Market & Performance Summary

In the third quarter of 2025, the Kovitz Core Equity strategy returned 2.7%, while the U.S. equity market, as represented by the S&P 500®, returned 8.1%.

Comparisons to Equity benchmarks are shown below.

KIG Equity Composite vs. Selected Benchmarks

Source: Bloomberg Finance, L.P. Data as of 9/30/25.

Equity markets continued to march higher in Q3 building on the significant rally that began after the administration partially reversed course on the “Liberation Day” tariffs. Momentum was the top performing factor in Q3 as stocks that led the rally from the April bottom tended to continue outperforming the rest of the market.[1] Relatedly, sentiment around the AI theme remains buoyant with Information Technology accounting for over 50% of the S&P500’s return.[2] Apart from Information Technology, Communications Services and Consumer Discretionary were amongst the top-performing sectors, while Consumer Staples, Real Estate, and Materials were the bottom-performing.[3] In summary, we would characterize this as a very “risk-on” market.

On a year-to-date basis, Core Equity’s performance is lagging the benchmark, largely as a result of the dynamics that drove the market in Q3. The largest drags to performance have been the portfolio’s relative underweight position in the top-performing Information Technology sector and declines in some of our Consumer and Health Care holdings.[4] As discussed further in the Outlook section, the momentum factor seems to be the dominating force driving markets, a dynamic which has weighed on our relative returns.

With the exception of a couple of our software holdings, our investments in the Information Technology sector have performed well. Oracle, Arista Networks, Advanced Micro Devices, Analog Devices, and Microsoft have all contributed positively to performance and have outperformed the broader Information Technology sector’s return. This has been offset by our lower relative weighting for the sector. As a reminder, Core Equity’s sector weights are a function of our bottoms-up approach to portfolio construction that seeks to identify opportunities with the best combination of risk and reward; they are not constructed relative to index sector weights.

The primary detractor within Consumer Discretionary this year has been CarMax, which has declined by 45% year-to-date.[5] The company has been mired in a difficult environment for used car sales as price inflation and the significant increase in interest rates over the last few years has weighed on affordability. Reflecting on the company’s performance over the last decade, we continue to think the company has significant scale advantages in reconditioning of vehicles and logistics, while also conceding that historical informational and sourcing advantages have likely weakened with greater online price transparency. In hindsight, we could have been more aggressive when we trimmed the position near its highs at the end of last year. However, we think the recent stock price move is overdone and would expect CarMax to deliver material earnings growth as the used car sales environment improves.

In Health Care, we discussed in our commentary last quarter how broader industry pressures and sentiment were negatively impacting our investments in Becton Dickinson and Thermo Fisher Scientific. We communicated that we felt the stock moves were primarily sentiment-driven and that we added to the positions as a result. We are pleased that both positions were positive contributors to relative performance in Q3.[6] Bigger picture, with AI commanding so much attention from market participants, we have found several interesting investment opportunities in the Health Care sector that we discuss in greater detail in the Portfolio Activity section.

In the following sections, we discuss our approach to managing the current market environment and key drivers of portfolio return in greater detail.

Outlook

This past quarter belonged to the trend followers and headline makers. An illustrative example was Tesla stock (TSLA) returning +40% in the quarter despite earnings estimates for next year declining as the quarter progressed.[7] Raymond James analysts covering automotive electrical components noted that “TSLA continues to lose share in every region.”[8]

Figure 1: TSLA Share Price 6/30/2025 to 9/30/2025

Source: Bloomberg Finance, L.P. Data

Perhaps it was Elon Musk’s $1 billion reported stock purchase in mid-September, his board-approved new pay package that could max out at $900 billion if Tesla stock reaches $8.5 trillion in market value, and some Wall Street analyst bullishness after the reported stock purchase.[9]

Our sense is that momentum investing carried the market higher in 2025. Momentum investing, as defined by its discoverers, is a strategy “which buys stocks that have performed well in the past and sell (sic) stocks that have performed poorly in the past [to] generate positive returns over 3- to 12-month holding periods.”[10] In fact, Bloomberg’s analytics module shows that high-momentum stocks gapped ahead of high-quality stocks in September, resulting in significant outperformance for the quarter and working against the Kovitz Core Equity portfolio.

Figure 2: Bloomberg’s “Factors to Watch”

Source: Bloomberg Finance, L.P. Data

The Kovitz Core Equity portfolio has been more tilted, not to momentum stocks, but to high-quality stocks. Our team’s recent Outlooks have discussed that many of our new purchases over the past year have been in stocks that would be considered “high-quality” per the definition used in Bloomberg Factors. Quantitative characteristics of “high-quality” companies typically include above average and consistent profit margins, high returns on capital, and low debt ratios.  Positions initiated in 2025 that exemplify these characteristics include Microsoft (Q1), Adobe (Q1), Waters (Q3), and Alcon (Q3). Additionally, third-party risk analytics confirm for us that the portfolio’s exposure to high-quality stocks has increased. This seems prudent to us at a time when stock markets at large are setting new highs and trading at or near record valuation multiples; corporate bond spreads are near 18 and 27-year lows for investment-grade and high-yield credits, respectively;[11] momentum investing is raging; tariffs are increasing costs to consumers and businesses; business uncertainty is high; and the Federal Reserve is cutting interest rates to address a slowing labor market and economy.[12] In short, amidst high prices and higher uncertainty, it seems most prudent to orient the portfolio towards ownership of businesses that should be able to do well in any kind of weather.

We continue to predicate our strategy on the philosophy that earnings growth drives stock prices over the long-term, that investing in strong businesses at good prices is the right recipe, and that a disciplined, valuation-centric adherence to these sound investing principles wins the race. This past quarter, we felt like the veteran marathoner who is pacing the race strategically, aligned with a training plan that strives for the top, yet who watches a pack of energetic, new runners burst forward in an early segment of the race, feeding on each other’s momentum. Yet, we have no doubts about our paced strategy, and in fact, the opportunities we found to recharge the portfolio with additional purchases and sales in the third quarter give us confidence that our pace is a sustainable and satisfactory one.

Portfolio Positioning

Over the past year, we’ve been active in our holdings that we assess to be related to artificial intelligence products, frequently trimming or selling when sentiment rapidly carries holdings toward or ahead of our best intrinsic value estimates. As with all stocks, we’ve also found opportunities to add to them when they fall, as we did in the first half of 2025 in names like AMD, Analog Devices, Arista Networks, and Microsoft, which has been noted in prior letters. This past quarter, activity fell a little heavier on the selling side of the equation, the most significant of those being Oracle. 

Oracle was a great holding for Core Equity, having tripled in price at the time of our exit compared with our original purchase in January 2024.[13] To be sure, the service contracts signed for the company’s Oracle Cloud Infrastructure (OCI) business have been more significant than almost anyone imagined 18 months ago. Figure 3, borrowed from a Bernstein report on Oracle, shows the increase in the remaining performance obligation (“RPO” = not-yet-recognized revenue from signed customer contracts), and the significant step-up it saw in this past quarter.

Figure 3: Oracle’s Remaining Performance Obligation (RPO) increased $317B QoQ last quarter while cRPO only increase ~$1B as these are large datacenter contracts

Source: Bernstein.[14] Company reports, Bernstein Analysis

Yet, 95% of the $317B increase in “RPO”[15] (blue bars) was attributable to just one company, which dramatically increases the risk profile of Oracle’s backlog. Moreover, we believe that the company responsible for the RPO increase is today earning revenue equal to less than 25% of the implied annual contract amount. With Oracle’s stock price appreciating 36% on the day the RPO increase was announced, we assessed that the stock market was ascribing a high probability to Oracle’s ability to realize revenue from this significant contract. Accordingly, we decided to exit the position and redistribute the proceeds.

This in no way is an expression of an opinion that Generative AI will somehow “not work” or that it is not exciting or transformative. It is an acknowledgement that life is very rarely linear; that human emotions tend to ebb and flow with wide amplitude; and that business plans tend to come to fruition in messier fashion than spreadsheets suggest. We think Oracle is great. We also think its stock became riskier during 3Q 2025.

We are optimistic about the new stocks we bought these past few months. With the Health Care sector having materially lagged the overall market year-to-date, we found ourselves attracted to some of the names on offer.

Figure 4: YTD S&P500 Sector Total Returns to 9/30/2025

Source: Bloomberg Finance, L.P. Data

Our weighting in Health Care doubled as a result of the quarter’s actions with three new purchases in the sector. We also augmented our exposure to the insurance brokerage business with the purchase of Ryan Specialty.

Reflecting on the new names added to the portfolio – Waters Corp, Alcon, Cooper Companies, and Ryan Specialty Holdings – all traded down at least 20% from a higher price over the course of 2025, we consider all world-class businesses, and we think that the reasons the stocks traded down reflect transitory concerns (see the following section on portfolio activity for more details). All have resilient demand profiles in industries that have fared well through prior economic cycles. We believe the addition of these names at the prices they traded at in the quarter improves the portfolio’s risk-return proposition looking forward.

We’re not pleased to have posted a quarter where the returns from our holdings lagged our benchmark by so noticeable a degree. Returning to our marathon analogy, we recognize that this period is but a leg in a longer endeavor. Regarding the elements that we control - stock prices that have the potential for appreciation from valuation multiple expansion, the pacing of companies’ sales and earnings growth, and the permutations through which those holdings are organized into an investment portfolio – we were pleased with the quarter. Our activities continue to feel more right than not given the decision points we were presented with. We were pleased to have sold Oracle after such a strong return and with a higher risk profile by virtue of its embedded expectations, and we are pleased with the new names added to the portfolio. We look forward to discussing the outcomes of these decisions in future letters.

We thank you for your trust and confidence, and we remain highly invested alongside you.

Key Contributors to Portfolio Return

The portfolio's top three contributors to its return during the quarter were Alphabet (GOOG/L), Arista Networks (ANET), and Oracle (ORCL).

Alphabet (GOOG/L):

Alphabet continues to grow its digital advertising revenues across Search and YouTube at a double-digit clip. Its cloud infrastructure business accelerated in the most recent quarter with ramping demand for the company’s AI services, while also achieving record profitability. Lastly, the remedies handed down by the Judge in the Search antitrust trial were largely better than feared and do not mandate drastic changes to Google’s business.

Arista Networks (ANET):

Arista significantly increased its revenue growth expectations to 25% for 2025 driven by strong momentum with its large cloud customers and in its enterprise campus business. On top of the higher revenue forecast, management also raised its guidance for operating margins by 350 bps. We expect Arista to continue playing an integral role in networking in the AI infrastructure buildout and increasingly, for the networking needs of enterprise campuses, too.

Oracle (ORCL):

Oracle shares appreciated sharply following the company’s fiscal first quarter earnings report. The company’s contracted backlog, which primarily reflects its cloud infrastructure business, grew substantially from $138B at the end of last quarter to $455B in the most recent quarter. As discussed in the Portfolio Activity section, much of this increase was related to one customer, which led to our decision to exit the position.

Key Detractors to Portfolio Return

The top three detractors to return during the quarter were Fiserv (FI), Carmax (KMX), and Philip Morris (PM). 

Fiserv (FI):

Fiserv stock continued to languish in the quarter. Last quarter we wrote that Fiserv stock declined after reporting that volume growth decelerated in the company’s Clover payment services product line. There has been some transitory noise in year-over-year comparisons, a CEO succession, and U.S. payments volume growth has moderated from a mid-teens growth rate to high-single digits in 2025, although this is still at a healthy level and above digital payments industry averages. Fiserv stock is trading like it won’t grow, and we think that is completely incorrect. For reference, 2025 will mark the company’s 40th consecutive year of double-digit EPS growth. Consensus earnings estimates for 2025 and 2026 have also remained stable throughout 2025. We continue to see an advantaged company.  Since 2019, Fiserv has bought back $22 billion of stock, a material proportion of its current $70 billion market capitalization, and we believe they will continue to aggressively buy back stock at current prices. We added to the stock on the price decline and are optimistic about its risk-return profile.

CarMax (KMX):

CarMax shares declined by 33% in Q3 after the company reported a decline in same-store-sales growth and a significant miss to earnings expectations. This followed a quarter in which CarMax reported very strong same-store-sales growth of 8% on the back of fears of tariffs driving up prices. This pulled forward demand dissipated quickly as the administration’s tariff policy reversed, and consumers turned cautious amidst increased economic uncertainty. In addition to lower-than-expected sales growth, the company reported a decline in financing income driven by an increased loan loss reserve related to underperformance of loans extended in 2022/23 when borrowers were paying high prices right before there was significant depreciation in used car values. This issue was thought to be behind the company, but surprisingly resurfaced in its Q3 results. While our assessment of CarMax’s competitive position and management team has soured with recent execution missteps, we find the move in shares to be overdone. Scale advantages in reconditioning of vehicles and logistics remain and used vehicle volumes continue to run significantly below long-term averages, which should enable better results when the environment improves.

Philip Morris (PM):

Philip Morris reported a modest miss in Zyn shipment volumes in the U.S. in its most recently reported results and indicated that volumes grew 32% through the first eight weeks of its fiscal Q3 relative to the 41% growth reported in Q2. Management indicated that it would be stepping up promotional efforts to ensure pricing was more competitive with other nicotine pouches, which we expect to drive improved volume growth over the coming quarters and years. We continue to think that Zyn, with over 70% share of nicotine pouches in the U.S., and IQOS, the company’s leading heated tobacco product, represent strong growth opportunities for the business and are burgeoning, multi-billion consumer brands in the smoke-free category. Bigger picture, over 40% of the company’s revenues are now from smoke-free products, and this is headed to 50%; IQOS has overtaken Marlboro in terms of brand size, Zyn is one of today’s fastest-growing consumer brands at scale, and Philip Morris has a multi-year lead over competitors in product development, obtaining regulatory approvals, and branding success.

Portfolio Activity

Initiated: Alcon, Cooper Companies, Ryan Specialty Holdings, Waters Corporation

Alcon (ALC):

Spun off from Novartis in 2019, Alcon has a rich, 75-year history as a global leader in ocular health. The company commands supermajority market shares in optical surgical equipment and implantable premium intraocular lenses (IOLs) and is one of four companies that dominates the contact lens and over-the-counter vision care market. Alcon’s end markets are characterized by strong secular tailwinds, including an aging and wealthier population, increasing rates of myopia (nearsightedness) globally, and advances in technology and comfort that increase adoption of premium IOLs and daily/weekly contact lenses. We further expect Alcon to leverage its scale, where the company spends double its nearest competitor on R&D annually, to continue to introduce innovative new products and compete effectively against peers. Unusually low growth in cataract procedure volumes, paired with a slower-than-expected launch of its new surgical equipment platform led to a decline in shares following the company’s second quarter earnings report. This myopic focus on near-term results allowed us to initiate a position in what we believe to be an excellent business at its lowest absolute and relative valuation since Alcon became an independent company.

Cooper Companies (COO):

Our investment in Cooper Companies builds our exposure to the vision care industry alongside our investment in Alcon. Like Alcon, Cooper is a leading manufacturer of contact lenses, an industry characterized by an oligopolistic structure with strong barriers to entry. The company has achieved consistent market share gains over the last 15+ years aided by its unique ability to offer both private label and branded contacts to large retailers. Alongside its contact lens business, Cooper also operates a smaller women’s health business focused on fertility and surgical products. Cooper is emerging from a multi-year investment cycle that was needed to create additional manufacturing capacity for the ongoing shift to disposable daily contact lenses. With that investment now largely behind the company, we expect cash flow generation to improve significantly in the coming years, enabling the company to reduce leverage and return capital to shareholders. Recent share price weakness driven by what we deem to be transitory issues in the contact lens business created an attractive opportunity to initiate a position with shares trading at just 15.5x EPS vs its historical average 24x.

Ryan Specialty Holdings (RYAN):

Ryan is a broker of specialty insurance, which is a fast-growing segment of the property & casualty insurance market. As property catastrophes have intensified, jury verdicts have become larger, and new risks like cyber risks have emerged, the need for more customized risk underwriting has accelerated. Ryan has been outgrowing the insurance brokerage industry at large and has grown revenue organically at a double-digit rate for 14 consecutive years. The company was founded in 2010 by Pat Ryan at age 72, two years after he retired as Aon’s founder, Chairman, and CEO. Last year, at age 87, Ryan turned day-to-day management over to a hand-picked successor team. We think the management team is an A-rated group, and they are currently guiding the company through a high-growth phase with 2024 being the company’s biggest year yet for acquisitions. The stock sold off over 20% when the company incrementally cut its 2025 organic revenue guidance (from +11-13% to +9-11%) based on a down-cycle in the property insurance market. As is frequently the case, we’re willing to look through the transitory softness to establish a position in an excellent company. We think that the complexity and magnitude of insurable risks will continue to grow, and that Ryan can be a very good long-term holding. 

Waters Corporation (WAT):

Waters is a leading manufacturer of analytical instruments, along with associated consumables and software, used to separate and identify chemical compounds, for customers in the biotech/pharma, materials, and food science end markets. With instruments primarily used in more stable late-stage manufacturing and quality assurance / quality control in biopharma end markets, a majority of revenues derived from recurring service and consumables, and a strong management team five years into a transformation plan that reinvigorated product innovation and optimized the entire organization, Waters has displayed above-market growth and rising profitability in a difficult environment. The company has below-average exposure to academic and government end markets that have been plagued by cuts to NIH and other sources of federal funding, which enabled the stock to hold up relatively well this year compared to peers. However, the shares fell nearly 20% since Waters announced it was acquiring Becton-Dickinson’s (BD’s) Biosciences and Diagnostics business in mid-July. As owners of Becton-Dickinson, we believe the assets acquired by Waters are underappreciated in their own right and are a good strategic fit with Waters’ existing business. Additionally, we find management’s plan to generate cost efficiencies and reinvigorate the sales motion using the same playbook successfully employed at Waters for the last five years to be highly credible. The structure of Waters’ acquisition of the BD assets will result in client portfolios receiving shares in Waters equivalent to roughly a 1% weight when the merger is completed in early 2026. We believed it was an advantageous time to increase that exposure by initiating a position in what we think is a very good business at a suddenly average price.

Exited: Oracle, PPG

Oracle (ORCL):

We initiated a position in Oracle in early 2024 on the premise that the company was building a differentiated cloud offering relative to incumbent hyperscalers Amazon, Google, and Microsoft. After many years of low-single-digit revenue growth, Oracle’s business started to accelerate in 2024 driven by a significant ramp in its cloud infrastructure business. With the larger incumbent cloud providers remaining capacity constrained, Oracle has been successful in attracting business from large AI customers looking to train increasingly powerful models. The result has been a dramatic increase in the company’s contracted backlog to $455 billion from $138 billion in the prior quarter and $99 billion a year ago, which is expected to lead to nearly 15x growth in cloud infrastructure revenues from $10 billion in FY25 to $144 billion in FY29. While we have been impressed with management’s ability to capture new cloud business, we are wary of the significant customer concentration in Oracle’s backlog. Nearly all of $317 billion increase in backlog in the most recent quarter was from a single customer – OpenAI. With shares reflecting nearly all the upside from OpenAI and little of the risk that comes with tying their fortune to a customer reliant on external funding and extremely aggressive revenue growth assumptions, we elected to exit the position.

PPG (PPG):

We owned shares in PPG for roughly two years with an expectation that the new CEO would refocus the company on its technology-advantaged products, shed underperforming assets, and reinvigorate organic growth. We were pleased with the CEO’s strategic decisions since taking the helm including focusing resources on higher growth businesses like Aerospace and Mexico architectural coatings, divesting the US architectural business, and increasing share repurchases. However, we have come to appreciate that management’s ability to impact PPG’s organic growth trajectory is limited relative to the broader macroeconomic forces that influence each of PPG’s end markets. With opportunities surfacing to invest in companies in greater control of their destiny, we elected to reallocate capital into other positions.

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[1] Per Bloomberg factor analysis, in Q3, an equal-weighted portfolio of the highest quintile of momentum stocks returned 12.8%.

[2] Per Bloomberg attribution data for the SPDR S&P500 ETF, Information Technology contributed 4.4% of the S&P500’s 8.1% return in Q3.

[3] Per Bloomberg sector data for S&P500 GICS sectors, in Q3, Information Technology returned 13.2%, Communications Services returned 12.0%, and Consumer Discretionary returned 9.6%. Consumer Staples declined -2.4%, Real Estate returned 2.6%, and Materials returned 3.1%.

[4] Kovitz calculations using Bloomberg attribution data for the Core Equity portfolio and the SPDR S&P500 ETF Trust.

[5] As of 9/30/25.

[6] Kovitz calculations using Bloomberg attribution data for the Core Equity portfolio and the SPDR S&P500 ETF Trust.

[7] TSLA’s 2026 estimated earnings were $2.79 per share to start the quarter and just $2.45 to end it per Bloomberg estimated EPS.

[8] Fairbanks, Melissa and Munoz, Maruicio.  RJ Express: JBL – Additional Notes Following Management Call.  September 25, 2025.

[9] Berkowitz, Bram.  The Motley Fool.  “Elon Musk Just Bought $1 Billion of Tesla Stock, Which is Up 90% Since Lows Made in April.  Is Now the Time for Investors to Go All In?”  September 20, 2025.  "We are becoming more bullish," William Blair analyst Jed Dorsheimer wrote in a recent research note. "This purchase is Musk's first buy since 2020. To us, this sends a strong signal of confidence in the most important part of Tesla's future business, robotaxi."

[10] Jegadeeh, Narasimhan and Titman, Sheridan. The Journal of Finance Vol. XLVIII, No. 1. “Returns to Buying Winners and Selling Lowers: Implications for Stock Market Efficiency.” March 1993.

[11] The Credit Market Is Humming—and That Has Wall Street On Edge - WSJ.

[12] CBS News. “Federal Reserve FOMC Meeting Today: Rate Cut in September 2025 and Powell’s Impact.” October 9, 2025. https://www.cbsnews.com/news/federal-reserve-fomc-meeting-today-rate-cut-september-2025-powell-impact/

[13] From 1/2/2024 to 9/10/2025, ORCL stock logged a +215.5% price change and a 222% total return, per Bloomberg.

[14] Moerdler, Mark; Valligi, Firoz; Tang, Shelly.  Bernstein: Oracle: Implications of updated OCI guidance ($144B in FY30) over the next 5 to 10 years.  26 September 2025.

[15] RPO = Remaining Performance Obligation; CRPO = Current Remaining Performance Obligation.

Disclosures

Kovitz Equity Composite

Fees: Gross-of-fees composite returns incorporate the effects of all realized and unrealized gains and losses and the receipt, though not necessarily the direct reinvestment, of all dividends and income. Gross-of-fees returns are presented before management fees, but after all trading expenses. From inception through December 31, 2020 and after July 1, 2024, the Beginning Value Method (BVM) method was used to calculate returns. From January 1, 2021 through June 30, 2023, the Average Capital Base (ACB) method is used. Beginning on October 1, 2020, the net-of-fees returns are calculated by deducting model investment management fees, which are defined as the highest, generally applicable fees for the strategy of 1.00% of all composite assets. Prior to that, generally applicable fees were 1.25% for equity assets and 0.50% for cash assets. The firm's current management fee schedule is as follows: 1.25% on assets below $1 million, 1.0% per annum for assets from $1 million to $5 million, 0.85% per annum on assets from $5 million to $10 million, 0.75% per annum for assets from $10 million to $20 million, 0.65% per annum for assets from $20 million to $35 million, 0.55% per annum for assets from $35 million to $50 million, and 0.50% per annum for assets over $50 million. Such fees are negotiable. Where applicable, the total bundled or wrap fee charged to each portfolio is dependent on the end client’s financial advisor and wrap sponsor. The composite includes accounts that do not pay trading fees.

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Composite Definition: The Kovitz Equity Composite includes all fee-paying, discretionary portfolios managed to the Kovitz Core Equity strategy. The Kovitz Core Equity strategy utilizes a private owner mentality to purchase equity securities issued by companies with durable competitive advantages and strong balance sheets that are trading at a significant discount to their intrinsic value. The goal of this strategy is to maximize long-term total return. The Composite’s inception date is January 1, 1997. The Composite was created on January 1, 2001. Effective January 1, 2000, the Composite no longer included portfolios managed by a manager who made a change in investment style. The persons currently responsible for managing Composite portfolios have been primarily responsible for portfolio management throughout the entire period shown. The minimum portfolio size to be included in the Composite is $250,000 until December 31, 2021. Thereafter, the strategy minimum was raised to $1 million. Portfolios in the Composite may occasionally make use of leverage and/or derivatives, but such use does not have a material effect on Composite performance. The use of derivatives is generally limited to covered call writing, and uncovered option writing is never used.

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