1Q25 Fund Update

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So Jon, 2025 started with a bang for US equities.

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So much to talk about. I’d love to get your view on

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what I think is the key question we’re now being asked

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by clients, which is,

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is America still a great place to invest?

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Yes, we think it is,

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which might sound surprising coming from a Canadian,

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I definitely do not want to be part

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of the 51st state of the US. It’s not surprising

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that the markets have been unsettled by, you know,

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Trump’s unconventional style, his combative trade policy.

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But, you know, the attributes that have made the US

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a very good place to do business

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and a good place to be an investor over time,

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in our view, are enduring.

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They’re gonna outlast a democratic administration,

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a republican administration, even someone

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as different, uh, as Trump.

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And that’s because a lot of the reasons

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you look at a very shareholder friendly culture,

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incredibly entrepreneurial, country.

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I mean, if you look at the, the amount

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of very large companies

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and wealth creation that’s come from businesses

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that have been,

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and ideas that have been hatched in someone’s basement

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or in a garage.

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So very innovative and dynamic

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and those ideas need to be financed.

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And the US has an incredible depth, from angel investors

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to venture capital to private equity to where we exist,

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you know, in the public capital markets,

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energy, self-sufficiency.

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So a lot of these things we think are enduring.

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And I would point out on tariffs,

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while tariffs overall could be perceived as a negative.

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The US

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because it’s so domestically focused, is more able to

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absorb the negative effects

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of tariffs than other countries economically.

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And tariffs are of course very topical

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and we just had liberation day.

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So we read the headlines,

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but obviously as investors we get to talk

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with companies and engage with them.

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I’d love to get your view from, from your travels

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and speaking with companies, how are they dealing

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with tariffs right now?

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It’s a great question and quite a few members

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of the investment team have actually been in the US

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recently, and you’re getting two different

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or two views from, from company managements.

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One is short term and one is long term,

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In the short term they’re pausing, which is understandable

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because they’re not sure what some of the policies are.

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So they’ve paused. Long term

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many of them are actually quite optimistic of

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where the administration is actually heading with respect

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to less regulation, which tends to fall,

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a lot more on smaller and mid-sized

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companies than than large companies.

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Lowering the budget deficit and the debt

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and driving stronger

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and faster growth in the private economy.

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So long term,

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they’re very much optimistic on where we’re going.

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The key is landing the plane, so to speak, you know,

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between now and then in getting from where we are today

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to that place. In terms of tariffs, specifically

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for our companies, we believe we’re relatively well

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positioned, for a few reasons. Some companies have

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that we hold, have quite strong pricing power,

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so they will be able to raise the prices

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to accommodate the higher prices.

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The companies that we have also,

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there’s quite a few domestic,

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oriented companies in the portfolio.

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And the companies that have foreign operations,

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quite a few of them have local for local production.

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So if they’re making something in

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Mexico, it’s staying within Mexico.

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If they’re making something in

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China, it’s staying within China.

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And then we have a few business models,

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like distributors that actually like higher nominal prices.

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So all told on a relative basis pretty well positioned,

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with one caveat, which is, you know, we can discuss

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and debate that overall raising the tariff level might lower

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aggregate demand, but that’s for everyone.

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Absolutely. And you, you mentioned

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make caps with respect to regulation,

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and I believe we also think that midcaps

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because they are slightly more domestically focused again,

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could, could be more resilient to tariffs.

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Yes. And obviously we, we now in a lot of them,

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in these kind of companies,

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sub 50 billion I think are about half the fund right now.

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And that’s in stark contrast

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to obviously the magnificent seven

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and are holdings in those, which is only kind

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of one holding in Microsoft now.

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And so that really leads me to the next question,

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which is around the change in environment for magnificent,

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magnificent seven and whether their underperformance this

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quarter in your view has been merited?

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We think it has.

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and if you look at these companies, you know,

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since the launch of chat GPT in November, 2022,

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you’ve seen an extraordinary

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run, you know, for these companies.

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I think in the last two years they were almost half the

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contribution to the S and P 500’s return.

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So, while they’re in different gig sectors, they’ve kind

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of moved in unison on the back of this AI narrative.

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and they’ve been spending a lot of money to, of course try

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and seize this opportunity,

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this transformational opportunity.

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So I think any news that came out that dampened enthusiasm

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for AI was not gonna be taken well by markets

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and, you know, prior to DeepSeek,

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there was already concerns that some

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of these companies might have been spending, um, you know,

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overspending on AI.

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And then of course, DeepSeek came out and

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accelerated these concerns around,

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the return. The fact that you had a model put out

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that had the capability of these Western model,s

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but a fraction of the price, you know, really put a lot

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of questions over the amount of money that’s being spent,

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and the monetization potential.

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So the Mag seven, as you know, has traded at a premium

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to other companies in the market

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and they’ve earned it. Faster earnings growth,

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higher free cash flow margins,

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and higher returns on capital.

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But we see more uncertainty

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regarding all three of those going forward.

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If you look at forward expectations, the growth premium

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of the magnificent seven versus the rest

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of the market is starting to narrow.

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And then in terms of the free cashflow margins

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and the returns, they put so much money into AI

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that we are now concerned that the free cash flow margins

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and the returns, there’s more risk there.

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And we really need to see, you know, revenue

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and products coming from the

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amount of money that they’ve spent on.

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And so far speaking to our companies,

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we haven’t actually seen a lot. Yeah,

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Very interesting.

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One quotation I really like when thinking about AI is

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just what’s generally true of technology that we tend

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to overestimate the impact

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of the technology in the short run,

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but underestimate it long term.

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And I think we’d agree that AI has huge potential kind

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of long term, but to your point, kind of picking winners

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and losers at this stage really, really difficult.

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But we do like technology.

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I think it’s our second largest sector,

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which is obviously very different from some of the,

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you know, equal weighted index for instance,

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which has less there, so not quite as much as the S & P 500

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and certainly not in the magnificent seven.

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But a but a healthy weighting in

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technology more broadly.

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So we talked a lot about the market, rightly so.

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There’s been so much getting on going on,

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but I’d love to get onto performance.

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How have we done this quarter?

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What didn’t go so well? What went well?

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So the fund finished,

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the first quarter down about 1.7%, which is about 3%,

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better than the benchmark.

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And while we’re never happy

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to see the fund decline in value.

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You know, this does mark the, I think the 31st

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of 33 quarters where the benchmark has fallen

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and the fund has outperformed relatively.

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If you look at the top contributors

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and detractors to performance,

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the most consistent theme among them is kind of stability

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or perceived lack of stability,

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or sensitivity to economic growth.

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So if you look at the top contributors’ performance

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companies like Waste Connections, which is a waste,

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you know, removal company, Berkshire Hathaway,

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incredibly strong balance sheet, the insurance brokers,

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Arthur J. Gallagher

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and Marsh McClellan, which, you know, these companies tend

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to have less economic sensitivity and are

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considered to be much more stable.

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And if you look at some of the big detractors, again,

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I believe six of the top 10 detractors

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to performance were either in the technology

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or the industrial sector.

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So again, the perception of higher

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economic sensitivity is really what drove, you know, most

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of the contributors and detractors to performance.

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Yeah, understandable.

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Given everything that we’ve been discussing today Yeah.

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And a period of, of more uncertainty.

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So, chance for me to ask you a question, uh,

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firstly, congratulations.

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You are the new CEO of Findlay Park.

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Interested in your thoughts,

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what are you most excited about looking forward?

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There’s a lot that I’m excited about and Thank you.

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So two things really.

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I think firstly just the stage of

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where we are in our evolution.

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So we’re 27 years old as a company,

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and I think that’s an amazing balance between having

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experience

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but also being young enough to continue

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to evolve and grow.

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And I think the second thing is that, in these periods

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of volatility, that’s really where over time

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we have outperformed the market.

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And we’ve seen something of that this quarter.

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And so I think this could be a really interesting

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environment for Findlay Park going forward.

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And I’m really thrilled to have a front row seat.

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Thanks. Congratulations.