Insights

The Portfolio Managers discuss how the current market environment has affected the Fund’s positioning, new Fund positions, and artificial intelligence (AI) adoption phases.

Would you please discuss the current geopolitical tensions and how the current environment affects the Fund’s positioning?

The escalating conflict involving Iran, the U.S. and Israel has intensified regional instability, disrupted global energy markets, and heightened uncertainty across financial markets. With the geopolitical tensions, we believe elevated energy prices might continue, reinforcing inflationary pressures and reducing expectations for Federal Reserve interest rate cuts. In fact, rate cuts could be limited to one or, perhaps, none in 2026.

As a result, in the first quarter of 2026, there was a flight to quality assets, resulting in a stronger U.S. dollar and favoring U.S. equities over international markets. We have found compelling opportunities in the mid-cap space, even though in a rising rate environment, large-cap companies with strong balance sheets generally tend to benefit. We believe well-managed midcaps with durable free cash flow are well-positioned to navigate the current environment and maintain earnings stability.

How did first-quarter market volatility create investment opportunities within the portfolio?

We purchased a few new holdings, reflecting opportunities to invest in high-quality, durable businesses at attractive valuations amid market dislocations.

One new holding is Tyler Technologies, which specializes in providing enterprise software to local municipalities, handling functions including ticketing and permitting. Historically, relationships with local municipalities have offered a strong competitive moat, yet the stock price dropped because of AI advancements. We believe nuanced union contracts embedded in its software increase switching costs, reinforce customer stickiness and strengthen the company’s long-term competitive advantage.

Another company we purchased was Phillips 66. Our interest in Phillips 66 was driven by the opportunity to process discounted Venezuelan heavy crude, which can enhance refining margins for select Gulf Coast operators. The company is particularly well positioned given its specialized refining capacity, allowing it to capture wider spreads across refined products.

Beyond refining, Phillips 66 offers a more diversified and higher-quality assets compared to other pure-play refiners. About one-third of its earnings comes from its refining business with the remainder from its midstream unit and retail gas stations. Despite this diversity in earnings, the stock has traded in line with other refiners which we believe creates a valuation disconnect. Additional upside exists from potential improvements in its petrochemical segment and ongoing operational enhancements.

How could the Fund benefit from the AI buildout?

We believe AI adoption is unfolding in distinct phases, creating opportunities across several sectors.

• Compute infrastructure. As AI development requires significant computing power, advanced semiconductors, and scalable cloud platforms, this initial infrastructure phase may benefit portfolio companies such as ARM Holdings. The rise of agentic AI is leading to an exponential growth in token generation, which require processors to handle/orchestrate. ARM is moving to capture more value by designing its own processor specifically for these AI tasks.
• Power demand. The next phase centers on power demand for data centers, supporting companies such as GE Vernova, which provides power generation and grid infrastructure solutions; Talen Energy, which provides power through its nuclear and merchant gas plants; and Bloom Energy, which sells solid oxide fuel cells systems that can be a near-term solution to bridge the energy gap for fast growing data center demand.
• Industrial buildout. A broader industrial buildout should follow, benefiting firms such as Martin Marietta, a leading aggregate company; WESCO International, a distributor of electrical and networking products; and Vertiv, a provider of thermal and power management solutions.

When analyzed across the broader spectrum, these phases highlight how the Fund could benefit from a widening set of opportunities beyond early AI leaders.