareholder. Who knows? But it did not make sense to us, so we bought a sizeable amount of shares, in fact 50% more. By the end of the quarter it accounted for 6.9% of the Fund. Post quarter’s end, a restructuring was proposed by a large shareholder.
Ryanair was down 18.7% – clearly on concerns about rising aviation fuel costs and a likely softening in demand for leisure travel. It seems these concerns took precedence to a very good set of third quarter results and management’s positive full year outlook with marginally higher traffic numbers and fares than it previously guided. We are more focused on its long term prospects and its resiliency throughout a crisis – like the one we currently find ourselves in. On that note, Ryanair continues to widen its ex fuel cost advantages versus competitors. It also has the most fuel efficient fleet, and with more Boeing (BA) Max 8’s to be delivered, and the pending delivery post certification of the Max 10’s, that position will continue to strengthen. Meanwhile, it had hedged 84% of its fourth quarter and 80% of its FY27 expected fuel requirements (at USD 67/barrel). Ryanair management has a long standing track record of increasing its competitive positions in times like these. We would argue that the broader, but far more remote risk, is whether restrictions could be placed on non-essential services in order to preserve fuel supply. Irrespective, we do not see as destroying this business. Despite management’s upped guidance, we did not change our valuation, and the share price now trades 13% below it. It remains the largest position in the Fund at 7.7%.
Group 1 Automotive (GPI), the car dealership, was down 15.8%. Management released full year results, and to be frank, we were disappointed. Its recently acquired UK business continues to be problematic. With a significant fall in sales, it is reducing headcount (again), consolidating operations and exiting the Jaguar Land Rover brand. It is now clear to us that management misjudged this one. Taking on substantial debt to fund a poor business concerns us. There was better, but not overly positive news for its US operations, with higher car prices being achieved, but there was a small decline in volumes. Our business valuation declined as a result of revised and less optimistic assumptions; and given its increased debt and pension liabilities, this was quite pronounced at the equity level. That fall was greater than the share price decline, and it now trades at a premium. So, we are closely considering the Fund’s 2.8% position.
Our other car dealership, Autonation (AN), (down 5.4%) fared a little better. But like Group 1, its increased debt levels are concerning. In this case the new debt is largely being applied to its fast growing financing business. The OEMs have competitive finance terms available to purchasers of their new vehicles, so Autonation’s financing book is largely comprised of second hand vehicles that it sells. Whilst not discrediting the investment merits of finance businesses, there is a reason they are excluded from our screening process. And so we are now assessing whether, with its growing exposure to this line of business, Autonation is still an appropriate investment for us. It accounts for 3.9% of the Fund.
Visa and Mastercard were both poor performers being down 13.6% and 12.3%. This is perplexing. Those returns are polar opposites of their business performance. Both of their recent results show mid-teens earnings growth, which is driven largely by 20-25% growth in their “Value Added Services”. This is all expected to continue in the foreseeable future. We updated our valuations. For Mastercard, which released full year numbers, it increased by 16.3%. For Visa it was little changed, but we expect that after having the benefit of full year results (released later this month) it will similarly increase. None of this comes as a surprise – except of course the trading price of the shares. With falling share prices and increased (but still conservative) valuations, the premium that the shares trade has reduced from around 40% to negligible levels. Accordingly, we bought more of both, to now hold 4.9% and 4.7% respectively.
With our new Amazon investment, the Fund now holds 20 businesses and 16.1% cash.
Closing Remarks
As we finalise this report, equity markets have once again recovered. In fact, they have rebounded to new all time highs. The S&P500 is up 9.2%, the Nasdaq is up 13.3%, and MSCI World Index (in USD) is up 9.3%. Such is the nature of the markets.
We don’t understand. Haven’t the events over the quarter highlighted a few things? Like, for example:
- ➤ The erratic nature of a world leader. Could other prominent and belligerent world leaders follow suit?
- ➤ The global economy’s vulnerability to unpredictable events, and its functional reliance on critical infrastructure.
- ➤ Our complacency, which has led to that vulnerability.
- ➤ The costs of economic interconnectedness and globalisation in general.
- ➤ The previously unacknowledged risks of catering to the environmental threats the world faces.
Are we complacent in other areas? We wrote about our amazement with the enthusiastic and fast paced AI adoption last quarter. What are the hidden risks lurking below the surface? Studies already show how manipulative AI can be. We know it cheats. We are unsure about its ethics and values. We also know that to a large and growing extent it trains itself on content which is itself AI generated – thereby potentially compounding the risks at an exponential rate.
After years of widespread adoption, the negative societal effects from social media (fueled by confirmation biased algorithms) are only now truly coming to light. In the case of AI, it seems the world is enthusiastically embracing the benefits (which, no doubt are enormous) but perhaps without adequate caution. This is worrying for us.
And finally – we have spoken of the SaaSocalypse. Is there opportunity amongst the carnage? After all, these are extreme falls to share prices and in some cases they have persisted over a prolonged time. But when we look at some of our recent valuation updates, much of it makes perfect sense to us. For example:
- ➤ Gartner is a research and advisory company with annual revenues of around USD 6.5b. Our valuation fell around 8% from the same time last year. The share price fell 37.2% over the quarter. The shares now trade at a 14% premium.
- ➤ Wolters Kluwer (WTKWY) is an information and software service business with annual revenues of around USD 7.1b. When we updated our valuation it was little changed from a year ago. Over the course of 2025 the share price fell 45%. During the March quarter it fell a further 23.7%. It now trades at only a 24% premium.
- ➤ Veeva Systems (VEEV) provides cloud services for the life sciences industry, and has annual revenue of USD 3.2b. Once again, our updated valuation was little changed from a year ago, but after falling more than 40% over the last six months, the premium is now reduced to only 54%.
So, despite huge price declines, the share prices do not necessarily represent value, at least in our view. Irrespective, given our new understanding of AI’s capability and its wide availability (largely triggered by the Anthropic CoWork news), we see our revised valuations as largely irrelevant for those highlighted examples. Given the range of possible outcomes, there’s just too much risk. Having said that, amongst the share price falls, we have not given up on identifying a promising opportunity.
As always, thank you for your interest.
Stuart Pearce, Principal
Alexis Delloye, Principal
References
- This was reportedly part of an address Adolf Hitler gave to his top military commanders at his Obersalzberg home on August 22, 1939, just days before the invasion of Poland that sparked World War II.
- Factset
- Source: UI efa S.A. (The Fund Administrator)
- The fund is not managed in reference to any benchmark index and any reference is solely for comparison purposes.
- Company names have been abbreviated throughout this document in the interest of readability.
- Google search engine’s first response (AI generated) when requesting a definition, on 17 April 2026.
- Based on the most recently reported last 12 months earnings and cash flow data.
- This is not a constant portfolio, it represents the portfolio as at different points in time.
- Alluvium (for AUD series only).
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
