In the initial half of 2026, Highwood Value Partners experienced a 9.8% reduction in its portfolio value. This adjustment positions the firm's total return since its inception at a positive 58.7%, calculated in Canadian dollars after all fees. This performance contrasts with the MSCI Europe SMID Cap index, a key market benchmark, which recorded an 83.2% increase over the same period. The market continues to be heavily influenced by substantial investments in Artificial Intelligence infrastructure, a trend Highwood has consciously sidestepped due to its inherent volatility and uncertain returns. Despite this market dynamic, the majority of the businesses within Highwood's portfolio showed robust fundamental growth, aligning with the firm's strategic investment theses.

Highwood is strategically adapting its investment approach by integrating Artificial Intelligence to enhance analytical capabilities and refine investment hypotheses. This shift aims to boost the firm's capacity for due diligence and data analysis, identifying resilient, high-quality global businesses that are currently undervalued as capital flows predominantly into AI-focused sectors. The firm remains committed to its core mission of compounding capital through fundamental value investing, focusing on businesses with strong underlying fundamentals and less correlation to the speculative 'Big Bet' on AI infrastructure. This approach also involves a rigorous assessment of potential disruption risks posed by AI to existing business models, ensuring the portfolio maintains a sensible margin of safety.

Navigating the AI Investment Landscape

Highwood Value Partners has observed a significant downturn in its portfolio during the first half of 2026, with a 9.8% decrease in value. However, the firm maintains a strong cumulative return of 58.7% since its inception, calculated in Canadian dollars and net of fees. This period has been characterized by an unprecedented allocation of capital towards Artificial Intelligence infrastructure, an area Highwood has consciously avoided. The firm views this 'Big Bet' on AI as highly speculative, drawing parallels to historical capital cycles like the railroad and internet booms, where initial investors often faced significant losses despite the long-term societal impact of the technologies. This cautious stance underscores Highwood's commitment to fundamental value investing principles, prioritizing long-term capital preservation and growth over short-term speculative gains.

The investment landscape is currently dominated by a massive influx of capital into AI, with Hyperscalers spending trillions to build compute capacity. This aggressive investment strategy is largely fueled by the high profitability of these tech giants, but it introduces substantial risks, including unknown unit economics, potential oversupply, and regulatory challenges. Highwood is carefully monitoring these developments, recognizing that while AI presents transformative opportunities, the financial returns for the primary investors in its infrastructure remain highly uncertain. The firm's strategy is to avoid direct exposure to this capital-intensive sector, instead focusing on identifying and investing in businesses with robust fundamentals and less direct correlation to the volatile AI investment cycle. This allows Highwood to seek out mispriced assets that offer a clearer path to sustainable returns, insulated from the speculative pressures of the AI market.

Strategic Portfolio Adjustments and Core Holdings Performance

In response to the evolving market, Highwood Value Partners is actively re-tooling its investment process to harness AI's analytical power. This involves utilizing AI to enhance data analysis, refine investment hypotheses, and perform extensive due diligence on potential opportunities. The goal is to identify high-quality global businesses that are currently undervalued, particularly those overlooked due to the market's intense focus on AI. This enhanced analytical capability allows Highwood to deepen its understanding of equity outperformance drivers and apply historical lessons, such as those from Cornelius Vanderbilt's playbook during the railroad boom, to current market dynamics. The firm is expanding its idea generation globally, seeking companies that are resilient to disruption and trading at attractive valuations, thereby diversifying its portfolio away from the concentrated risks of the AI sector.

The portfolio review highlights several core holdings that have demonstrated solid fundamental progress despite market headwinds. Burford Capital, a leader in litigation finance, experienced a setback due to an overturned court judgment but its core thesis remains strong, driven by a well-functioning origination engine and a proprietary dataset that AI can further enhance. Borr Drilling, a special situations investment in shallow water drilling, benefited from increased global demand for localized oil and gas production. Bolloré and Compagnie de L’Odet, holding companies with a stake in Universal Music Group, are poised for asymmetric upside as their circular ownership structure simplifies. GetBusy PLC, a productivity software business, is nearing an inflection point with accelerating revenue growth and expanding margins, though it faces some AI-related obsolescence risk. Fever-Tree Drinks PLC, a premium mixer company, is expanding its market through strategic partnerships, while Trigano SA, a recreational vehicle market leader, continues to gain market share and return capital to shareholders through buybacks. These diverse holdings collectively aim to provide a sensible and uncorrelated exposure to the broader market, driven by bottom-up mispricings rather than speculative trends.