Insights

Portfolio Managers Quoc Tran and Michael Im, CFA, discuss their three-step process during periods of heightened market volatility, a new holding in the Fund, and current investment themes.

Given the market volatility over the first half of 2025, what is your investment approach these periods?

During periods of dramatic market volatility, we employ our long-standing three-step process, where we:

1. Check our assumptions on the companies in our portfolios to confirm their validity and that they have not changed.
2. Look for other high-quality businesses that may be unfairly discounted because the market has declined.
3. Purchase new holdings at discounted prices.

As an example of this process in action, we initiated a position in GE Vernova in the first quarter and added to it in April as the stock price was declining. According to our analysis, the stock could potentially be an excellent long-term compounder, and we were able to purchase shares during heightened fears that had nothing to do with the business operations of GE Vernova.

What other notable new holding was added in the second quarter?

During the second quarter, we added Fair Issac Corporation (FICO), a midcap company with a market capitalization of $37 billion.

Known for its FICO scores, Fair Isaac uses predictive analytics and data to help businesses make more informed decisions. Financial institutions use FICO scores to predict how likely an applicant is to repay loans on time, allowing them to make more consistent and structured underwriting decisions. From a consumer perspective, FICO scores democratize borrowing by using income, historic payment patterns, and outstanding debt to determine ability to repay.

Fair Isaac enjoys an entrenched industry-standard product, steady pricing power, and strong margins. Most of the company’s revenues come from royalties from the Scores segment. Additionally, it leverages its intellectual models to offer software subscriptions for origination and risk assessment.

We found an attractive entry point when Fair Isaac’s stock sold off on concerns that the Federal Housing Finance Agency (FHFA) would impose regulatory changes to address the high closing costs for homes via savings from credit scoring. Our research suggests these fears over credit scoring are likely unwarranted as this would potentially introduce adverse outcomes.

We believe the likely approach will be the introduction of a competitive credit scoring metric such as VantageScore. Our research suggests Fair Isaac’s product is highly entrenched in the mortgage industry and the switching costs to a competitive score (even at parity effectiveness) is too high for mortgage originators, MBS investors, and the overall ecosystem.

We believe Fair Isaac can offset any small amount of lost volumes through pricing levers, added services, a recovery in the mortgage market, and growth in non-mortgage markets such as auto loans and credit cards. We believe FICO scores are essential for financial underwriting and that Fair Isaac’s long-term competitive advantages have not changed. As such, the recent setback in the stock price appears to be an attractive setup for long-term gains.

What investment themes are you avoiding or embracing?

Currently, we are limiting our consumer discretionary exposure in the portfolio in favor of companies we believe can outperform in an uncertain economic backdrop. While many indicators remain positive, the ongoing tariff situation could have a lagging impact on inflation or employment.

Conversely, the Fund holds many investments we expect to benefit from the artificial intelligence (AI) wave. Similar to waves of innovation in the past, such as PCs and smartphones that brought forth decades of productivity improvements and innovation, we may be at the forefront of the next major technological growth cycle in AI.

Most applications so far have been for consumer use, such as using ChatGPT to generate content or deep dive into interesting topics. As AI advances over the next few years, we believe agentic AI will be deployed in industrial, financial, healthcare and professional services. Businesses can become more efficient, allowing for revenue growth with minimal headcount growth, lifting profit margins. Meanwhile, advances in AI will pave the way for robotics, drug discovery, and new implications for national security. These markets will only increase the demand for AI semiconductors, software applications, and reliable energy to power those ecosystems.