Generation PMCA commentary for the third quarter ended September 30, 2025, titled, "Long Live Value Investing."
Some have argued that value investing is dead. Growth names have considerably outperformed. Passive (index-linked) investments now represent the majority of ETFs and mutual funds. These two phenomena have been reinforcing because the growth companies—pricier companies whose valuations tend to overshoot as growth is prized—represent such a disproportionate portion of major indices. Because information is so readily available, markets are highly efficient and many contend that markets no longer produce meaningful anomalies. As such, strategies focused on value have been regarded as outdated.
But claims of the death of value investing are always prevalent near market tops, when speculation has unduly lifted securities, seemingly without reference to underlying value. Bitcoin is up because bitcoin is up. Gold is way up. What kind of “safe haven” is as volatile as stocks? And it trades about 2.7x its cost of production—a level only briefly reached by 4 other commodities in the last 50 years, all of which promptly sold off dramatically. Many stocks are also ignoring underlying fundamentals. Anything AI related has been raging.
Active managers generally underperform underlying stock indexes. It’s mainly because indexes are designed to include the strongest companies—most are cap weighted, overweighting the largest ones—while weaklings are culled. No fees or commissions in indexes helps too. Over the last 20 years, fewer than 2% of all U.S. mutual funds have managed to beat the S&P 500. As such, why would investors not simply passively invest in index ETFs?
Stacking the Deck in Our Favour
To us, the answer is simple; by employing the tenets of value investing we can buy high-quality undervalued securities that are being ignored, while avoiding poor quality or expensive ones. Therefore, our process begins with specifically designed screens of leading securities and/or markets to distill a list of those that are likely to outperform. Then, these positions are assessed utilizing our TRAC™ tool to optimize entry and exit points.
Some assert that stock prices always reflect the value of companies. But prices fluctuate way too much to constantly be indicative of value. Most academics argue markets are mostly efficient, and we agree; however, inefficiencies certainly exist. Though, in our wired world, inefficiencies don’t last as long. Therefore, we need to react relatively quickly when an opportunity presents itself, and similarly when a position reverts to our estimate of its Fair Market Value (FMV).
Indexes are currently positioned to underperform. Markets have been more efficient than usual leaving fewer companies undervalued. Some have traded too high above their underlying values, pushing overall indexes too high, right to ceilings in our work.
In the short term, market psychology drives prices. Over time, economic reality prevails and prices coincide with values derived from businesses’ bottom-lines. That’s right out of the value investing handbook. Value investing isn’t dead; it’s just been overshadowed.
Weakening Fundamentals
Across the U.S. and Canada, construction is contracting for housing and commercial buildings. You don’t need to tell Toronto condo builders there’s a contraction. Sales activity is 90% below the 10-year average and prices per square foot are down over 22% from their 2022 peak.
Lenders generally have become anxious. For example, lenders are changing terms to require unanimous consent before borrowers can cause a new loan to rank ahead of theirs. At the rate this is occurring—over 80% of all credit deals—it’s possibly an early-warning sign about impeding credit issues. Delinquencies are already up for consumers and small businesses, while sub-prime borrowers are feeling an even greater pinch. Business bankruptcies are running high too.
In the first 3 quarters of 2025, companies cut 55% more jobs than the comparable period last year, the most since the 2020 recession. October’s job cuts were the most for October since 2003. Consumer sentiment is awful and, based on history, is foreshadowing much more unemployment.
Capacity utilization has weakened globally, down to about 75% from its peak of 79%. This likely means additional idle capacity, lower capital spending, increased corporate financial pressures, and potential price cuts. While it doesn’t auger well for economic growth, it implies lower inflation. Disinflationary pressures should also continue from AI—a productivity enhancer and expense reducer—as well as tariffs which inhibit global trade, and other growth suppressors such as high government debt levels, contracting money supply, and anemic population growth. As a result, lower interest rates are likely.
The economy has been buoyed by spending on AI infrastructure which has been astounding, though it is unlikely to last at its current level. U.S. IT spending has risen to nearly 4.5% of GDP, just below where it peaked in the dot-com bubble. Further evidence that it’s overdone, Microsoft, Amazon, Alphabet, and Meta have spent 10 times what they’re receiving in AI revenue this year, and profits, if any, would be negligible. These companies are now spending over 60% of their cash flow on capital expenditures, up from a more normal average of 30%. And we won’t even delve into the complications around the key players who seem to be funding each other, i.e. investing in/financing customers.
GDP growth rates have already fallen and profits margins nearly always follow too but, unusually, margins have increased for the past year or so.
Competition from China is coming. Though U.S. protectionism could slow its onset, misplaced U.S. policies are forcing lasting structural changes. The political climate has led many Chinese born academics and tech experts to flee the U.S. and return to China. Already, China produces many products more efficiently and much cheaper. Now, with better funding, more R&D, and operating in a more competitive fashion, with more urgency, it could catapult ahead. China is responsible for half the world's most-cited scientific papers, compared to a decline to one-third from the U.S. China could take the lead in key areas such as AI, quantum computing, and biotech.
Priced for Perfection
Yet, major U.S. and Canadian stock markets are close to all-time highs, at or below TRAC™ ceilings, and priced above FMVs, leaving them vulnerable to price declines. Long-term attractiveness is poor too, since real returns (net of inflation) have never been positive over a 10-year period when equity valuations have been this high. The ratio of the Wilshire 5000 (the broadest measure of U.S. corporate prices) to after-tax profits has only been higher during the dot-com bubble.
The stock markets don’t seem to care. Market speculation has continued. Equity call option volume relative to puts—bullish bets versus bearish—is the highest on record. Equity ownership is at all-time highs, itself implying poor 10-year expected returns. And the Russell 2000 small cap companies that are unprofitable were up 30% in 6 weeks through mid-October, while high-quality stocks’ underperformance is at a low not seen since the dot-com bubble.
Given that valuations are so high, U.S. growth is weakening, and our Economic Composite, TEC™, is still alerting us to a potential recession, we continue to maintain hedging strategies by either holding short positions (where authorized) or inverse long ETFs.
Our Model Portfolios
Our managed accounts are invested based on one or more of our Models (particular investment strategies with notional allocations of securities). A managed account’s holdings will generally be similar to its applicable Model’s, but may not hold all of them based on client-specific factors (income requirements, tax-related considerations, requests/restrictions, and cash available for purchases) and/or market forces which impact specific investment decisions from time to time.
The following descriptions of the holdings in our managed accounts are intended only to explain the reasons that we have made, and continue to hold, these investments in the accounts we manage for you and are not intended as advice or recommendations with respect to purchasing, selling or holding the securities described. Below, we discuss each of our new holdings and updates on key holdings if there have been material developments.
All Cap Model
The All Cap Model combines selections from our large cap strategy (Global Insight) with our small and medium cap ideas. We generally prefer large cap companies for their superior liquidity and lower volatility. The smaller cap positions tend to be less liquid and more volatile; however, we may hold these positions where they are cheaper, trading at relatively greater discounts to our FMV estimates, making their risk/reward profiles favourable.
There were no recent material changes in our smaller cap holdings, and no smaller cap purchases or sales. Our large cap positions are summarized in the Global Insight section.
Global Insight (Large Cap) Model
Global Insight portfolios hold large cap stocks (typically with market caps over $5 billion at the time of purchase but may include those in the $2-5 billion range) where portfolios are managed Long/Short or Long only. At an average of less than 70 cents-on-the-dollar versus our FMV estimates, our Global Insight holdings appear much cheaper, in aggregate, than the overall market.
We adjusted our lululemon FMV estimate down to $260 to reflect the impact from U.S. tariffs. While we expected some margin erosion from tariffs, we did not expect the removal of the de minimis exemptions (one could receive products in the U.S. with a value of less than $800 without duties). lululemon itself wasn’t expecting that removal, if at all, until 2027. And the impact is widespread since 92% of all cargo shipped to the U.S. (about 4 million packages a day) apparently fell under de minimis exemptions prior to the removal in August. Approximately two-thirds of lululemon’s online U.S. shipments were being fulfilled by its Canadian warehouses. The company already has plans to offset half the impact of the additional tariffs and de minimis exemption removal. Potential price increases could further assist in alleviating these cost pressures. It also blames itself for being too lax with respect to new product launches, so that should be revitalized going forward too. The company is adding about 40 new stores annually, or over 5% per year to its store base. Its return on invested capital remains way above the average company, even with its depressed forward earnings base, which should be a temporary low point.
In the last few months, we have made several changes in our large-cap positions. We bought Adobe, Blue Owl Capital, and Wise. We sold Marvell Technology, Uber Technologies, Universal Health Services, and Warner Brothers after each ran up TRAC™ ceilings near our FMV estimate and we sold Alibaba Health Information Technology, Ping An Insurance, and Alibaba Group as each broke below TRAC™ floors.
Adobe provides productivity and creative software for businesses, creators, and marketing professionals. Key products include Acrobat, Express, Firefly, and Creative Cloud. Naysayers have argued that artificial intelligence apps such as Sora and Nano Banana could replace the need for Adobe’s creative suite. We believe Adobe’s products should remain the gold standard for creative work since its suite is the only solution that synthesizes commercially safe AI with powerful tools for human input, options for custom art, video, and music, and final formatting for print, video, web, and social media. We view AI as a growth driver, not an existential threat. Top-line growth should be in the high-single-digits and free cash flow could hit $10 billion this fiscal year. Our FMV estimate is $440.
Blue Owl Capital is a rapidly growing U.S. asset manager with over $250 billion under management. Its funds operate primarily in direct lending with holdings also in various General Partnerships and private REITs. Almost all its fee revenue is from permanent capital, because of multi-year lockups or indefinite holding periods in the case of its listed Business Development Companies or GP stakes. While the stock has fallen because the market has become concerned with private credit risks generally, the company underwrites its loans to Great Recession conditions, the average loan-to-value is only 39%, and historical credit losses have been a mere 11 basis points. Direct lending should continue to capture market share from banks and other traditional lenders. Blue Owl trades well below our estimated FMV of $27 and yields 6.4%.
Wise is a UK-based financial services company whose products have been designed to offer a faster, cheaper, foreign exchange solution for retail and business customers. Where banks often charge 2-3% for cross-border transactions, which are burdened with administration, Wise transfers average only 52 basis points (which it keeps reducing) and over 74% of its transactions are instantaneous. A Wise VISA debit card is a useful tool for any international traveler. Over 70% of new customers have been generated by word of mouth but the company is now marketing aggressively to further advance its already robust growth. Earnings are expected to continue to grow by 15-20% annually. The company should not be susceptible to competition from Stablecoins, which are geared to one currency. Wise aims to minimize competitive threats by increasing the number of countries where it’s registered under regulations to operate, onboarding major partners, and lowering prices. Our FMV estimate is £13.5.
Multifaceted Diversification
We also aim to limit volatility and drawdowns by combining investment strategies, especially where returns are less correlated. The goal is to outperform through economic cycles with low correlation, therefore less susceptibility, to market index declines. We can construct portfolios with multiple unique return drivers—strategies that differ in style and approach—based on bottom-up fundamentals, macro tools, or pure quantitative analysis. This can provide exposure to different styles and asset classes beyond just stock and bond indexes.
The benefits of multifaceted diversification are not only from different ways to perform but also from a portfolio comprised of strategies that are less correlated. So that when a strategy underperforms, it’s less likely to occur at the same time as another strategy, which softens the volatility and drawdowns of the overall investment portfolio.
Global Tactical Allocation Model
Our Global Tactical Allocation Model (GTAM) investment process combines macroeconomic analysis with valuation and momentum. ETFs (exchange traded funds) are used to gain exposure to 4 broad asset classes: Equities—major markets, emerging markets, sectors, styles, private equity; Fixed Income—bonds issued by governments, investment grade corporations, high-yield issuers, as well as mortgages, and bond indexes; Real Assets—real estate, infrastructure, renewable energy; and Commodities—Precious Metals or Oil. GTAM emphasizes ETFs that should outperform based on the macro environment, are selling at attractive absolute and relative valuations, possess good relative price momentum, and are at TRAC™ floors.
Current exposures are: Equities (44%); Fixed Income (31%); Real Assets (23%); and Commodities (none). Its current broad themes are emerging markets, U.S. real estate, U.S. consumer staples, and U.S. healthcare. The consumer staples and healthcare sectors are undervalued and sitting at TRAC™ floors. In fixed income, long-term U.S. bonds were sold after rallying on rate cut anticipation.
Quantitative Investment Models
Quantitative equity strategies commonly select securities based on systematic, rules-based decisions, using technology to uncover and exploit historical statistically significant anomalies. Our quantitative equity strategies employ proprietary and systematic processes that rank large cap stocks based on factors such as relative valuation, operating metrics (quality), financial strength, and price momentum. The two models noted below select approximately 40 holdings from the top-ranked stocks in the model’s respective universe. Portfolios are rebalanced every 6 months with interim partial rebalancing. TRAC™ is also utilized to optimize entry and exit points.
The Quantitative Global Value Model (QGVM) invests in large-cap equities from around the world. The U.S., Canada, and Japan currently represent the top three countries. The top 3 sectors are Energy (19%), Industrials (16%) and Communication Services (9%). QGVM has a price-to-earnings ratio of 15x, much lower than 23.6x for the ACWI. The model’s dividend yield is 3.4% versus the ACWI’s 1.6%.
The Quantitative Canadian Value Model (QCVM) restricts its universe to Canada’s S&P/TSX Composite. The top 3 sectors are currently Materials (25%), Energy (16%), and Industrials (11%). After an incredible multi-year run, most precious metals companies are at or near TRAC™ ceilings; we expect to rotate out of our precious metal positions and use proceeds to invest in more undervalued opportunities. We believe QCVM has similar quality metrics as the S&P/TSX, yet on average, QCVM’s holdings have a lower valuation (median forward P/E of QCVM is 12.4x, versus the S&P/TSX constituents 15.1x) and a higher dividend yield (3.1% compared to 2.3% for the index).
Income Model
Our high-yield investment strategy has an average current annual yield (income we receive as a percent of current market value of income securities held) of about 5.4%, and most of our holdings—corporate bonds/debentures, preferred shares, REITs, and high-yielding common shares—trade below our FMV estimates.
U.S. high-yield corporate bonds (ICE BofA Index) yield 6.8%. Long-term U.S. government bond yields have remained higher than most expect because inflation remains higher than bondholders prefer. High-yield corporate bond spreads are also quite narrow relative to history. We expect a widening, especially if the economy weakens and corporate delinquencies escalate.
We recently purchased Blue Owl Capital (described above under Global Insight) and XIOR Student Housing, Europe’s largest student housing company because we were attracted by its 100% occupancy rate, 5% steady rental growth rate, new projects, discount to our €39 estimated FMV, and 6% dividend yield. We sold Northland Power and HA Sustainable Infrastructure, as both rose to TRAC™ ceilings in line with our FMV estimates.
Investment Grade Income Model
Our investment grade strategy utilizes a systematic process to rank Canadian investment-grade rated corporate bonds based on their duration, yield, financial strength, and momentum.
Currently, positioning has emphasized longer-dated bonds—duration is 10.6 years, 5 years more than the S&P Canada Investment Grade Corporate Bond Index. The average yield-to-maturity is 5.1% versus 4.1% for the index.
A Rare Breed
As indexes run higher and passive investing gains even more converts, value investors are becoming scarce. But bottom-up security selection based on value and quality, while not easy, should be sought out and embraced, especially when market valuations are so high.
Value investing uses common sense. We endeavour to buy at a discount and sell at fair market value. We emphasize quality businesses, diversify holdings, and hedge via shorting or inverse longs when our models indicate a recession or bear market. We can diversify across strategies too, for exposure to additional assets classes or geographies which ought to reduce drawdowns and volatility. None of that sounds like it should be scarce.
The best investment ideas tend to come from well-sourced idea generation. We continue to integrate all our tools to screen for the best new potential investments, to constantly parse and analyze the results, and to find appropriate entry and exit points for those selected for inclusion.
Underlying fundamentals ultimately matter, even though psychology can overwhelm for some time. Just like their investments, value investors themselves are currently ignored. But time and logic are on our side. We’re nowhere near extinction.
Long live value investing.
Randall Abramson, CFA
Generation PMCA Corp.
November 25, 2025
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