YTD 23.76% Total Return Vs 5.7% S&P 500 for Inner Circle Portfolio – May 2, 2026

We finished 2025 with Time Weighted Return of 23.5% compared to 17.8% with S&P 500. In the first 4 months of 2026, our portfolio has powered ahead, returning 23.76%. S&P 500 in the same time this year has returned a very respectable 5.7%. The Russell 2000 small cap index has returned 13.21% YTD.

We consider time weighted return as it corrects the performance record for cash inflows and outflows from the portfolio. This is the return mutual funds report.

You would also notice that this reporting is different from what we did in 2025. This is because Fidelity now has proper TWR reporting which simplifies the performance tracking and reporting significantly. I no longer have to rely on a 3rd party tool and worry about syncing and accuracy of their data.

Recap of the Year To Date for Inner Circle

Bulk of the returns this year have come from the shipping stock we have owned for a while, returning 72%+ since the beginning of the year. As the Iran war broke out and affected the oil tanker traffic, the tanker rates skyrocketed. Frontline is one of the largest tanker companies in the world and has been benefitting from this, hopefully short term, situation in a myriad of ways:

• Higher day rates means higher revenue per day booked
• Longer routes (as ships are diverted), means more number of days on water and less days in port
• Use ship market values have risen allowing Frontline to dispose off some of its older ships in the fleet, retiring debt. The company now has very young and more cost efficient fleet.
• Significant increase in dividends to the shareholders

Frontline has actually reached our target price but the target price was set before the Iran war started, and I have continued to hold the stock even as the price has gone beyond the target as I think there is more value that can be extracted out of this stock.

Additionally, in the past few weeks one of the net-net stocks we own has woken up. The stock is now up 35%+ since the beginning of the year. The company has 0 debt and $5.37 in pure cash/share. The stock closed at $4.96/share today, so there is still a little bit more return to be squeezed out based on the balance sheet value. If the company returns to profitability, the valuation can be re-rated significantly higher.

The company has improved its revenues and gross margins and expects to continue the growth. Big part of this is its moving a manufacturing plant from high-cost Singapore to Lower cost Thailand. This move is substantially complete so the margins going forward will be better. At the same time, in the past year the company incurred atypical expenses related to move and shutdown, which should now go away.

There is no change in my outlook on any of the portfolio stocks.

I continue to evaluate other potential opportunities and will post as needed. I do not plan to make rash decisions influenced by short term displacements in the market. We are positioned in the most appropriate corner of the market today. Small Cap Value is resilient to external shocks (tariffs, wars, etc), as these companies tend to be more domestic oriented.

Debt Fueled AI Spectacular

The Mag 7 continue to grow. There is no end to how much they are willing to spend on infrastructure build out to stay ahead of the competition. When I started investing over 25 years ago, GE was the most valuable company at around $300 Billion market cap and $1T seemed to be an impossible dream. Now, $5 Trillion has been reached and even $10T seems to be within reach.

Feels like Douglas Adams’ The Restaurant at the End of the Universe. Here is what Google Gemini has to say about this:

The comparison between the current debt-fueled AI spectacular and Douglas Adams’ The Restaurant at the End of the Universe (Milliways) is apt. Both feature an absurd, immensely expensive, and chaotic party taking place right at the edge of inevitable destruction, fueled by high-stakes speculation.

1. The Premise: Milliways vs. AI Mania

• The Restaurant at the End of the Universe: A time-displaced restaurant where patrons watch the final destruction of the universe over drinks, funded by magical technology.
• The AI Spectacular: Investors and tech giants are pouring hundreds of billions in debt-fueled spending into AI infrastructure, largely to witness a “spectacular” productivity boom that is yet to materialize.
• The Link: Both are hedonistic, high-cost, final-hour spectacles. The AI hype feels like “drinking and dancing” while waiting for the tech/economic bubble to pop.

2. The Funding: The Debt-Fueled “Black Hole”

• The Restaurant: Existed by transferring money through time, requiring infinite, magical energy.
• The AI Spectacular: The AI buildout is projected to cost $3 trillion to $3.5 trillion by 2026-2029. This is largely funded by “a staggering wall of debt”.
• The Link: Both represent a “black hole” in the economy, where massive capital is sucked into one place, distorting everything around it, with little concern for immediate profitability.

3. The Atmosphere: “Everything is Fine”

• The Restaurant: Patrons are unconcerned about the end of existence because they are distracted by the show and food.
• The AI Spectacular: Despite rising debt and fears of a bubble larger than 2008, investors remain, for now, intoxicated by AI stock growth, often comparing it to “another Dot.com boom”.
• The Link: Both scenarios feature an attitude of “disbelieving the end,” focusing on the entertainment/hype value while the foundation fails.

4. The Characters: The “Stupendous One” vs. Zaphod

• Zaphod Beeblebrox: Irresponsible, chaotic, and reckless, Zaphod is the perfect avatar for the “magnificent seven” tech giants who are spending lavishly on AI despite questioning its practical value.
• The “Magnificent Seven” / AI Giants: They are acting as if they are above the risks of the market, pouring in billions while others fear a “much deeper and widespread economic crash”.
• The Link: Reckless leadership aiming for a spectacular finale, ignoring the danger.

5. The Aftermath: The Total Perspective Vortex

• The Restaurant: After the meal, the characters are forced to find a new, unknown destiny, often through destruction (e.g., the sun).
• The AI Spectacular: Analysts warn that if the AI bet fails, it could create massive “stranded assets,” wasted energy, and a significant, permanent scar on the global economy.
• The Link: The “Total Perspective Vortex” in the book, which reveals a person’s insignificant place in the universe, is analogous to the market correction that may eventually show investors the true, small value of their “42” (AI-generated answer).

Like the guests at Milliways, AI investors are enjoying the finest food and wine while watching the universe burn, oblivious to the fact that they have to pay the bill at the end of time.

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AI is a transformative technology, just as internet was. The bubble in the stock market is as real as the internet bubble was. We do not have any exposure to this in our Small Cap Value portfolio, but I know many of you have invested in Nvidia and other tech stocks. Please be careful.