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There is no doubt the SaaSpocalypse, the savage sell-off of software stocks was bad. But since we published our piece on the topic last month, SaaSpocalypse Now!, the AI disruption debate has intensified further and the selloff has broadened well beyond SaaS.

This was driven by several new tool releases from Anthropic, but it culminated when Citrini Research released a thought experiment titled, “The 2028 Global Intelligence Crisis”, on the 22nd of February. The piece imagines an AI automation shock that sees human workers replaced so rapidly that it ultimately tips the economy into a demand and credit spiral.

Source: Ophir, Bloomberg, data as at 10 March 2026. Software measured by S&P North American Technology Software Index.

We believe there are three things investors need to be doing to navigate this uncertainty:

1. Firstly, they need to understand that the debate around agentic AI disruption is more nuanced than doomsday scenarios suggest.
2. Secondly, they also need to bucket which companies will be best protected from AI disruption and will become opportunities when the debate settles.
3. And they also need to look beyond the AI noise for compelling opportunities. (One we’ve found is Artivion, our brief case study.)

Below, we examine each of these.

The Doomsday Scenario Misses Real-World Offsets

First up, we take AI disruption risk seriously. But the AI doomer fanfiction disregards the frictions, constraints, and offsets that matter in the real economy.

We don’t believe AI agents will create as much disruption as the Global Intelligence Crisis suggests for several reasons:

1. Adoption is not the same as capability

Even if the capability of AI models improves quickly, it doesn’t mean that enterprises can roll out their use quickly. Real-world deployment is challenging – it runs into process change, integration risk, legal liability, governance, and regulatory constraints. Capability can move fast. Implementation is slow, expensive, and messy.

Source: Anthropic: Labor market impacts of AI, 5 March 2026.

2. Physical constraints create a speed limit

For large-scale displacement of SaaS to happen, it would require vast infrastructure: chips, data centres, energy, and connection to the grid. If the supply of compute – the processing power needed for AI – can’t keep up with demand, its marginal cost rises. It will become less appealing for enterprises to switch to compute-intensive AI agents and substitution will slow. There is, therefore, a real possibility that infrastructure bottlenecks will limit the pace of near-term displacement.

3. The labour market is not yet showing collapse

So far, the data does not support ‘systemic’ displacement. In their own rebuttal piece, Citadel Securities pointed to still-low unemployment and continued demand for software engineers as evidence that the feared feedback loop is not present today. While there has been an increase in tech companies pointing to AI as the reason for layoffs, there is a strong case to be made that many of these businesses had bloated work forces following hiring sprees during the COVID period. While AI is clearly driving efficiency, there is likely an element of it being used as an excuse for these businesses to right-size their work force.

Source: Citadel Securities, Indeed. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.

4. AI is, mechanically, a supply shock

Finally, automation is fundamentally a productivity shock, which historically lowers marginal costs and expands the frontier of what can be produced and consumed. An economic collapse scenario requires extra assumptions layered on top: failed redistribution of wealth, no reinvestment of capital income generated by AI, and a sudden absence of new categories of demand. While this is possible, it’s highly unlikely this would occur.

The Real Debate: Speed of Absorption

That being said, we are not arguing that AI won’t disrupt white-collar jobs. It almost certainly will (see Wisetech, Block and Atlassian). To us, the real question is: How quickly the system can absorb that disruption?

If AI enables firms to do the same work with fewer people, labour displacement could occur faster than wages, policy, and new job categories can adjust. That’s the scenario that creates genuine macro risk – not the existence of automation itself.

History suggests new technologies eventually create new industries and new demand, but the transition is rarely smooth. The adjustment path matters enormously. Will we see a gradual reallocation over years, or a sharper reset over quarters?

And if the transition is too abrupt, the stabilisers will come. Government support could become an important offset – whether that’s targeted wage subsidies, retraining programs, or tax reform. Or will the productivity enhancement be so significant that we see what Elon Musk has been advocating for: Universal Basic Income (UBI)?

The point isn’t to predict the policy mix. It’s to recognise that society doesn’t just accept a sudden income shock without a response.

In our view, the AI disruption debate is not about ‘doom versus boom’. It’s a question of timing, friction, and policy reaction – and the market needs those variables to become clearer before terminal values and multiples are revised materially higher.

Our Framework: Disrupted, Protected, Native

To navigate this regime shift, we’ve been grouping AI exposure into three buckets:

1. AI Disrupted – Traditional seat-based SaaS and other business models where AI can plausibly substitute the paid workflow.
2. AI Protected – Businesses with stronger moats: regulatory barriers, proprietary data, network effects, infrastructure positioning, mission-critical integration, and switching costs.
3. Native AI – Unlisted, early-stage, or not yet created.

The issue today is that Buckets 1 and 2 have been sold off together. The market is not yet consistently distinguishing between ‘disrupted’ and ‘protected’.

And while our Funds haven’t been immune from this disruption via some software, ad-tech, and AI-adjacent holdings, we resisted the temptation to ‘double-down’ by increasing the weights in these names while the debate continues.

Our view is that Buckets 2 and 3 are the long-term winners, which means Bucket 2 should recover once markets regain confidence in certain competitive moats that will protect those businesses from disruption.

That is the set-up we are watching for before we materially increase weights in selected ‘protected’ software names trading on lower multiples.

Looking beyond the AI noise

Amidst the uncertainty, many investors have been seeking security in themes such as AI infrastructure/semis and defence. While we have exposure to these thematics, we are conscious of crowding. Similarly, we are not piling into cyclicals or going maximum overweight healthcare.

While we do have exposure to AI infrastructure and defence, we’re complementing it with names across a diversified range of sectors that have been overlooked and offer compelling return profiles at attractive valuations. And we’re actively seeking less GDP-sensitive names where revenue is not closely tied to the macro cycle.

Over the past two months, therefore, we’ve added a broad range of companies spanning:

• Countercyclical consumer beneficiaries
• Highly resilient industrials
• US medtech

Medtech Compounder: Artivion (NYSE: AORT)

One recent addition that illustrates how we’re finding compelling opportunities away from the AI noise is Artivion, a ~US$2bn medical device company headquartered near Atlanta, Georgia.

Artivion is focused exclusively on aortic disease – a highly specialised area of cardiac and vascular surgery. Their product portfolio spans four key areas:

• Aortic stent grafts
• The On-X mechanical heart valve
• Surgical sealants (BioGlue)
• Implantable human tissues.

They sell into more than 100 countries worldwide.

We’ve been deeply engaged in Artivion for several years and followed the company through multiple product cycles, clinical readouts, and management meetings. The work we’ve done leads us to believe the company will experience a product-led growth acceleration into 2027 and beyond.

The stock recently pulled back after the market got ahead of itself when it priced in the expectation that some of this product-led growth acceleration could be pulled forward into 2026. When the timeline reverted to the original 2027 trajectory, the share price gave back those gains.

For us, this was the opportunity because the fundamental thesis hadn’t changed. We now believe we’ve been able to buy a high-quality, accelerating growth story with over 20% three-year EBITDA compound annual growth rate (CAGR) at a ~50% discount to standard sector takeout multiples.

Source: Ophir, Bloomberg, data as at 11 March 2026.

Artivion is exactly the kind of name we’re drawn to right now: a medtech compounder with product-cycle driven growth, limited GDP sensitivity, and a valuation that reflects neither the clinical pipeline nor the margin expansion runway.

It doesn’t need a resolution to the AI debate to work. It just needs its products to keep performing – and so far, they are.

The debate continues

We also have a deep pipeline of potential investments in active, high-return opportunities across healthcare, industrials, financials, and – of course – AI winners and defence names.

We will continue, however, to maintain high hurdle rates due to crowding risks.

When it comes to AI, while the worst of the rotation appears to be over and AI-disrupted baskets of stocks have recently had some reprieve, we still don’t see an imminent resolution to this debate.

This will limit the extent to which beaten-up names can re-rate, with multiples likely to remain depressed compared to historical levels.

Meanwhile, the market is likely to keep oscillating between ‘doom’ and ‘boom’ narratives as new tools launch and macro confidence shifts.

We are pleased to announce that investors in the Ophir Global Opportunities Fund can now switch between Class A (Unhedged) and Class H (Hedged to AUD) unit classes, giving you greater flexibility to manage your currency exposure over time.

What this means for investors

The Ophir Global Opportunities Fund is available in two monthly priced unit classes:

• Class A — Unhedged exposure to international equities, meaning returns reflect both underlying portfolio performance and movements in foreign currencies relative to the Australian dollar.
• Class H — Currency-hedged exposure, where foreign currency risk is hedged back to AUD, isolating returns to the performance of the underlying portfolio.

Switching between these classes allows investors to adjust their currency positioning as their views or circumstances change, without needing to fully exit and re-enter the fund.

How to switch

Investors can initiate a unit class switch by completing the below “Switch Form“, also available on the Funds webpage. Switch requests must be received by our unit registry, Automic Group, at least three business days prior to month end and will be processed at NAV with no buy/sell spread applied. Please read the Product Disclosure Statement and Reference Guide to which the Switch Form applies.

Important — tax consideration

Investors should be aware that a unit class switch may constitute a Capital Gains Tax (CGT) event. You should consider obtaining professional advice from your financial adviser or tax accountant before proceeding.

Global Opportunities Fund: Switch Form

Please Note: Unit class switching is only available to direct investors and is not available to those invested via an investment platform.

The three big events impacting markets today

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In this Letter to Investors, we look at

• Why the history of past conflicts suggests the record oil price spike caused by the US/Israel v Iran war may not last, and why that will be good for equities.
• The momentous pivot in market leadership away from the large-cap growth stocks (the Mag-7), and what that means for the outlook for equities.
• The role played ‘doomer’ scenarios around the impact of AI agents on software stocks and whether they are likely to be true.
• The macro factors giving us confidence that small caps will continue to outperform.

The three major events impacting ‘top down’ investor thinking

Share markets generally had a pretty good February.

But wait, didn’t the S&P500 fall last month?

It did. It was down -0.8%. That’s its first negative total return month since the Liberation Day stinker back in April 2025.

But that’s just what was visible at the surface.

If we look deeper, the US share market in February was dragged under by the dead weight of the Magnificent 7 (Amazon, Apple, Google, Meta, Microsoft, Nvidia, Tesla). As a collective group, the Mag 7 slumped -7.3%.

But what if we remove the distorting effect of the Mag 7’s gigantic size? Well, on an equal weighted basis – where all 500 companies instead get a 0.2% weight each – for the month, the S&P500 was actually up +3.6%!

Most other major markets were also up, including

• Australia (ASX200, +4.2%)
• Europe (MSCI Europe, +4.1%)
• The UK (FTSE 100, +7.0%)
• Japan (Nikkei, +10.4%).

But then in early March, markets were rocked by the US/Israel attack on Iran that sent oil prices soaring and equities sharply lower.

We now have three big, overlapping forces that are creating rough seas and causing confusion for markets and investors:

1. The new US/Israel v Iran war that kicked off at the end of February.
2. A rotation in market leadership that has ended three years of large-cap growth-stock leadership by the Magnificent 7. This has been exacerbated by the fog hanging over software stocks from doomsday scenarios around the impact of agentic AI.
3. The evidence (predating the war above) of a mid-cycle acceleration in US economic and earnings growth.

Let’s look at each in turn.

The war: How long will it last?

Despite the multiplicity of effects listed above, you could be forgiven for thinking that we are in a single variable market. When it comes to the direction of daily financial market moves in early March, the state of the US/Israel versus Iran war, and its impact on oil prices, seems to be the sole influence.

The reasons for the US (with Israel) initiating the war aren’t entirely clear but include:

1. Stopping Iran from developing nuclear weapons.
2. Destroying Iran’s ballistic missiles and military capabilities.
3. Getting ahead of an imminent threat from Iran.
4. The US being forced to join Israel in the first strikes so they didn’t suffer greater retaliatory casualties; and
5. To replace the current Iranian regime.

Without a clear rationale, however, it’s hard to understand where the finish line might be and whether the war will be over in days, weeks, months or even longer (Iraq/Afghanistan anyone?).

The most obvious financial market impact of the war has been the stratospheric rise in the oil price after the Iran-controlled Strait of Hormuz was effectively shut down.

Some 20 million barrels a day of crude oil flow through the Strait each day – or about 20% of total daily global oil consumption. That’s one important choke point!

That disruption caused the oil price (WTI) to shoot up intraday on the 9^th of March to just shy of USD$120 a barrel. From the start of the year, the oil price has more than doubled.

If we use closing day prices, at writing, the oil price jump is almost equal to the post-1980 record rise seen in the first Gulf War in 1990.

In uncharted (oil) territory

While the first Gulf War may take the record (so far) for the largest percentage jump in the oil price since 1980, today’s war has seen the fastest – one week in early March recorded the biggest weekly jump in the oil price ever!

Source: Ophir, Bloomberg.

Just how dangerous is this situation?

Here are the three things that stand out to us from past oil spikes caused by geopolitical events:

1. The pattern is pretty consistent. Across six major geopolitical shocks – from the Iran-Iraq War in 1980 to Russia’s invasion of Ukraine in 2022 – oil prices often spike hard and fast … they then give the gains almost all back.
2. The current Iran shock is one of the most violent early moves we’ve seen. A near 60% spike in a few trading days puts the US & Israel conflict firmly near the top of the pack for speed and magnitude of the initial oil price reaction. Dramatic? Yes. Unusual? Only if it continues on from here.
3. The median tells us what to expect from here. Oil prices historically fell back to pre-shock levels in approximately 4-5 months. In the chart below, if history rhymes, the spike is largely done.

Source: Bloomberg. Ophir.

So while investors are worried about a prolonged disruption, history suggests that disruptions are temporary.

The most important factor is not how high oil prices go, but for how LONG they stay high.

The question we are asking ourselves now is: Is Iranian supply actually off the market this time? Or is the oil price spike just a fear premium?

If fears around the impact of the war on Iran’s oil supply are just that, fears, then we can use the median pathway of 4-5 months for prices to fall back to pre-shock levels as our roadmap.

We think US President Donald Trump will ultimately be persuaded to back down from the war if that is the only means to sustainably get the oil price lower.

Trump is facing a very important mid-term election this year and he won’t want to be adding cost pressures to consumers at the petrol pump or through rate hikes to combat oil price-induced higher inflation.

The playbook from past shocks such as this suggests they tend to see short-term, mean-reverting oil price spikes, which creates short-term negatives for equities, but then equities tend to bounce back over the next 3-6 months.

Unless the Trump Administration wants to perform a coup de grâce on its domestic economy, we suspect it will avert the worst-case outcomes on the oil and share markets.

And it seems the market agrees. Futures markets at present have the oil price (WTI) back down below USD$70 a barrel by the end of this year and dropping rapidly over the next few months.

The ‘Death of Software’ was greatly exaggerated (maybe)

OpenAI launched ChatGPT to the public on the 30^th November 2022. The launch triggered an incredible run for the Mag7, US large-cap growth stocks and the US share market in general.

2023, 2024 and 2025 saw the S&P500 put on 24.2%, 23.3% and 16.4%, respectively, each of those years.

When it comes to three-year market streaks in the U.S. since 1928, the run from 2023 sits well within the top decile (top 10). As Sinatra might say, “It was a very good year(s)”.

Source: Bloomberg, Datastream, Goldman Sachs Investment Research.

But for the last five months or so, the S&P 500 has been largely treading water between the 6500 and 7000 levels.

The waters have been pretty calm of late if you were an index investor.

Like a duck on a pond

But like the proverbial duck on a pond, beneath the surface, the legs have been whirling. In the chart below, you can see the volatility of individual stocks within the S&P 500 index minus the volatility of the index itself.

Source: Goldman Sachs

And market leadership has been undergoing some momentous pivots.

Basically, the car (index) isn’t going anywhere lately, but the passengers (companies in the index) keep swapping around all the time and trying to fight for who is going to drive the car (index) forward.

While it was clear who was driving from when ChatGPT was launched at the back end of 2022 until about three months ago (the Mag7), that has become less clear recently.

Strong commodity and oil prices have seen energy and materials stocks jump into the driver’s seat to dominate.

At the same time, IT stocks, and software companies particularly, have been on a rollercoaster ride as AI has moved from the much less valuable ‘telling you stuff’ (ChatGPT) period, into the much more valuable ‘doing stuff’ for you (AI agents) phase.

This new phase, caused by the emergence of powerful new AI agents, has seen ‘doomer’ narratives emerge, suggesting that we will imminently see one person in a garage ‘vibe coding’ to create a whole leading enterprise software solution that will drive leading software businesses into bankruptcy and put everyone out of work.

As you know, those fears triggered a huge sell-off in SaaS stocks (The SaaSpocalypse) that had widened during the first three weeks of February.

Fortunately, leading voices such as Jensen Huang, founder of the world’s most valuable company, Nvidia, have provided some credible pushback against these most extreme narratives, and we’ve seen a reprieve bounce in software names since the last week of February.

We unpack the SaaSpocalypse in much more detail in this month’s Investment Strategy Note where we push back against the most extreme ‘doomer’ narratives.

A Deep Breadth – at last

What does the changing underlying structure of the market and leadership mean for our space and the recent outperformance of small-cap stocks?

In our last couple of Letters (here & here), we highlighted how breadth had been returning to global equity markets, particularly the US share market. For the first time in years, small-cap stocks have outperformed large caps more durably.

This has happened because the lagged impact of Federal Reserve rate cuts, along with household and business tax cuts in the US, broadened economic and corporate earnings growth, diminishing the reliance on Mag7-related AI capital expenditure.

There are macro indicators we are watching that are giving us confidence that this broadening has durability.

First one caveat. The following presumes that the global oil supply issues caused by the Iran war will be resolved soon. As we highlighted, there is a good reason to expect this to occur, but it’s not written in stone.

Market breadth – and the outperformance of small caps – is intimately tied with the business cycle, which moves in years, not days or weeks, and follows a typical pattern:

• They start with lower inflation and/or softer labour market data.
• That’s followed by central banks lowering interest rates. (This is exactly what happened from 2023 through to today in the US.)
• Early business cycle data, such as mortgage applications, then start to improve.
• Then comes improving business activity (purchasing manager indices – PMIs).
• Followed by improving and broadening corporate earnings expectations.

The chart below illustrates the Institute of Supply Management’s (ISM) PMI of New Manufacturing Orders in dark blue and the breadth of S&P 500 company earnings revisions.

Source: Piper Sandler

As you can see, they move together in nice broad cycles lasting years and after a few years of both moving sideways.

They have recently both started trending upwards.

That same measure of PMI New Orders (now in orange below) also correlates quite nicely with the percentage of stocks in the US share market whose prices are trading above their 200-day moving average. (The more stocks trading above the moving average, the greater the market’s breadth.)

Source: Piper Sandler

In other words, as business activity picks up, so too does the number/breadth of stocks that are performing well.

Unless the current business cycle is knocked off course by an exogenous event (like a protracted war causing long last oil price disruption!), we can expect the trends that go along with it. That is, we can expect to see a continuation of broader equity market participation, with more stocks outperforming, including, importantly for Ophir and our investors, small-cap outperformance.

Should the oil price settle back towards its pre-war level in the near term, we expect equity markets to “go back to regular programming” that was in place early this year: increased breadth and with a tailwind behind the backs of small caps.

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SaaS versus Semis

For this month’s Stock in Focus, we’re doing something a little different.

Rather than spotlighting a single company (though we will highlight one), we’re zooming out to explore a significant rotation: The growing dispersion between software and semiconductors, particularly within the broader AI thematic.

Both groups sit under the ‘tech’ umbrella, but their near-term investor narratives couldn’t be more different.

Put simply:

• The application layer (SaaS) is being severely punished for uncertainty around the durability of its business models in an AI world.
• The picks and shovels (semis, AI Infrastructure) are being rewarded for their growth potential and the earnings certainty that AI investment is creating for them.

This dispersion is throwing up big opportunities for Ophir in both application companies and semis, but we are mindful of managing downside risks as debates about the impact of AI continue to play out.

Source: Ophir. Bloomberg.

The Software Shakeout: Zero-Seat Threat

The woes of the software sector started as a slow bleed in the second half of 2025 when it became clear AI investment would skew heavily toward infrastructure, rather than application-layer enhancements. Investors began recalibrating growth expectations for software businesses.

But then the software sector was rocked on January 12 when Anthropic released its Claude Cowork preview. It showcased autonomous agents that could perform complex workflows with minimal human input.

This wasn’t just another chatbot. It highlighted that entire seat-based workflows (licensing models based on the number of users) could be replaced.

For the past decade, enterprise SaaS companies have grown alongside corporate headcount. Products were priced ‘per seat’, and forward multiples assumed that more humans meant more licences.

But if AI agents can perform a week’s worth of work in a day, the unit of value in software – the human seat – comes under serious structural pressure.

This is the Zero-Seat Threat.

While big-cap incumbents like Salesforce (CRM) and Adobe (ADBE) have launched AI initiatives (Agentforce, Firefly) to defend their moats, these have yet to translate into a tangible revenue uplift, and investors fear that incumbents are simply running to stand still.

When long-duration stocks lose revenue predictability, multiples compress quickly. Morgan Stanley’s SaaS index forward earnings expectations are now trading on ~15x, compared to a 30-40x range since mid-2022.

Source: Ophir. Bloomberg.

The software sector is now showing its weakest technical breadth since 2018. The S&P North American Software Index recently hit it’s most oversold level ever based on its 14-day RSI (relative strength index) – even more than in the tech wreck of 2001!

Source: Ophir. Bloomberg. U.S. Software Index refers to S&P North American Technology Software Index (SPGSTISO).

Given the quantum and indiscriminate nature of the price moves in the sector, we expect there to be opportunities to invest in companies that have been oversold.

However, we are mindful that as uncertainty persists and the debate around future earnings continues, it will be difficult for many software names to see their multiples re-rate.

Meanwhile in Semis: Earnings Visibility is the New Growth

While software stumbles, semiconductors are going from strength to strength.

Semis are benefiting from both a cyclical rebound and structural AI demand.

It began, of course, with Nvidia, the poster child of the AI build-out, but it’s now expanded into the broader infrastructure stack.

The major driver is huge AI capex.

Microsoft, Amazon, Alphabet, and Meta have all locked into multi-year AI capex plans, committing hundreds of billions each toward training clusters (specialised supercomputers to build large language models) and inference capacity (infrastructure to run AI for users).

In their recent results, all of these companies provided capex guidance for 2026 that was well above market expectations.

This obviously creates surging demand for chips and chip-making infrastructure.

Source: Ophir & Company Reports. Figures in $USD.

Semis have typically been more cyclical, but massive AI capex has given them what investors love – earnings visibility.

With AI being funded in real time, order books are now full, supply is constrained, and lead times are stretched.

This has shifted the entire sector’s narrative from ‘cyclical’ to ‘critical infrastructure’.

At the same time, semis are benefiting from a broader macro recovery in PCs and smartphones.

And in January there were several key events that added more fuel to the fire:

• At CES (Consumer Electronics Show), Nvidia CEO Jensen Huang called out memory and storage as the next AI frontier.
• Samsung and Micron said the price of memory was increasing 40-50%.
• TSMC came out with really strong capex guidance of ~US$52-56 billion, which was well above market expectations.

As a result, memory and storage names have continued to surge, including (approximate 1-year returns) SanDisk (+1,520%), Seagate (+335%) and Western Digital (+450%).

Silicon Motion Technology Corp (Nasdaq: SIMO)

A key holding for us in the storage space is Silicon Motion (SIMO), which performed strongly in January following CES.

The company is a global leader in the semiconductor industry, specifically acting as the ‘brains’ behind modern storage.

Silicon Motion is a ‘fabless’ company, which means they design the hardware and software but outsource the actual manufacturing to foundries like TSMC.

The company designs NAND flash controllers. A controller is a small processor that manages how data is stored, retrieved, and protected on NAND flash memory (the chips found in SSDs and smartphones).

Silicon Motion’s products are found in:

• Solid State Drives (SSDs): Used in PCs, laptops, and data centers.
• Mobile Storage: eMMC and UFS controllers used in smartphones and IoT devices.
• Specialty Solutions: Industrial-grade and automotive storage (e.g., in-vehicle infotainment and ADAS).

Source: Ophir. Bloomberg.

Managing Exposure Across the Stack

So how is Ophir playing this dynamic?

From our seat, this isn’t just about picking winners amidst an ever-shifting debate and material share price movements.

It’s about managing risk and not doubling down when stocks could de-rate further.

We believe in application-layer AI, but the market will take time to separate the winners and the survivors from the losers and the disrupted.

And while we remain exposed to some AI infra winners, we’re conscious that ‘earnings certainty’ trades rarely last forever as the market eventually overcapitalises future earnings and pays too high of a multiple.

While we will selectively invest in SaaS names that have cash flow support and have catalysts to reduce uncertainty, we won’t be relying on a recovery in software or a continuation of semi strength to drive future performance.

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The Great Currency Hedging Debate

In this Letter to Investors, we look at:

• The record small cap outperformance run in January, and why we think the small cap renaissance will be sustained.
• What is causing the big changes in market leadership, including the ongoing surge in gold and silver.
• Why traditional software companies remain on our radar despite the recent fear-driven indiscriminate selling across the sector.
• Whether, in light of the Aussie dollar ripping in January, investors should hedge their currency exposure to our global funds?

After ho-hum headline index returns of 1.4% for the S&P 500 and 1.8% for the ASX 200 in January, you might be thinking that not much happened to start 2026.

You’d be dead wrong!

Under the surface, there was a lot going on, and we want to touch on four key developments in this month’s Letter:

1. Record small cap run

The first is that investors had small caps front of mind.

While the S&P 500 was +1.4% in January, over in small cap land, the Russell 2000 was up 5.4%.

Global small caps (MSCI World Small Cap Index) outperformed global large caps (MSCI World Large Cap Index) for 16 consecutive trading days – the longest streak in the 30-year history of the data!

Source: Bloomberg. Global Small Caps is represented by the MSCI World Small Cap Index and Global Large Caps is represented by the MSCI World Large Cap Index.

As we’ve been saying for some time now, valuations, including relative valuations, are like an elastic band, and they can snap back fast.

Global small caps have been trading at the cheapest valuation to global large caps in 25 years.

Last month, we covered how we think the catalyst for this snap back for outperformance to start was Small Caps earnings expectations outperforming like they have been in recent months (link).

This broadening in earnings growth, particularly outside of the Magnificent 7 in the U.S., is happening as the U.S. economy looks to be in the early days of a mid-cycle acceleration.

At the time of writing in early February, another key leading economic indicator helps to confirm this with the Manufacturing Purchasing Managers Index (a key cyclical real-time barometer of the U.S. economy) seeing the biggest monthly gain since we were all released from COVID lockdowns in 2020.

This is important because it gives us confidence the small cap snap-back is not another short-term ‘head fake’; but rather a more durable broadening in economic and earnings growth that includes small cap land.

2. Gold glitters

You must have been hiding under a non-shiny rock to not hear about what’s been happening recently to the price of shiny metals – gold and silver.

In January, gold was up 13.3% and silver rose 18.9%. This was after they rose 64.6% and 148.0% respectively in 2025.

Move over share investing!

It could have been even better. Gold and Silver were up over 25% and 60% each at one point during January (!) before President Trump announced the new Federal Reserve Chair would be Kevin Warsh.

Markets view Warsh as a more hawkish choice for interest rates than his main competitors. In response, the U.S. dollar and bond yields rose in late January, which reduced the appeal of precious metals as a hedge against worries that too low interest rates would stoke inflation fears and dollar debasement.

All in all, still a great month for gold, and a bad one for any boyfriend planning on buying their partner jewellery.

This fed into a cracking month for the materials sector, which rose 9.5% in Australia (ASX 200) and 8.6% in the U.S. (S&P 500).

Materials was only pipped by the Energy sector, which rose 10.6% in Australia and 14.4% in the US after the oil price (WTI) surged 14% in January off the back of Iran conflict supply concerns and Winter Storm Fern in the U.S. disrupting production.

3. Software sinks

On the flip side, the IT sector globally and software businesses in particular have faced a bloodbath.

It started at the back end of 2025 and has picked up steam this year.

Domestically in Australia, the IT sector was down -9.4% in January, while it fell a much more modest -1.7% in the U.S.

This understates the carnage in the U.S., though, where the S&P 500 Software Index was down -13.1% on the month, nearly twice the fall of the next worst industry group.

What caused it?

Well, it’s a murderer’s row of suspects, including:

• Claude’s new AI release
• ChatGPT
• Agentic coding
• Fear of what’s to come from Elon Musk’s ‘Macrohard’ – which started as a joke on Microsoft’s name.

But broadly, investors have become petrified at how easy it might be for AI to replicate and improve on traditional software businesses, particularly those operating what was previously thought of as stable Software-as-a-Service models (delivering applications on the internet usually via subscriptions).

The victim list so far is a roll call of some of Australia’s best-known tech names, like Xero, TechnologyOne, WiseTech, Catapult Sports, Pro Medicus and Life360.

In the U.S., it includes names like Atlassian, Docusign, ServiceNow, Salesforce, Palantir and Adobe – all those names are down -20% or more so far this year, at time of writing.

The sell-off has been indiscriminate, with high-quality stocks tossed out with the low quality, and those with likely big moats against AI disruption getting carted with the rest.

It’s interesting, because if history tells us anything with the internet, it’s that the software application layer of the internet made all the money – think Google, Meta, Amazon, WhatsApp, etc.

But with AI, there are essentially five layers:

1. Energy needs: Including companies like Constellation Energy that power data centres.
2. Chips needs: NVIDIA is the clear standout here in the semiconductor design and manufacturing space.
3. Memory/storage needs: Mostly in the cloud, in data centres with winners like Microsoft Azure, Amazon Web Services, Coreweave and NextDC.
4. Large Language Models: Like Claude, ChatGPT, Gemini and Grok, which are the most visible winners so far.
5. Application software layer: This is also where some hardware like robotics sits as investors debate what form factor the software will be delivered in – e.g. desktop/mobile/glasses/robot, etc.

There will no doubt be new AI-enabled application software companies that we don’t know yet, or haven’t been established, that will likely be big winners and household names in 5-10 years.

But to assume all of today’s traditional software companies are going to be losers and not be able to successfully integrate and leverage AI seems very shortsighted.

It really is an environment of ‘shoot first, ask questions later’ at the moment. So important is this topic that we’ve written this month’s entire Strategy Note about it, which we encourage you to read (link).

For now, the Materials, and particularly commodities outperformance, as well as software underperformance, have created headwinds for our style of investing and performance.

At the margin, we are typically structurally underweight Materials (which is a more cyclical/value sector) and overweight IT (which has more high-quality growth style companies). Andrew covers this in this month’s video update (link).

Importantly, though, it’s clear some of these traditional software businesses today that are able to harness the benefits of AI to increase their moats, along, of course, with new AI-related start-ups, will be some of the best performing in the years ahead, and they remain firmly in our investment ‘hitting zone’, which keeps us incredibly excited.

4. Big currency movements

Finally, anyone in Australia who has been booking their U.S. holiday trip at the moment will likely have been licking their lips.

In January, the Australian dollar rocketed above US$0.70 for the first time in a few years and is well above the sub-US$0.60 level it reached at one point last year.

Source: Bloomberg. Ophir.

While this is great for holiday makers to the U.S., it is a headwind to the performance for the Australian-dollar returns of the unhedged classes of our global small/mid-cap Funds, the Global Opportunities Fund and Global High Conviction Fund.

We do have a 100% currency hedged class of the Global Opportunities Fund available though (Class H), and it protected against the appreciation in the Australian dollar in January relative to all the major currencies in which we invest, including the U.S. dollar, Euro, British Pound and Japanese Yen.

Why did the Australian dollar increase against so many foreign currencies? Will it keep happening? And should you hedge it?

Given the U.S. dollar represents 60-70% of our currency exposure in the Global Funds, we’ll keep our focus here.

There have been two key factors pushing down on the U.S. dollar lately:

1. The Fed is expected to cut rates by more than any other major central bank (some central banks including in Australia and Japan are actually hiking.) That makes U.S. interest rate yields less attractive to foreign investors and therefore reduces demand for U.S. dollars.
2. With U.S. exceptionalism fading and risk sentiment improving as global growth improves, capital flows are shifting to more ‘risk on’ countries, including Australia.

Will this trend of an appreciating Australian dollar continue in the near term?

Sadly, the answer, if we are being honest, is that no one really knows with any high degree of confidence. (The RBA itself simply forecasts no change in its projections.)

Since 1983, when the AUD began freely floating against USD, it has averaged almost bang on US$0.75. Where we are today is pretty close to that average.

With official rates likely still pointing higher in Australia and lower in the US this year, as well as evidence of acceleration in growth helping to support commodity prices, there may be a little upside still to the Australian dollar.

That said we are pretty close to that long-term average and short-term forecasting of the currency is perhaps the most difficult of all asset prices.

Fortunately, in the longer term, it tends not to matter that much whether you are hedged or unhedged for currency movement in your exposure to overseas equities.

You can see this below, where the difference in annual returns between hedged and unhedged U.S. equity returns, from the perspective of an Australian investor, can be big – often in the 10%-30% range.

But when you get out to 10- and 20-year rolling periods, the difference is quite small (often 0-3% p.a.).

Source: Bloomberg. S&P 500 Index used for U.S. Equity returns and AUD/USD exchange rate used to compute unhedged returns.

There is one key benefit, though, of the unhedged Global Opportunities Fund classes: foreign currencies, and most notably the U.S. dollar, are negatively correlated with global share markets.

When share markets sell off, like in March 2020 after COVID first broke out, the U.S. dollar tends to rise, and the Australian dollar fell, offsetting the decline in an Australian investor’s exposure to the U.S. equity market.

For example, the currency-hedged maximum drawdown of the S&P 500 in March 2020 was -33.9% while the unhedged number was -24.3% as the Australian dollar fell from US$0.67 to around US$0.57.

That is why, long-term, most Australian investors have larger allocations in unhedged global equities than funds that provide currency hedging.

At the end of the day, the choice is yours! We’ll just be working our butts off, aiming for the underlying companies we invest in to provide great returns for you.

As always, if you’d like to chat to us about any of the Funds, please feel free to call us on (02) 8188 0397 or email us at ophir@ophiram.com.

Thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs.  You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation.  Ophir does not guarantee the performance of the Funds or return of capital.  An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment.  Past performance is not a reliable indicator of future performance.  Any opinions, forecasts, estimates or projections reflect our judgment at the date this was prepared and are subject to change without notice.  Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

The missing ingredient for small cap outperformance is here.

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The 2025 narrative rollercoaster

With Trump 2.0 at the helm of the world’s largest economy, many investors expected 2025 to be a wild ride and boy, it certainly did not disappoint.

Shifting investor narratives were enough to cause whiplash, turning the morning headline check here in Australia into a real rollercoaster.

Consider just some of the questions that were crammed into a single year:

Is the U.S. headed for a recession?

Does Trump want to tank the U.S. economy to drive rates lower?

Does Trump want to run the economy hot, caring less about returning inflation to target?

Are we in a market bubble? Or maybe just an AI bubble?

Will the Fed Chair be fired, or will the Fed lose its independence?

How high will U.S. tariffs go, and what will that mean for growth and inflation?

Is rising U.S. imperialism hurting its investability?

Is World War III about to start?!

Are all our jobs going to be replaced by AI?

Despite all that, including a -19% drawdown in April after Trump’s Liberation Day tariff announcements, the S&P 500 put on a very healthy +16.4% in 2025. This followed gains of +23.3% and +24.2% gains in 2024 and 2023. It has been a very good few years for global share market investors, particularly those exposed to U.S. large caps, more specifically, mega cap tech companies.

New year, same winners

Perhaps the most surprising thing is that, despite the macro and political volatility dominating headlines, you were better off throwing your crystal ball in the bin at the start of 2025 and simply sticking with what had worked in 2024 and 2023.

As shown below, U.S. large caps again outperformed mid and small caps, while growth orientated stocks outperformed value.

On a sector basis, the winners were once again familiar, with Technology (think Nvidia, Apple, Microsoft) and Communication Services (think Google & Meta) coming out on top.

Source: Piper Sandler, Ophir.

BUT, we do not see 2026 as a “Connect 4” year where the same large cap growth playbook delivers a fourth consecutive year of outperformance. We unpack why a little later.

First though, despite U.S. and global small caps underperforming large caps again in 2025, we want to highlight what drove the larger than normal outperformance across our global funds.

2025 Ophir performance highlights

Enter the multi-factor performance attribution we have been sharing with investors over the last few years. In 2025, our Global Opportunities Fund returned +27.1% before fees (+25.6% after fees) compared with its benchmark, the MSCI World SMID Cap Net Return Index (in AUD) which returned +9.9%.

Global Opportunities Fund: Multi Factor Attribution

Source: Ophir, Bloomberg, Citi. Past performance is not a reliable indicator of future performance.

Crucially, this outperformance was not driven by tailwinds from industry or country skews, nor by a bias towards small companies relative to the benchmark. In fact, all of the typical factors or characteristics monitored by our performance attribution software detracted from returns in aggregate.

Instead, “Selection Effect” or stock-picking, accounted for more than 100% of the outperformance, contributing +30.6% of the +17.2% excess return.

As regular readers will know, this is great news.

It confirms that our bottom-up due diligence is doing the heavy lifting, rather than returns being boosted by unintended factor exposures or “free kicks”.

Another stand out feature of the Global Opportunities Fund’s performance in 2025 was how it behaved in both rising and falling markets.

While the return profile remained consistent with our long term style, it was even better than usual.

As shown below, since inception “S.I” (October 2018), in months when the benchmark has risen, the fund has delivered, on average, around 140% of the benchmark’s return.

For example, if the benchmark rose by +1.0% in a month, the fund rose by around +1.4% on average. This highlights our tendency to outperform in rising markets.

Global Opportunities Fund: Outperforming in up markets & protecting capital in down markets

Source: Ophir, Citi. Past performance is not a reliable indicator of future performance.

On the flip side, in months when the market has fallen, the fund was down only around 95% of the benchmark on average.

Or for example, if the benchmark fell -1% in a month, we fall around -0.95% on average. This means, on average, we fall less in down markets.

The key takeaway here is that we generally outperform by more in up markets than we tend to outperform in down markets, while still delivering outperformance across both environments. This characteristic is shared across all Ophir funds.

In 2025, this profile was even more favourable. The Global Opportunities Fund captured almost 180% of the upside, well above the long term average of 140%. On the downside, it fell only 73% of the market on average, compared with the long term average of 95%.

The result was a smoother and more attractive experience for investors over the year, something we continually seek to improve.

And finally, on the topic of investor experience, we want to highlight progress in an important statistic called “Tracking Error“, a statistic closely watched by sophisticated institutional allocators, such as large superannuation and pension funds, which has almost halved over recent years – a great thing!

What is tracking error? Put simply, it measures the volatility of a fund’s monthly outperformance or underperformance relative to its benchmark.

For example, in December the Global Opportunities Fund (Class A) returned +1.6% compared with a benchmark return of -0.8%, meaning an outperformance of +2.4%. Tracking error measures how consistent or variable those monthly relative returns are over time [1].

Clearly investors want outperformance, but they also want that outperformance to be delivered consistently. More stable relative returns are generally viewed as more reliable than returns driven by a small number of exceptional months.

Looking at the rolling one-year returns for the Global Opportunities Fund, the volatility of relative performance (1 year tracking error) has fallen sharply to around 6 to 7% per annum, compared with around 12% per annum in the early years of the fund.

Importantly, this improvement has not come at the expense of returns.

Over the past three years, the fund has outperformed its benchmark by +10.9% per annum after fees, delivering +26.0% per annum versus +15.1% per annum. Since inception in 2018, outperformance has averaged +9.4% per annum after fees, with returns of +18.5% per annum versus the benchmark’s +9.1% per annum.

More outperformance, delivered more smoothly. That’s something every investor wants.

Global Opportunities Fund: Volatility of out/underperformance almost halved

Source: Ophir, Citi. Past performance is not a reliable indicator of future performance.

The Missing Ingredient: Earnings

There is no shortage of geopolitical risks for investors to digest, from ICE raids in Minnesota, to the toppling of a dictator in Venezuela, and the prospect of military action involving Iran and Greenland, to name just a few.

From an economic perspective, however, particularly in the U.S. as the world’s primary growth engine, there are several positives supporting ongoing equity market strength:

• The lagged effect of Fed interest rate cuts with the potential for more to come;
• Falling oil prices which effectively act as a tax cut for consumers;
• Large tax refunds flowing to U.S. households, alongside accelerated depreciation for capex and R&D expenditure under Trump’s One Big Beautiful Bill;
• Ongoing deregulation, with the likelihood of further stimulus and affordability measures ahead of the U.S. mid term elections in November.

Together, these factors have recently driven outperformance in more cyclical areas of the U.S. share market, such as transport, housing and manufacturing, helping broaden market participation beyond a narrow group of stocks.

Since the rates induced sell-off in equity markets in late 2021, small caps, one of the more cyclical and risk sensitive segments of the market, have underperformed.

This is illustrated in the chart below, where the red line shows the Russell 2000 (U.S. small caps) divided by the S&P 500 (U.S. large caps). It’s been heading south for a LONG time which highlights prolonged small cap underperformance relative to large caps.

While there have been brief rallies lasting days or weeks linked to hopes for lower inflation or interest rates, these moves have not been sustained.

What has been missing is the key catalyst investors expect lower rates to deliver: earnings growth. The gold line in the chart shows small cap earnings expectations relative to large caps over the next twelve months.

Source: Bloomberg. Indices indexed to 100.

As with individual stocks, earnings are the primary long term driver of index performance. From 2022 through to mid 2025, small cap underperformance closely mirrored their relative earnings underperformance.

There is now compelling evidence that this is changing.

When combined with improving momentum in early cycle sectors, a supportive economic backdrop and broader market participation, this emerging earnings outperformance represents the final ingredient needed to support sustained small cap outperformance.

It has been a long wait, but as small cap specialists, we believe this shift sets up a favourable tailwind for the asset class in 2026 and beyond, and ultimately for the Ophir funds.

[1] Technically tracking error is calculated as the standard deviation (volatility) of monthly out or underperformance.

As always, if you’d like to chat to us about any of the Funds, please feel free to call us on (02) 8188 0397 or email us at ophir@ophiram.com.

Thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs.  You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation.  Ophir does not guarantee the performance of the Funds or return of capital.  An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment.  Past performance is not a reliable indicator of future performance.  Any opinions, forecasts, estimates or projections reflect our judgment at the date of this was prepared, and are subject to change without notice.  Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

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Finding Alpha in Zeta

In a sea of marketing tech companies competing for attention, Zeta has quietly established itself as one of the most compelling players in the space. But it hasn’t all been smooth sailing, especially when it listed.

We first met Zeta in 2021 during a virtual roadshow shortly after what can only be described as a disastrous IPO. Just after listing, the analyst from the bank who listed the stock came out with a Neutral recommendation and a price target below the listing price. This contributed to the stock falling nearly 50% post IPO, and for a while, Zeta became a name most investors avoided.

So we took a meeting, did the work, and came away with a very different conclusion.

How We Gained Conviction

Major agency partners are the core customer base in Zeta’s market. After a series of diligence calls, we found repeated evidence of Zeta’s superior return on ad spend (ROAS) compared to the incumbents. We also sat through a two-hour technical demo with Zeta’s product engineers and walked away convinced the platform had the scalability, usability, and performance to support sustained growth with large enterprise clients.

In short, Zeta was misunderstood, but not broken.

Keeping Our Finger on the Pulse

In Q3 2024, with the stock having exceeded our price target, we exited our position. After consistently beating and raising every quarter post IPO, we believed the stock was priced for perfection and the market was paying two years forward. We still liked the story, but felt the set-up required growth to accelerate further.

Source: Zeta Global Investor Day Presentation, October 2025.

As anticipated, guidance wasn’t enough to satisfy the markets’ elevated expectations.

Following the conservative 2025 guide, a short report attacking Zeta’s data integrity was released. This is a classic vulnerability for advertising technology (AdTech) businesses and the stock was sold off aggressively. We had already done deep diligence on Zeta’s data pipeline and knew from customer and partner conversations that the underlying data quality had been reviewed and validated by some of the most sophisticated agency buyers globally.

We believed the short report, while well-timed, was opportunistic. So we re-entered in Q4 2024 at a significant discount to intrinsic value.

Source: Ophir. Bloomberg Data as of 10 December 2025.

What They Do and Why It Works

Zeta is a leading U.S. marketing technology (MarTech) company. Their platform helps large enterprise customers identify, engage, and retain customers more effectively by using predictive AI, real-time signals, and a differentiated first-party data graph.

Unlike traditional software companies that sell you an “empty” database to fill with your own customer data, Zeta provides the software already filled with a massive proprietary dataset of consumer identities and behaviours.

This unique combination allows them to bridge the gap between AdTech (acquiring new customers via ads) and MarTech (retaining customers via email/SMS), a convergence that defines the current industry landscape.

Source: Zeta Global Investor Day Presentation, October 2025.

The Thesis in Focus

Zeta is a classic, Rule of 40 compounder, but isn’t currently trading like one.

• Organic revenue growth of 20%+
• EBITDA margins in the low 20s, growing toward 30%+ by 2030
• Multiple M&A levers to accelerate platform expansion
• Trades on just ~11x forward EBITDA

With margin expansion and top line momentum both in place, we believe Zeta deserves to re-rate back to the high-teens multiples it saw during prior periods of growth acceleration.

COR refers to Cost of Revenue, S&M to Sales and Marketing, and G&A to General and Administrative expenses.

Source: Zeta Global Investor Day Presentation, October 2025.

What Gives Us the Edge

• 20+ customer and agency diligence calls across several years
• Portfolio company usage validation from advertisers and data partners
• Three separate product walkthroughs with Zeta’s engineers to assess capability evolution
• Built conviction through multiple cycles — pre-IPO dislocation, post-rally exit, and re-entry after short attack

Why We Still Hold

We held a mid-sized weight going into the most recent result, halved it post-print due to macro uncertainty, and have since increased our position size as macro uncertainty has started to abated (relatively speaking).

• Q3 results beat EBITDA by ~10%, and consensus for 2026 was upgraded
• Yet the stock finished flat for the month
• Multiple is now at its lowest in years, despite ongoing earnings momentum

This isn’t about betting on the macro, but if risk sentiment improves, Zeta is well-positioned to slingshot out of this multiple compression phase.

Managing the Beta

It’s important to highlight: Zeta is a cyclical, higher-beta name. And that’s a feature, not a bug.

• It offers tremendous upside when confidence returns to the macro
• We believe the downside remains manageable, but it can be volatile during periods of macro uncertainty

For now, we’re happy owning a mid-sized position given the attractive multiple and as the macro backdrop shifts, we can flex the weight accordingly.

Final Word

Zeta may have started its public life under a cloud, but what’s emerged since is a category leader with a clear value proposition, an expanding product suite, and the kind of performance profile that earns loyalty from budget-conscious agency buyers.

With ongoing growth, rising margins, and a valuation that provides more reward than risk, we see Zeta as a name that can quietly compound, then quickly re-rate when sentiment catches up.

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Investing in the share market: Go all-in or stage your entry?

In this Letter to Investors we look at

• The importance of ‘factors’ in driving short-term market moves.
• How a radical reshaping of interest rate cuts in November led certain factors, particularly growth, to underperform during the month.
• How these factor dynamics temporarily affected our Ophir Funds performance in November, and how they’re now unwinding … assisting with outperformance in our Global Funds at writing in December.
• We also look at the vital topic of whether to invest your money all at once in the market (lump sum) or in staged investments (staged market entry) over time.
• As part of our analysis, we look at which strategy – lump sum or staged – has outperformed over the last 50 years.
• And we then factor in risk/volatility and examine how staged investing is really like an insurance policy.

Last month, a very well-known Australian businessman said he wanted to  invest in one of our share Funds.

But then he asked us: “Should I invest all at once, or stage it in over time?”

A great question – and one every investor faces.

And in this month’s Letter to Investors, we want to share our answer.

But first, we’d like to touch on November’s performance. All of our Funds underperformed during the month. But we are not concerned.

Why?

Factor facts

While earnings drive share prices over the long term, so-called factor headwinds or tailwinds can sway performance in the short term.

What are these factors?

There are an almost unlimited number of ‘factors’ professionals track these days. But essentially, they are various characteristics shared by certain groups of shares, including:

• The size of the company (small caps, mid-caps, etc)
• How liquid its shares are
• How fast their earnings are growing
• The stock’s valuation (cheap, etc.)

Professional investors often crowd in and out of these ‘factors’ at different times based on when they think the macroeconomic or market environment is going to suit a particular factor.

A radical move

November was one of these months where we saw big factor moves.

The precipitation factor? (pardon the pun).

The U.S. Federal Reserve.

Heading into the end of October, markets thought the Fed was a sure thing to cut rates at its next meeting in December.

But then Chair Powell poured cold water on that idea at his post-meeting press conference on October 29.

As a result, over the first three weeks of November, the market switched to expecting a higher-for-longer interest rate environment.

The probability of a December rate cut crashed from 100% to about 30%.

For those who don’t track market pricing for these probabilities, for such a brief period, this is a radical move.

Probability of Rate Cuts

Source: Bloomberg for FOMC meeting at 10th December 2025. Data as of 30 November 2025.

Growth hit

The new higher-for-longer expected rate environment triggered winners and losers amongst various factors:

• Growth, liquidity and beta underperformed.
• Low volatility and lower valuation stocks outperformed. (The chart below shows factor moves for U.S. small caps in November.)

Higher interest rates, particularly if unexpected, impact the valuations of growth-orientated stocks more as they have more of their lifetime cash flows further out in the future, and when you discount those future cash flows with a higher interest rate to determine their valuation today, that results in a bigger valuation drop.

U.S. factor headwinds in November

Source: Bloomberg for the Russell 2000 index long-short factors. Data as of 30 November 2025.

You will get some further idea of the relative factor performance of growth versus value-oriented companies in the U.S. in November in the microcaps chart below.

While we don’t really fish as low down the market capitalisation spectrum as microcaps, it shows that growth-oriented microcaps underperformed their value counterpart in November by the fourth most of any month in the last 20 years!

One of the largest factor headwinds – Growth vs Value

Source: Bloomberg. Data as of 30 November 2025.

Given the importance of the U.S. Federal Reserve in driving the direction of interest rate policy globally, this growth underperformance compared to value was broad based in the U.S. in November and also impacted the Australian share market.

Sticking with our edge

For Ophir, as a manager seeking to invest in higher-growth businesses (and why wouldn’t you in small caps, as that is where the next 10 or 20 bagger is found), this underperformance of growth naturally created a headwind for our performance in November.

In the last week or so of November, as further Fed Governors came out in support of an end-of-year cut, Fed rate cut probabilities for its December meeting headed back towards 100%. However, that led to only a partial recovery in the underperformance of smaller, less liquid growth businesses.

But now, at the time of writing in December, growth style companies in the U.S are continuing their recovery from the November factor underperformance, and as a result, our Ophir Global Funds have outperformed so far in December.

There will be times where having a growth factor bias will be like running into the wind; other times, it’s like running with a wind at your back.

But, ultimately, companies that consistently grow earnings faster than market expectations will be rewarded, and finding them is where we believe our edge is.

Market Entry – dip your toe or jump in all at once?

Back to this month’s key topic!

You’ve got a lump sum of cash, and you want to start investing in the stock market. You might consider ploughing it all in today. But then you worry: what if the share market then slumps?

Fortunately, there is a wealth of data available that can help investors make better-informed decisions.

Below, for the last 50 years of Australian share market data (ASX 300 index), you can see the average 12-month results for

• ‘Lump sum’ investing (investing all at once).
• ‘Staged market entry’ (four equal investments at the start of each quarter over 12 months).

Source: Bloomberg. ASX 300 total return used for Lump Sum option. ASX 300 total return and Bloomberg Ausbond Bank Bill Index returns used for calculating Staged Market Entry return. Bloomberg Ausbond Bank Bill Index return used for Cash return.

On average, lump sum investing wins.

This makes sense because share markets tend to rise over a year. Delaying your investment through staged entry is, therefore, on average, going to hurt you.

And, of course, just sitting in cash earning interest has provided the worst result – though investors today would love to get a 7.1% return from their cash investment![1]

Lump sum risk

BUT, that is not the end of the story.

The world does not live in averages.

As famed investor Howard Marks said: “Never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average”.

If we look at the ‘risk’ to those average annual returns we saw above – or the spread of outcomes around those averages – we see that lump sum investing was the riskiest.

Source: Bloomberg. Data from 1975 to 2025.

You don’t have to be a brainiac to understand why.

The share market return is more volatile than keeping all, or some, of your money earning interest from a cash investment. So going in all at once means you could do either a lot better than the 14% average … or a lot worse.

Naturally, by potentially staging their investment, it’s the ‘lot worse’ outcome investors are thinking of protecting against.

Like an insurance policy

So next up is the really insightful data to help you make your decision.

We have chopped share market returns over a year up into 10 deciles – or in other words, 10 equal baskets from the worst 10% of annual share market returns to the best 10%.

We have then looked at how much more, on average, you’d be better off from staging market entry compared to lump sum investing.

Source: Bloomberg. Data from 1975 to 2025.

What you can see is that:

• Staging makes you better off if share market returns are in the lowest return four deciles, or the worst 40% of returns.
• However, more often, staging makes you worse off because it underperforms in the best six deciles or best 60% of returns.
• There is also a ‘negative skew’ to staging. That is, staging makes you worse off to a greater extent in the best returning share market environments than it makes you better off in the worst returning share markets (i.e. -16.2% versus +10.2%).

The best way to think of staging market entry is like an insurance policy on your house burning down. Most of the time, you won’t need the policy, and it’s costing you money.

However, if your house burns down, or in this case, if you have unfortunate market timing and the share market falls after you’ve just started investing, then staging will have saved you money.

Why not just be a better market timer and only invest in a lump sum when you know the share market is going to go up over the next 12 months?

Sadly, that’s not possible.

Things like an expensive share market, or one that has gone up a lot over the past year, have virtually zero predictive power of what the share market is going to do over the next year.

And the longer you wait in cash for a ‘perfect’ share market opportunity, the likely longer you will have been sitting on the sidelines watching a rising share market go by.

A better-informed decision

So, as we see it, just like whether to purchase insurance for a house that might burn down, each individual needs to make up their own mind as to whether the insurance from staging your market entry – which will likely cost you money on average – is worth it for the peace of mind that it will have saved you money if share market returns turn out poor over the next year.

In our experience, for big, meaningful investments, many people choose to stage.

Ultimately, the choice is yours.

But hopefully, you are a little more informed now to make your decision.

[1] This seemingly high 7.1% average 12-month cash return is so high in large part due to the high interest rate/inflation years in the 80s and early 90s.

As always, if you’d like to chat to us about any of the Funds, please feel free to call us on (02) 8188 0397 or email us at ophir@ophiram.com.

Thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs.  You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation.  Ophir does not guarantee the performance of the Funds or return of capital.  An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment.  Past performance is not a reliable indicator of future performance.  Any opinions, forecasts, estimates or projections reflect our judgment at the date of this was prepared, and are subject to change without notice.  Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

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In this edition of our Letter to Investors, we look at what it takes to become – and to select – an award-winning fund, including:

• Our fantastic win at this year’s Australian Fund Manager Foundation Awards
• The vital importance of long-term consistency in becoming a top-performing fund
• Why investing in the ‘best-performing’ fund of the year isn’t always a path to riches
• Three elements that have contributed to the success of our Ophir Opportunities Fund (including a relentless focus on earnings)
• Why we’re so excited about the outlook for our global small cap fund

Pounding the Rock – the Stonecutter’s credo

When nothing seems to help, I go look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before. – Jacob Riis

The above quote is from The Making of an American, a 1901 book by the Danish American journalist Jacob Riis. It was about the idea that success often comes after long unseen labour.

NBA basketball team the San Antonio Spurs adopted it as a team motto under Hall of Fame and five-time Championship coach Greg Popovich.

It’s one that we love here at Ophir and one we’ll come back to in this month’s Letter.

Ophir awarded best Australian Small Companies Manager 2025

But first, we’d like to share some exciting news – the Ophir team took home a major win last month at the Australian Fund Manager Foundation Awards, where we were named Best Australian Small Companies Manager for 2025.

This is our favourite industry event for two reasons:

1. It’s voted by a committee of industry peers. It’s not a ‘pay to play’ awards night like some others, where you have to pay to be considered. Bias-free is the best!
2. It raises funds for community-based charities. This year the awards supported Odyssey House NSW and the Sydney Children’s Hospital Foundation.

As Andrew mentioned on the night, the award reflects a huge team effort – and it’s only possible thanks to the tremendous support and faith of our investors who trust us with some of their life savings.

This marks the first time our Aussie small-cap fund, the Ophir Opportunities Fund, has picked up the prize.

We’re extremely proud of its long-term performance. Initial investors have now made 18x their investment with the Fund clocking up +24.5% per annum after fees.

By comparison, the benchmark ASX Small Ordinaries Accumulation Index has returned 2.6x its initial investment, or +7.6% per annum.

That outperformance puts it well ahead of every other Australian equity fund launched since 2012 – as the chart below shows – when Ophir and the Opportunities Fund began.

How many years at the top?

You might look at the chart below and think, surely there are many years where you’ve had the top performing Australian Small Cap fund.

The reality? Just one – 2015.

Below is the ranking (according to Morningstar) of the Ophir Opportunities Fund out of all the Aussie small-cap funds each year, followed by the number of funds operating:

Year to date 2025: 5/211

2024: 2/207

2023: 26/192

2022: 58/184

2021: 42/173

2020: 39/160

2019: 10/146

2018: 94/140

2017: 2/123

2016: 109/118

2015: 1/107

2014: 19/103

2013: 3/99

2012 (from Aug): 2/98

What stands out?

First, there are a LOT of Australian Small Cap Funds! In fact, there are only 200 Australian small-cap stocks, so we now have more managers than stocks!

And while we’ve had strong results recently in 2024 and so far in 2025, we haven’t been at the very top every year.

Another way to look at our long-term consistency is through that familiar Year 10 maths favourite — the box and whisker chart.

In it, the ‘box’ shows the middle 50% of small-cap fund results, while the ‘whiskers’ stretch up to the best performers and down to the worst.

Box & Whisker Chart

Below, the Ophir Opportunities Fund’s returns are shown with the green “X’s” compared to all the other Aussie small-cap funds that were in operation each year.

Calendar Year Returns Aus Mid/ Small Peers

Source: Morningstar Australian Mid/Small Caps (Blend, Value, Growth).

Note: CY12 is August 2012 to December 2012. YTD25 is January 2025 to October 2025.

Four Lessons Learnt

So, what are the lessons for us and investors in general:

1. You don’t need to be the best in any given year or even in many given years, to generate great returns over the long term. Being consistently good or very good is enough. We were near the top in a few years… with even a few positive outlier years.
2. When we reviewed the names and holdings of some of the top funds in any given year, they often tend to have a ‘factor’ or ‘sector’ bias, and that bias gets over-rewarded that year – shooting the fund to the top and outperforming the true stock pickers. Be wary of those funds. Those biases often reverse. Today’s hero can quickly become tomorrow’s villain if it’s not backed up by a sound and repeatable investment process with an ‘edge’ on the market. Often the top-performing manager in a given year will have a big skew towards (for example) things like lithium, gold, AI, a high-beta levered balance sheet in a risk-on environment, etc, only to see performance suffer when that bias falls out of favour.
3. Likewise, be wary of thinking reports in your favourite business newspaper about “this year’s best performing fund” offer a path to riches by investing with them. Far too many have poor performance in the years prior due to some factor that is out of favour. Their performance then pops when the factor mean reverts and they make the press – but you won’t read that in the article. “One of this year’s top performing managers has had a ripping year, after falling for each of the previous three years!”. At Ophir, we know our performance comes from stock picking not some big bias. That’s why it has been sustainable.
4. It sounds trite, but avoiding horrible years is also important to long-term success. If you fall -50% you have to make a +100% return just to break even. 2016 was clearly a poor year of returns for us with the fund. You just can’t have too many of them… and fortunately, we haven’t. Every fund will have them, even the long-term top performing ones. Share prices don’t always follow a company’s business success in the short run.

Three Elements of Success

Reflecting on our award-winning year for our Ophir Opportunities Fund, what would we put our success down to? Three things stand out:

1. Limited Capacity

If you have good performance, you can’t keep taking in money forever and a day. In funds management, size kills – especially in small caps. Take in too much money and you either have to:

• Invest in larger companies. But they have more eyeballs on them, so it’s harder to get an edge on the market. We felt for Warren Buffett (but not too much!) for much of the latter part of his career having to manage hundreds of billions of dollars that could only be invested in the largest and most picked-over companies in the world. We are not foolish enough to believe we could find an edge investing in those businesses.
• Own bigger stakes in the same-size companies. But that sees you incurring market impact costs to enter or exit. It also takes ages to get into or out of the positions, so you lose your ability to be nimble if your view changes quickly.
• Own many more companies. But that dilutes your edge and outperformance potential as stock numbers blow out.

Of course, it could be a combination of all three. The history of funds management is littered with managers who had great initial performance, got too greedy, then saw performance suffer.

2. Put all your money in your funds

It’s easier said than done, and maybe it’s not for everyone, but we subscribe to the Charlie Munger view: “You show me the incentive and I’ll show you the outcome”.

Or as former NSW Premier Jack Lang said – a quote repeated by former Australian Prime Minister Paul Keating – “In the race of life, always back self-interest, at least you know it’s trying”.

It’s one of the reasons we insist that investment team members who join us only invest in the Ophir Funds – it’s the best way to ensure their complete focus at work.

3. And, finally, “Pound the Rock”!

We said we’d come back to it. Investing for us is about finding a process that works and trusting that process. There is a lot of noise in financial markets. Share prices don’t always track a company’s short-term success. You can get your analysis right, but you can’t account for all the thousands of different variables impacting a profit result. Some will go against you. That is life.

Even if you do all the work, get an edge on the market, and the profit result is better than the market expects, there is no guarantee the share price will go up in the short term.

As we’ve seen before from painful experience, you might be invested in a ‘consumer discretionary’ sector stock (take JB HiFi as an example), but investors suddenly don’t care about today’s earnings result. Instead, they’re focused on a possible recession around the corner and potentially poor future results. So they use the strong earnings news to exit the company, pushing its price down.

But as investing legend Peter Lynch says “A company’s earnings and stock price are 100% correlated in the long term”.

You’ve just got to keep pounding the rock and focus on getting the earnings result right. Eventually, the rock will crack and the share price – and ultimately the fund performance – will go the way you want.

An Easier Edge

It was fantastic to win an award recently for our original Ophir Opportunities Fund.

But as investors who have caught up with us lately have heard, it’s actually another Ophir fund that is receiving the most of our personal investments: the Ophir Global Opportunities Fund.

Why?

Simply, we think it will outperform the Ophir Opportunities Fund over the next five-plus years.

Global small caps are a lot cheaper than Aussie small caps at present. With one-fund-manager-per-stock in Aussie small caps, it could be slightly easier to get an edge on global small caps these days. Plus its also got some great runs on the board, returned +19.1% p.a. after fees since inception in 2018.

As always, if you’d like to chat to us about any of the Funds, please feel free to call us on (02) 8188 0397 or email us at ophir@ophiram.com.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs.  You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation.  Ophir does not guarantee the performance of the Funds or return of capital.  An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment.  Past performance is not a reliable indicator of future performance.  Any opinions, forecasts, estimates or projections reflect our judgment at the date of this was prepared, and are subject to change without notice.  Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

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Seeing in the Dark

At Ophir, we’re always looking for exceptional businesses sitting just outside the spotlight. That’s how we came across Exosens, the European leader in night-vision components.

We first encountered Exosens – which is based in Merignac, France – through our investment in Theon International (THEON), a night-vision device manufacturer that IPO’d in February 2024. During diligence on THEON, it became clear that a key strategic supplier, Exosens, was a company we needed to know better.

Exosens is the European leader in high-performance electro-optical technologies. It specialises in image intensifier tubes (IITs), the critical components used in night-vision goggles and weapon sights. (The tubes convert low-level light into bright images that humans can see.)

With more than 85 years of experience, Exosens has quietly built a strategic position as a mission-critical supplier to NATO forces, holding 42% global market share in IITs, and 72% market share ex-U.S.

Importantly, Exosens is “ITAR-free”, meaning it is not subject to U.S. arms export restrictions – a major advantage for European buyers seeking sovereign and secure supply chains.

Outside defence, Exosens also supplies radiation detection (24% global share), nuclear control components (38%), and imaging systems for high-end medical, scientific, and industrial use (~7% share overall, focused on niche segments). These non-defence operations provide valuable diversification and help create a steadier, less cyclical earnings base than defence alone.

Company Overview

Source: Exosens Company Report October 2025.

So when Exosens went public in June 2024, we were ready. With a front-row seat for the THEON process, and strong conviction in the electro-optical space, we became a top-five initial holder in Exosens. Since its IPO, Exosens shares have surged around ~130%, supported by growing investor enthusiasm for defence-related stocks.

After a three-day research trip to Europe in September 2025 – where Exosens stood out among 15 company meetings – we increased our position further.

Exosens is one of the most attractive under-the-radar growth stories in the whole defence and industrial imaging landscape. We are confident it will remain a fantastic investment for several key reasons.

1. A Secular Defence Tailwind

The first is that the company is well placed to benefit from surging defence spending in Europe.

The global market for night-vision IITs is highly concentrated. Alongside U.S.-based L3Harris and ElbitUSA, Exosens is the only other player of scale. Importantly, it is the only non-U.S. option with mass production capabilities and NATO credibility.

Europe’s penetration rate for night-vision remains low at ~30%, compared to ~100% in the U.S., offering Exosens significant room for growth.

If Europe’s penetration rate were to increase to 50%, it would imply roughly 400,000 additional devices – each requiring one or two IITs, depending on whether they are monocular or binocular.

Further supporting demand, Germany has announced plans to expand its armed forces by 40–45% by 2030, from approximately 180,000 to 260,000 troops.

Procurement ratio and penetration remain low outside of the U.S.

Source: Exosens Company Report October 2025.

As defence budgets across NATO continue to rise, electro-optics are growing even faster, driven by rising electronics use in warfare; night-fighting capability gaps across Europe; and shifting NATO procurement policies that favour ITAR-free, interoperable technologies.

We believe Exosens is uniquely positioned to capture this growth as the only European manufacturer producing mission-critical IITs at scale.

2. A Clear Vote of Confidence from THEON

Further supporting our thesis is that THEON recently entered into an agreement to purchase a 9.8% strategic stake in Exosens at a ~25% premium to the last close prior to the announcement (EUR54.00 per share).

The rationale for THEON’s deal with Exosens is two-fold:

• It strengthens THEON’s relationship with Exosens as its key supplier for image intensifier tubes, thereby mitigating supply risks in the near term; and
• It lays the ground for future collaboration on digital technologies which can provide further capabilities to night-vision products and other product segments.

We see this as a strong validation of both Exosens’ strategic importance and the robust demand outlook for THEON’s products.

3. Diversification and M&A

The third reason is Exosens’ track record of successfully diversifying through acquisitions.

Since 2022, Exosens has completed eight acquisitions, expanding its reach into nuclear, detection, and industrial control markets. These deals bring not only incremental revenue but also margin uplift and a more diversified customer base.

Exosens has also attracted suitors of its own. In 2020, U.S. electro-optical conglomerate Teledyne (TDY) made a bid for Exosens at roughly 11x EBITDA – before the surge in valuations following the Ukraine conflict. The bid was blocked by the French government due to the company’s strategic importance, and Teledyne went on to acquire FLIR Systems (FLIR) a year later for 17x EBITDA.

In calls with former Teledyne employees, we confirmed that the bid for Exosens was driven by its superior technology and market access – reinforcing our conviction in the quality and positioning of the business.

4. High Margin Optionality: Drone Imaging

The final reason for our confidence in Exosens’ ongoing success is the massive potential in drones.

Exosens also supplies imaging technology to the drone market, though it is not yet a material contributor to group earnings. Our research with a dozen global drone companies suggests this could evolve into a meaningful revenue stream, with incremental margins exceeding 60%. While it may not appear in near-term results, it provides substantial upside optionality for future years.

In our view, the market continues to underestimate the scale of this drone opportunity.

Just look below at the comparison to some Australian-listed companies – Droneshield and Electro Optic Systems – that saw significant share price appreciation on the global defence thematic.

(These two names have given back a lot of the recent gains, which demonstrates the volatility associated with investing in an undiversified business exposed to a ‘hot’ thematic.)

By the numbers, every US$50m of incremental drone revenue would be ~US$30m of EBITDA, adding ~15% to outer year EBITDA.

If even a portion of Exosens’ drone exposure materialises, its earnings base could expand materially and potentially warrant a significant multiple re-rating in line with other high-growth defence and imaging peers.

Gaining Our Edge Through the Fog of War

Exosens has carved out a rare position: a high-margin, IP-rich business with both defensive resilience and offensive growth.

We expect the company to deliver a top-line compound annual growth rate (CAGR) in the mid-teens over the next three to five years, underpinned by strong structural demand and disciplined execution.

We also anticipate continued EBITDA margin expansion driven by operating leverage, scale benefits, and an improving business mix.

Despite this growth potential – and the advantages outlined above – Exosens still trades on an attractive forward 12-month valuation of around ~15x EBITDA.

Source: Ophir. Bloomberg. Data as of November 2025.

Exosens sits at the crossroads of national security, advanced optics, and industrial innovation.

With a growing customer base, increasing optionality in high-growth verticals such as drones, and strong backing from sovereign governments, we believe Exosens stands out as one of the most compelling under-the-radar compounders in the European small-cap landscape today.