We May Have Seen This Movie Before

The third quarter of 2025 was not unfamiliar, with several common themes in markets reemerging. Perhaps the most relevant for this investor letter is that active managers are, as a group, having an especially rough time of late. A chart published by Bloomberg citing Jefferies data shows that only 22% of active managers were outperforming their index through September of this year, which would represent the worst showing in decades if it holds through year end.

One of the longer-term causes of underperformance is basic math around competition — if active managers charge fees to ply their craft while passively managed peers charge almost no fees but get the benefit of efficiently priced securities, then active strategies in the aggregate receive the market’s return less their higher fees, resulting in a lower net return for investors in active strategies than for passive.

This competition creates near-term incentives to not fall behind and to therefore “limit risk” by reducing the extent to which a strategy can deviate from its benchmark; it also creates an incentive to buy what’s been hot, and when those two combine, it can lead to extremes. We believe a lot of the current market concentration could be attributable to this dynamic. Indeed, a recent research piece from Empirical Research Partners notes that, “In the past six months the relative returns produced by a price momentum strategy have amounted to nearly +20 percentage points, making this one of the best runs in more than seven decades.”¹

In previous notes, we have warned that unprecedented index concentration and potentially stretched valuations among trending companies benefitting from artificial intelligence could lead to heartache among index adherents, a possibility that has not materialized. A financial news commentator recently flagged that Nvidia’s market cap of $4.5 trillion was higher than the market capitalizations of all but a few countries’ entire stock markets. Of course, this has no relevance to the intrinsic value of Nvidia, nor should this statistic have any bearing on whether Nvidia is likely to outperform or underperform the market in the future. However, here’s something that might: a study by Bain found that the revenues required to sustainably support projected AI capex investment would need to reach $2 trillion annually by 2030, which is more than the combined annual revenue of Microsoft, Alphabet, Meta, Nvidia, Apple and Amazon; the WSJ also notes it is more than five times the size of the entire global subscription software market. Bain still projects a stubborn $800 billion shortfall even if we assume all of the following: 1) 100% of all on-premise IT moves to the cloud, 2) AI reduces sales/marketing/customer support costs by 20%, and 3) R&D costs fall by 20% thanks to AI. Many are more optimistic than Bain, but few have yet to quantify or contextualize the aggregate economic demand offsets required to justify today’s investment frenzy.

Yes, AI will change the world in ways we probably cannot yet imagine. So too would airplanes, telephone lines, railroads, cars and the internet; all experienced a bust and consolidation on the heels of an investment rush. None of this changes our approach, which is to construct concentrated portfolios with attractively valued companies with minimal regard to the benchmark, which will lead to results that sometimes differ materially from our benchmarks, for both better and worse.

As always, we remain significant investors in all of our strategies, and we appreciate your partnership and welcome any questions or comments.

Bill Miller IV, CFA CMT

Miller Value Partners

@billfour

¹Empirical Research Partners. Portfolio Strategy, October 2025. “Big Mo and a Friendly Fed: 1998 Redux? The Distrusted Fifty: Skepticism in Short Supply.” Written by Michael Goldstein, Managing Partner.

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The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

The views expressed in this commentary reflect those of the author as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Adviser believes that the content provided by third parties and/or linked content is reasonably reliable and does not contain untrue statements of material fact, or misleading information. This content may be dated and may not have been independently audited by Miller Value Partners.