Policy Clarity Creates Near-Term Value; AI Drives Long-Term Growth

John Hillenbrand, CPA

Key Points:

• The third quarter of 2025 marks a pivotal transition. Policy uncertainty has begun to resolve, providing a more constructive environment for disciplined long-term investors, and the economy continues to demonstrate solid mid-cycle characteristics.
• We believe policy clarity around trade, taxation, and regulatory frameworks should continue to reduce market volatility and enable economic growth to improve from the lower and volatile growth seen in the first half of 2025.
• The artificial intelligence (AI) revolution is accelerating across consumer and enterprise applications, creating compelling investment opportunities for companies positioned to capitalize on this transformative trend, which remains a core long-term investment thesis.
• We remain vigilant about risk management given potential headwinds including mid-cycle economic slowdown, policy implementation challenges, and potential overextension in certain market segments. We are utilizing convertible securities and options strategies to manage downside exposure.
• Our diversified approach emphasizes companies with strong cash-flow generation, pricing power, and clear returns on AI investments, and we maintain defensive characteristics through the fund’s multi-asset structure.

As we enter the third quarter, we believe the investment landscape reflects a market that is successfully navigating the transition from policy uncertainty to operational clarity. The initial volatility of early 2025 has given way to a more stable foundation as markets adapted to the new administration’s economic agenda, creating opportunities for disciplined investors focused on both near-term policy beneficiaries and transformative long-term themes.

Policy Normalization Creates Constructive Environment

The forthcoming resolution of key policy uncertainties has provided welcome clarity for markets and corporate planning. Despite fueling some near-term inflation pressures, trade policies appear manageable within the broader economic context. Our analysis suggests that companies are successfully implementing selective pricing, sourcing, and cost-containment strategies to mitigate tariff impacts while maintaining competitive positions.

The economy’s continued mid-cycle characteristics—solid employment, moderate GDP growth, and normalizing inflation—provide a stable backdrop for risk asset allocation. Corporate earnings visibility has improved as management teams adapt their operational strategies to the new policy environment, focusing on efficiency gains and margin protection. We also expect the Federal Reserve to move forward on projected rate cuts later this year as the moderate tariff impact emerges.

We anticipate particular strength in sectors positioned to benefit from policy clarity, including financials benefiting from regulatory normalization, transportation companies adapting to trade flow changes, and infrastructure-related businesses positioned for domestic investment priorities. The Federal Reserve’s measured approach to monetary policy supports our constructive outlook and allows the central bank to maintain flexibility in responding to evolving economic conditions.

Along with cyclical improvement, we expect the market to reward quality growth companies with proven execution capabilities—businesses that demonstrate operational excellence and strategic clarity. Our security selection process continues to emphasize companies well-positioned for both policy-driven tailwinds and secular growth opportunities such as AI.

The AI Revolution: A Core Long-Term Thesis

The AI transformation has moved decisively beyond the experimental phase into wider consumer and commercial adoption, validating our conviction that AI represents the next major technology innovation wave. Consumer AI applications like ChatGPT have achieved unprecedented user growth, reaching adoption rates that dwarf previous technology innovations. More significantly, for our investment thesis, enterprise AI applications are demonstrating clear revenue generation and productivity improvements.

Corporate AI coding solutions have driven significant productivity gains and cost efficiencies across enterprise IT operations over the past year. This amplification isn’t merely about semiconductor demand—although that remains robust—but rather a comprehensive transformation touching every aspect of the digital economy, from productivity enhancements to entirely new business models.

We believe our diversified AI holdings strategy has proven prescient. Rather than concentrating solely on obvious beneficiaries, we’ve positioned across the entire AI ecosystem:

• Consumer AI platforms driving user engagement and monetization
• Enterprise AI solutions delivering measurable productivity gains
• Software infrastructure enabling AI deployment and scaling
• Data center operators providing the computational backbone
• Hardware suppliers powering AI workloads
• Power infrastructure supporting the energy demands of AI operations

This approach captures value creation at multiple levels while reducing concentration risk in any single subsector. We focus on companies demonstrating disciplined capital allocation with clear returns on AI investments, separating genuine AI-driven value creation from speculative positioning. Our positioning includes large- and smaller-capitalization companies and equity and convertible securities.  We believe these multiple layers of diversification can provide an optimal balance between risk and reward in this core long-term theme.

Managing Risks in a Dynamic Environment

While our outlook remains constructive, we maintain a heightened awareness of potential risks that could impact market dynamics and portfolio performance. Our risk management framework addresses several key areas:

Economic Cycle Risks: Despite mid-cycle stability, we monitor for signs of economic deceleration that could pressure corporate earnings and market sentiment. Extended policy uncertainty or implementation challenges could weigh on business confidence and investment decisions.

Policy Implementation Risks: Although policy clarity has improved, negative developments in trade negotiations or unexpected regulatory changes could create renewed volatility. We’ve observed how rapidly policy shifts can impact sector rotation and market sentiment.

Market Technical Risks: Some market segments may face valuation pressures if investor sentiment shifts or if technological progress disappoints relative to elevated expectations. Strong relative strength indicators in some areas suggest the potential for sharp corrections.

Sentiment and Positioning Risks: Given the positive market sentiment entering the period, any unexpected developments could have amplified impacts on asset prices and sector allocation.

Our multi-asset approach directly addresses these risks through several mechanisms:

• Convertible securities can provide downside risk mitigation while maintaining upside participation in growth themes
• Options overlay strategies have added meaningful value year-to-date, demonstrating active risk-management benefits
• Diversification across sectors reduces concentration risk in any single theme or policy outcome
• Quality focus emphasizes companies with strong balance sheets and sustainable competitive advantages
• Defensive positioning in stable portfolio components provides ballast during volatile periods

Looking Forward: Balancing Opportunity and Prudence

Our current positioning reflects confidence in both near-term policy beneficiaries and long-term secular winners, with particular emphasis on companies demonstrating operational excellence and strategic clarity in navigating the current environment. While short-term market dynamics will continue to create challenges (as always), our conviction in the long-term AI transformation remains high. We’re still in the early phases of what we believe will be a multidecade shift comparable to the internet revolution but with potentially greater economic impact.

Our balanced approach seeks to provide both participation in this historic opportunity and resilience during periods of uncertainty. We remain focused on quality companies with sustainable advantages, reasonable valuations, and alignment with enduring technological and economic trends, while maintaining the flexibility to adapt as conditions evolve. We believe the fund’s multi-asset structure—combining equities with convertible securities and systematic options strategies—provides the flexibility to capture opportunities across different market environments while managing downside risk.