Baron Large Cap Growth Strategy | Q1 2024

Baron Large Cap Growth Strategy (the Strategy) gained 12.61% during the first quarter, which compares favorably to gains of 11.41% for the Russell 1000 Growth Index and 10.56% for the S&P 500 Index, the Strategy’s benchmarks.

U.S. large-cap equities continued to perform well in early 2024. Picking up right where we left off last year, the Strategy gained 3.0% in January and was up 11.3% by the end of February and 12.6% by the end of March. The gains were largely driven by a robust U.S. economy, which continues to outperform expectations despite the higher interest rate environment. Real GDP grew 3.4% in the fourth quarter, while the unemployment rate remained stable at 3.8%. The outperformance of large-cap stocks was driven by the Magnificent Seven. These companies – Alphabet, Amazon, Apple, Meta, Microsoft, Tesla, and NVIDIA – continue to be the biggest drivers of the Russell 1000 Growth Index’s results. They now account for 48.1% of the Russell 1000 Growth Index and were up 13.2% during the quarter, driving 54.9% of the Russell 1000 Growth Index’s overall return. Their performance, however, was far from uniform, with Apple and Tesla down double digits, while NVIDIA (up 82%) and Meta (up 37%) drove 85% of the overall return for the group.

From a performance attribution perspective, the Strategy’s 1.21% of outperformance versus the Rusell 1000 Growth Index was driven entirely by stock selection, which was responsible for 1.54% of outperformance, while the sector allocation detracted 0.34% from relative returns. The strongest performing sectors were Information Technology (IT), Communication Services, and Financials, which contributed 4.01% combined to our relative results. This was partially offset by our holdings in Consumer Discretionary, which cost us 2.72%. The Russell 1000 Growth Index’s best-performing sector, other than Utilities at 24.1%, was Communication Services at 17.3%. The Strategy’s holdings in Communication Services outperformed, surging 33.8%. This growth was driven by a combination of strengthening fundamentals and, to a lesser extent, multiple expansion of 13.3% during the quarter.¹ Revenue expectations of our holdings within the sector were up 3.6% during the quarter, with operating income expectations up 10.6%.²

Information Technology was our second-best performing sector for the quarter, rising 17.0% and outperforming the 12.7% increase of IT stocks in the Russell 1000 Growth Index. Outperformance was driven by a combination of multiple expansions, which contributed 12.3%, as well as improving fundamentals. Our strong performance was driven largely by the semiconductors and semiconductor materials & equipment sub-industries, which surged 82.6% and 28.4%, respectively, contributing 3.67% to our relative returns. Additionally, excluding Apple and other lagging technology hardware storage & peripherals companies (down 10.6% overall) further benefited our performance.

From a company-specific perspective, while we had 19 contributors against 10 detractors, the contributors represented over 80% of the Strategy’s net assets, enhancing a good batting average with an excellent slugging percentage. Shares of NVIDIA, Meta, Adyen, ASML, CrowdStrike, Trade Desk, and Veeva Systems all posted gains in excess of 20% during the quarter, while NVIDIA, Meta Platforms, Amazon, CrowdStrike, Intuitive Surgical, ASML, ServiceNow, Trade Desk, and Cloudflare contributed over 50bps each to the absolute returns.

Despite the complex macro environment, many of our companies have reported improving business trends during their recent quarterly earnings calls, leading to upward revisions to estimates over the last three months. In addition to NVIDIA’s unprecedented growth, Amazon’s 2024 EPS consensus expectations increased 14.3% during the first quarter and were up 65.1% from the same period last year.³ Similarly, 2024 EPS Street expectations for Meta were up 13.5% and 62.7%, respectively. Both companies also saw an increase in revenue expectations of 0.8% for Amazon and 4.6% for Meta over these three months, while operating margin expectations have increased by 1.19% and 2.39%, respectively. Amazon is benefiting from the early stages of a recovery in its cloud business (AWS) while also seeing significant improvement in profitability for its e-commerce business. Meta is benefiting from a recovery in ad spending, partially due to AI-driven improvements in algorithms that drove better user engagement, better ad targeting, and improved overall spending efficiency, which in turn is improving operating leverage.

We continue to believe that we have put together the right collection of competitively advantaged companies with durable growth characteristics and great management teams. We have a lot of confidence in our process. If we continue to execute well, we should be able to outperform the Russell 1000 Growth Index over the long term while minimizing the risk of permanent loss of capital.

NVIDIA, AI, disruptive change, and Big Ideas

Even after taking some profits in the first quarter, NVIDIA remains the Strategy’s largest position. We identified NVIDIA as the company at the epicenter of one of the biggest technological paradigm shifts of the last 50 years. This shift involves computing moving from sequential to accelerated processing, and we are beginning to see the early stages of generative AI (GenAI) use cases entering the mainstream. GenAI is real and has the potential to be material, sustainable, and disruptive.

Is there hype around GenAI? Sure. There is always a hype cycle around major new technologies. Is GenAI a bubble similar to the Internet bubble of the late 1990s/early 2000s? We don’t think so. First of all, it is important to recognize that while many stocks were trading at outlandish valuations on newly invented metrics (peak multiples on peak eyeballs), the internet itself proved to be a paradigm-changing disruption, giving birth to a plethora of Big Ideas. But even more importantly, while the rise in NVIDIA’s stock price has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by rapid growth in revenues, earnings, and cash flows – not multiples. NVIDIA’s stock price exited 2023 with a P/E ratio of 24.7 and ended the first quarter with a P/E ratio of 35.⁴ We can debate whether it is cheap or expensive, but it cannot be compared to the triple-digit multiples assigned to the perceived market leaders of the early Internet era that were not in as strong of a competitive position then as NVIDIA is today.

We’re fully aware that the semiconductor industry is prone to cycles. In the past, the hyperscalers (AWS, Azure, GCP, etc.), who are significant customers for NVIDIA, have not maintained a consistent level of investment. It wouldn’t be surprising if a demand pullback led to a significant growth slowdown and a potential correction in the stock price in the near future. Therefore, it’s crucial for us to manage the size of this investment prudently while also envisioning the future without losing sight of the current reality.

There’s more to NVIDIA than just semiconductors. Many investors have missed the boat, thinking that Apple is just a smartphone company, Amazon is just a retailer, and Tesla is just a car company. We have long argued that, just like the other three, NVIDIA is a platform. We are more certain of this now than ever before.

In March, we spent four days in San José, attending NVIDIA’s annual developer conference, GTC 2024, and experienced firsthand what Forbes magazine called the Nerd Woodstock. Over 17,000 attendees (including ourselves) participated in the four-day event in person. There was a lot to choose from, with more than 900 sessions, 1,700 presenters, over 300 exhibits, and more than 20 technical workshops, all centered around AI. We were particularly interested in sessions on Large Language Models (LLMs) and how they compare to domain-specific Small Language Models. Other topics that caught our attention included how to enable LLMs to have long-term memory and the key challenges that need to be addressed to create reasoning, planning, and multi-agent LLMs. When the event was finished, we came away with several observations:

• AI is developing rapidly across industries – In the near term, there is a lot of excitement around AI for areas such as consumer chatbots, AI-based customer service, and AI-based assistants for a variety of business tasks like coding, marketing, back-office functions, and more. Longer-term avenues of development are broad, including drug discovery, where the opportunity for AI is significant due to the long timelines for drug approval and the high probability of failure (90% of drugs fail). This also includes planning and running factories and supply chains using digital twins (with help from NVIDIA Omniverse – NVIDIA’s real-time collaborative simulation platform) and using AI to build robots across a variety of use cases, from autonomous machines to humanoids. We believe this points towards multi-domain, multi-industry disruption.

   

• We are early on the adoption S-curve – Most companies are still in the proof-of-concept stage. However, very few are ready for production today due to hurdles in implementing AI. These hurdles include data preparation, model adaptation, and finetuning. To overcome these challenges, a surge of innovation is emerging. This includes tools and infrastructure that help companies build and run AI models more easily. Additionally, third-party AI models are now exposed via Application Programming Interfaces (APIs) that enable companies to use them without building their own models from scratch. NVIDIA’s ecosystem, encompassing developers, system integrators, cloud providers, independent software vendors, and internal software innovation, is also lowering these hurdles. For example, one of the most interesting announcements at the GTC Conference was NVIDIA Inference Microservices (NIMs). NIMs are APIs that provide easy access to open-source models (NVIDIA already has dozens available) without the need to worry about model optimizations, security, patching, or sending data to third parties. NIMs could ease AI adoption for enterprises while also driving incremental monetization for NVIDIA, priced at $4,500/GPU or at $1/GPU hour if used on the cloud, and increase the stickiness of NVIDIA’s platform.

   

• We are rapidly coming down the demand elasticity curve – While in the Moore’s Law era, performance per dollar improvements were driven by cramming more transistors into a piece of silicon, AI is a data center scale problem with performance per dollar improvements driven by every layer in the stack. NVIDIA innovates across the entire system – from the accelerator (the GPU) to the CPU (Grace), to server design and networking, to the software (NVIDIA’s TensorRT LLM enables a 2.9 times improvement in performance), and to algorithms. For example, NVIDIA announced the latest fifth generation NVLink, a networking solution that connects multiple GPUs together, enabling an order of magnitude higher memory bandwidth (1.8TB/sec) compared to the standard PCIe (NVLink has 14 times more bandwidth than PCIe Gen 5), which alleviates a significant bottleneck for many AI models. The latest fifth-generation NVSwitch also enables connecting up to 576 GPUs together, which creates a significantly higher overall bandwidth for a much larger computing cluster, which is especially important for very large LLMs (previously, only eight GPUs were connected with NVLink, while connecting a higher number required using the slower bandwidth, PCIe). Overall, the Blackwell GPU can see performance improvements up to 30 times for inferencing compared to the prior Hopper generation. AI algorithms themselves are rapidly improving as well. For example, the price of OpenAI’s GPT-3 (which cost $20 per one million tokens in early 2023) declined 95% with the introduction of the more capable GPT-3.5 Turbo, which costs 95% less at $1 per one million tokens, despite being a better model.

Roughly 18 months after the ChatGPT moment, GenAI is already showing rapid real-world adoption, with revenues of GenAI companies exceeding $3 billion, excluding the revenues that the large cloud providers (like Google and Meta) are generating from AI due to better engagement and better ad targeting.

We believe we are in the early stages of a multi-decade disruption. Jensen Huang, NVIDIA’s co-founder, president, and CEO, suggested at the conference that similar to how in the industrial revolution, raw materials came into the plant and final products came out, in the GenAI era, companies would become AI factories with data as raw material and tokens as the output. Tokens can represent words, images, videos, or controls of a robot. Over time, as models continue to improve and the cost of running them declines, an increasing number of human tasks could be augmented or replaced entirely by AI.

As demographics become more challenging across many economies (especially developed markets), a greater share of global growth must come from productivity enhancements. AI, in our view, is likely to be a key driver behind these gains and could form the basis for technological breakthroughs that help humanity address some of the most pressing challenges, from climate change to finding cures for intractable diseases. We believe this disruptive change will be truly profound.

NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and GenAI. NVIDIA’s stock rose 82.6% in the first quarter, driven by continued strong demand in its data center segment (driven by accelerated computing and GenAI). NVIDIA closed 2023 with unprecedented revenue growth at massive scale, with a fourth quarter revenue run-rate just shy of $90 billion, growing over 3.5 times year-over-year with operating margins of 67%. NVIDIA’s fourth quarter was even more impressive than numbers suggest, considering both the fact that sales to China declined significantly due to U.S. regulations and as we are nearing the end of the current generation of the Hopper architecture, with the next generation, Blackwell coming out in the third quarter. NVIDIA is taking a page from Apple’s vertical integration book, adding to its competitive advantage. For example, the recently introduced GB200 NVL72, a liquid-cooled rack with 72 GPUs interconnected with the latest generation NVLink technology, offers a significant boost to performance with one-fourth of the GPUs required to train a 1.8 trillion parameter model using one-fourth of the power. NVIDIA is also removing hurdles for AI adoption through software innovation, such as the recently announced NIMs, which make it easier for companies to adopt GenAI at scale. Despite the stock’s continued outperformance, its valuation remains reasonable. The company trades below 30 times P/E, indicating that most of the stock’s gains stemmed from earnings growth rather than a rise in valuation multiples. We continue to hold shares and believe there’s significant upside potential for long-term investors.

Shares of Meta Platforms, Inc., the world’s largest social network, rose 37.3% in the quarter due to robust fourth-quarter top-line growth of 25% year-over-year with operating margins more than doubling year-over-year to 41%, benefiting from the year of efficiency measures that included a 22% reduction in headcount. The profitability of the core business is even stronger than these figures suggest, as Reality Labs’ losses of over $4.5 billion in the quarter are included in the overall operating income metric. Meta also guided for first-quarter revenue growth of approximately 29% year-overyear, which was better than expected. Advertiser satisfaction and adoption of Meta remains strong, core app engagement is healthy, with video daily watch time up 25% year-over-year and the total number of monthly active users up 6% year-on-year to 3.98 billion in the fourth quarter, and Instagram Reels and click-to-message ads monetization continues to improve. Meta also continues to rapidly innovate in GenAI, with its leading research lab releasing widely adopted open-source models (e.g., Llama 2), internal algorithms, and core apps becoming augmented with AI (e.g., Meta’s recommendation engine). We remain shareholders and believe Meta can sustain its leading market share in digital advertising thanks to strong network effects enabled by its massive user and advertiser base. Additionally, we believe the company’s innovative culture, large installed base, and leading GenAI research should enable it to embed AI and GenAI into its offerings with further monetization opportunities ahead. For example, AI agents could help scale business messaging, handling many customer requests on behalf of business customers and making business messaging more viable at scale.

Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares increased 18.7% on quarterly results that exceeded consensus expectations, with revenue growth of 13% year-over-year and operating margins of 7.8% (up from 1.8% a year ago). We believe that Amazon is well positioned in the short to medium term to continue improving its core North American margins, reaching 6.1% in the fourth quarter, the seventh straight quarter of margin improvement, and an overall improvement of 8.00%. Amazon has been rearchitecting its fulfillment network, improving efficiency, reducing cost-to-serve, and accelerating delivery speeds thanks to initiatives such as regionalization, with the number of items delivered during the same day or overnight increasing by nearly 70% year-over-year. Reducing the service cost also enables Amazon to sell lower-priced items and expand its addressable market to everyday purchases.

Additionally, Amazon continues to benefit from its fast-growing, margin-accretive advertising business, winning market share in digital advertising thanks to its structural advantages of a closed-loop system, which enables a deterministic calculation of Return on Ad Spending. We also believe that e-commerce still has long-duration growth ahead as it still accounts for less than 15% of retail. Similarly, Amazon’s cloud service, AWS, remains relatively early in its S-curve, with cloud representing around 13% of worldwide IT spending incremental tailwinds across the three layers of the GenAI stack – infrastructure with NVIDIA’s own AI chips (Trainium and Inferentia) as well as with its offering of NVIDIA chips, platform (Bedrock), and applications (first and third party).

Shares of IT services provider, Endava plc, fell 51.1% after management cut guidance for the fiscal year ending June 30, 2024, by 7% to 8%. Growth has slowed over the last year as business customers pulled back on discretionary IT spending due to macroeconomic uncertainty. Last fall, management was seeing early signs of a recovery, but new projects have been taking longer to materialize as customers delayed spending decisions. Higher expenses due to increased staffing to meet anticipated demand weighed on margins as well. Management acknowledged that it misread the market and is taking steps to right-size the cost structure to improve margins. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as the demand for digitization remains strong, with AI likely to serve as a tailwind to digitization over the long term.

Tesla, Inc. designs, manufactures, and sells electric vehicles (EVs), related software and components, and solar and energy storage products. Shares fell 29.3% in the first quarter as the core automotive segment is facing headwinds due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and vehicle price reductions which are pressuring gross margins. During the first quarter of 2024, production was also negatively impacted by the Red Sea maritime supply-chain interferences, sabotage in a Tesla factory’s power supply in Berlin, and a factory closure for the launch of the refreshed Model 3. We remain shareholders. Tesla commenced delivery of its highly anticipated Cybertruck pickup, which features new technologies within the car and its manufacturing lines. Tesla also launched version 12 of its Full Self Driving product, which shows significant progress from prior versions and increases the probability that Tesla’s data collection at scale, and verticalized software and hardware approach will position Tesla as a leader in the future for autonomous driving and shared mobility. We also expect energy storage sales to continue to grow over the coming years as the adoption of renewable energy continues. Lastly, we believe Tesla’s core automotive segment will recover with the company remaining a leader in the EV market, which continues to expand, with EVs still accounting for only around 10% of vehicle sales globally.

Shares of Rivian Automotive, Inc., a U.S.-based EV manufacturer, declined 53.3% in the first quarter. Despite substantial improvements in production and delivery volumes in 2023, as well as an improvement in unit economics, Rivian’s business remains constrained by its limited scale, which creates pressure on gross margins, and contributes to the company’s elevated cash burn. Additionally, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand headwinds due to the continued complex macro environment, and the relatively small automotive segments that Rivian’s initial products target. Nevertheless, the recent unveiling of Rivian’s mass-market products, the R2 and R3, garnered enthusiastic responses, evidenced by over 68,000 pre-orders within the first 20 hours post-launch. In a strategic move, management opted to produce the R2 in Rivian’s existing facility, deferring the construction of a new factory. This decision should help reduce mid-term capital expenditure obligations while ensuring higher utilization of current facilities as the R2 ramps production in 2025. We remain shareholders.

The Strategy is constructed on a bottom-up basis, with the quality of ideas and level of conviction playing the most significant role in determining the size of each investment. Sector weights tend to be an outcome of the portfolio construction process and are not meant to indicate a positive or a negative view.

As of March 31, 2024, the top 10 holdings represented 62.6% of the Strategy’s net assets, and the top 20 represented 89.2%. The total number of investments in the portfolio was 30 at the end of the first quarter, unchanged from the end of 2023.

IT, Consumer Discretionary, Communication Services, Health Care, and Financials made up 98.7% of net assets. The remaining 1.3% was made up of SpaceX and GM Cruise, our two private investments classified as Industrials, and cash.

During the first quarter, we initiated a new position in Alphabet (the parent company of Google) as we believe the risk-reward equation has become increasingly attractive for long-term investors with the stock put, unfairly in our view, in the GenAI loser bucket. We also added to four existing positions: Microsoft, which is well positioned to benefit from GenAI; the e-commerce leader in Korea, Coupang; the connected TV-focused advertising platform, Trade Desk; and the assisted and autonomous driving solution provider, Mobileye. We financed those purchases with inflows and some profit-taking from NVIDIA, even though it remains our highest conviction idea and the largest position in the Strategy. We also exited EPAM Systems because we saw more attractive risk/reward profiles elsewhere.

Alphabet Inc., the parent company of Google, is the world’s largest search and online advertising company. Alphabet has over 90% market share in its core Google search business; it owns the world’s leading video platform, YouTube (which has over two billion users), a competitive cloud service provider, Google Cloud, a leading ad network, and optionality in a number of smaller subsidiaries like the autonomous vehicle company, Waymo.

Google’s core search business continues to grow at a solid clip, and we believe it could structurally earn much higher margins than it does today as the company increases operating efficiency. Google Cloud should also continue growing in the healthy double digits for years to come, given the relatively early stage of cloud adoption, with $597 billion in total cloud spending in 2023 out of worldwide IT spending of $4.7 trillion, or around 13%. Additionally, YouTube has a long runway for growth, driven by the growing adoption of connected TV and the shift of advertising dollars from linear TV.

When ChatGPT originally came out in November 2022, it appeared that Google was caught a bit unprepared for a potential change in the way people search. GenAI advancements pose a risk to Google, but we believe investors underestimate the company’s strong position in AI and overestimate the likelihood of this risk materializing. Alphabet possesses the largest consumer training datasets, particularly from Search and YouTube, which are crucial ingredients for a competitive edge in AI. Additionally, Google boasts massive user distribution (nine products with over one billion users each), long-established AI research labs (DeepMind and Google Brain), top AI/ML engineering talent, a robust cloud computing division (Google Cloud), and significant financial resources to invest in AI. In the past 18 months since ChatGPT’s introduction, Google has significantly accelerated its AI product releases. This includes public previews of the Search Generative Experience (GenAI-enhanced Google Search) and its Gemini large language models. Importantly, Google has maintained its dominant search market share of roughly 90% throughout this period. Bing and other startups haven’t made significant inroads yet.

Google has also taken advantage of its distribution to unlock various benefits of GenAI, such as helping advertisers generate creative content in different formats or helping them optimize their budgets across Google’s various platforms. Additional opportunities that GenAI creates for Google include improving its existing offerings (e.g., GenAI offerings for YouTube creators) and helping drive demand for Google Cloud, which now offers a managed AI service called Vertex AI. We continue to monitor the risk of GenAI disrupting search, particularly given Google’s large market share today but believe the valuation is attractive and reflects too high of a probability for a bad outcome.

Alphabet’s valuation doesn’t currently account for the real value of assets like Waymo. These assets might even be assigned a negative value because they generate losses, which brings down earnings per share (EPS). We also believe Alphabet has further room to improve its cost discipline, given its high-margin core Search business and similar efficiency measures taken at other large technology companies. Altogether, we believe Alphabet has a reasonable path to growing EPS at a mid-teens rate for years to come. Based on Alphabet’s strong fundamentals and a reasonable valuation, we decided to add Alphabet to the portfolio.

Our second largest purchase during the quarter was the software platform Microsoft Corporation, which we continued to add to after initiating a position in the fourth quarter of 2023. Microsoft continues to report strong quarterly results, with revenue growing 16% year-over-year in constant currency. This growth is fueled by better-than-expected demand in the Intelligent cloud segment, which saw revenue climb 19% year-over-year. Azure, a key driver within this segment, delivered impressive growth of 28%. Notably, artificial intelligence (AI) is playing an increasingly significant role, contributing six percentage points to Azure’s growth compared to just three points in the previous quarter. While GenAI adoption is still in its early stages, Microsoft has reported positive initial data points. As of Q4, they have 53,000 Azure AI customers, an increase from 18,000 in the previous quarter. Additionally, there are 1.3 million paid GitHub Copilot subscribers (up 30% sequentially) and more than 230,000 organizations leveraging AI capabilities in the Power Platform (up 80% sequentially). Management also noted that large cloud optimizations that started a year or so ago have largely finished. Profitability also continues to be strong, with 44% nonGAAP operating margins, which is 1.20% better than expected.

We also increased our position in the Korean e-commerce platform Coupang, Inc. The company’s strong execution continues, as evidenced by its recent financial results and accelerated revenue growth. In the fourth quarter, Coupang reported a 20% year-over-year increase in constant currency revenue, rising to 29% when excluding the impact of its Fulfillment and Logistics accounting change. This growth is driven by several factors: a 16% year-over-year increase in customer count, a 27% year-over-year increase in Wow membership loyalty program enrollment, and continued spending growth across all existing customer cohorts (with every cohort, even those using the platform for a long time, demonstrating at least a 15% year-over-year increase). These trends suggest continued wallet share gains for the company. While Coupang continues to gain market share, its attractive unit economics are beginning to appear in results, with adjusted EBITDA margins of its commerce segment reaching 7.1% in the fourth quarter (up 1.90% year-over-year). Coupang is utilizing the growing profits from commerce to invest in emerging offerings such as Fulfillment and Logistics by Coupang (FLC), expansion into Taiwan (with revenues up two times in the last six months), and Coupang Eats, its food delivery network, which saw order volume increase by two times as well in the last nine months. In the last week or so, Coupang also announced a material 58% Wow membership price hike, which should flow through nicely to the bottom line, sending the stock higher by close to 20%.

We also modestly increased our positions in The Trade Desk and Mobileye Global Inc.

The demand-side advertising platform, The Trade Desk, reported strong quarterly results with 23% year-over-year revenue growth and 47% adjusted EBITDA margins as the company continued to benefit from the growth in CTV and the shift of advertising dollars from linear TV.

The assisted and autonomous driving solution provider, Mobileye, experienced significant stock price volatility as a result of reporting weak quarterly results on the back of an inventory build-up, which led the company to reduce near-term shipments materially, resetting expectations for 2024. Despite the near-term cyclical correction, we don’t believe the issues are structural, and we are more focused on the continued adoption of Mobileye’s advanced programs, such as Supervision, which would increasingly become the key growth driver for the business.

As mentioned above, we sold EPAM Systems, Inc. and reduced our position in NVIDIA Corporation to manage its position size. It remains our highest conviction idea and the largest investment in the Strategy. 

Every day, we live and invest in an uncertain world. Well-known conditions and widely anticipated events, such as Fed rate changes, ongoing trade disputes, government shutdowns, and the unpredictable behavior of important politicians the world over, are shrugged off by the financial markets one day and seem to drive them up or down the next. We often find it difficult to know why market participants do what they do over the short term. The constant challenges we face are real and serious, with clearly uncertain outcomes. History would suggest that most will prove passing or manageable. The business of capital allocation (or investing) is the business of taking risks, managing uncertainty, and taking advantage of the long-term opportunities that those risks and uncertainties create. 

We are optimistic about the long-term prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities while remaining patient and investing only when we believe target companies are trading at attractive prices relative to their intrinsic values. 

Sincerely,