by Tom Bradley

For a professional investor and student of cycles like me, it’s a fascinating time to be alive. Consider what capital markets were chewing through in the first quarter alone. 

The fear of AI disruption took hold in February, with the market vigilantes selling first and asking questions later as they rotated through the industry sectors deemed most vulnerable. 

As part of the hunt, sentiment shifted violently away from capital light businesses, the market darlings of the last decade, and refocused on industries perceived to be impervious to AI. Software is now a dirty word while the hot new acronym is HALO – heavy asset, low obsolescence. 

The world of private assets was in turmoil.  More people want out of credit funds than could be accommodated, and private equity managers were stuck holding companies far longer than planned. 

Gold continued on a tear until the thing most people hold it for happened. We had a geopolitical crisis and the price went down.

Budgets for data center spending, which has turned into the mother of all capital spending cycles, increased despite a view by many that it was already excessive.   

And of course, investors made decisions in the fog of war where the most important market factor was, how long will President Trump be willing to continue? 

You get the picture.  There’s a lot going on. The war has been blamed for recent stock and bond market declines, but as always, it isn’t quite that simple. The first bombs hitting Iran were clearly a trigger, but markets were already running on fumes. Bond and stock valuations were stretched, risk-taking was extreme (leverage; options trading; AI and bitcoin hype), and uncertainty around trade policy was moving into a second year. 

As you’ll see in this report, stocks were down across the board in the first quarter, with the exception of ones related to energy. I expect client returns will vary widely across the industry due to the war, and the rapid shifts between the narratives mentioned above. 

Our funds were cautiously positioned to start the year, not because we anticipated a war and energy crisis, but rather because of high valuations and excessive speculation. A larger than normal cash position served the Founders Fund well, as did an on-going focus on profitable companies trading at reasonable multiples.  

What hasn’t yet helped is the Founders Fund’s full allocation to high quality bonds. Bonds are usually a safe haven at times like this but returns were flat as worries about inflation pushed interest rates up and overshadowed an increased chance of global recession. Bonds don’t like inflation but thrive during periods of economic weakness. 

How do we plan to deal with what’s going on?  We will stay well diversified, and recommend being a little more cautious than usual, which means the Founders Fund is conservatively positioned and our retired clients have their spending reserves topped up. And as always, our fund managers and team here at Purpose remain laser-focused on long-term value, no matter how noisy it is around us.