2025 Q1 Investment Letter

Tear sheet

The Pernas Portfolio closed out the first quarter of 2025 down 7.5%. In broader equity markets, small caps and growth significantly lagged larger and more value-oriented names. Given the challenging macro backdrop, historically high market valuations, and increased volatility, we continue to view markets as fragile—leading us to maintain elevated levels of cash. As we’ve discussed in previous pieces on how we manage risk, our portfolio is structurally long, with the majority of capital consistently allocated to equities. That said, the degree to which we extend equity exposure is dynamic: leaning in when broader valuations are subdued and liquidity is increasing, and pulling back when valuations are high and markets are brittle.

This approach is rooted in what Didier Sornette calls “dynamical risk assessment,” from his work on risk and decision-making—he likens it to riding a motorcycle:

“Riding a motorcycle is a continuous process of dynamical risk assessment. You are constantly adjusting your speed, balance, and trajectory based on the changing terrain, traffic, and weather. This is the essence of how we must manage risk in complex systems.”

We do our best to update our positioning in response to new information, or when previously held assumptions begin to weaken. Admittedly, this is hard to do in a world where everything can change on a single headline.

Economic Uncertainty Has Never Felt This Uncertain

The title, borrowed from a recent Bloomberg piece by Justin Fox, captures the mood since Trump’s salvo of reciprocal tariffs on April 2, 2025, dubbed Liberation Day. In many ways, the NYSE and Nasdaq have functioned as the world’s stock market. These exchanges host the most globalized companies on Earth. Today, roughly 40% of S&P 500 revenue comes from outside the U.S., and multinationals rely on sprawling, efficient supply chains. Apple’s iPhone, for example, touches over 1,200 facilities across 50 countries.

When that structure is disrupted by tariffs, sanctions, or forced reshoring, the assumptions behind corporate valuations must be revisited. Shifting toward U.S.-centric production introduces friction, inefficiency, and cost. The future cash flows companies are built on don’t look the same anymore. The volatility we saw post–Liberation Day wasn’t a knee-jerk reaction. It was a rational repricing of a potentially new, less efficient world.

We are operating in a period of Knightian uncertainty. It’s tempting to ponder the imponderables: How long until the U.S. and China strike a deal? Can they find common ground? Has the U.S. driven Europe and others into the arms of the Chinese? And on and on. While we do have views on all these questions, they are low-signal—and low-signal opinions don’t help in investing. We’d rather focus on the few trends and insights we believe have a firmer footing.

Insights, Trends & Opportunities

Global Defense Balkanization & Erosion of Pax Americana

The peace dividend and security ensured by Pax Americana is eroding. Global norms once upheld by U.S. power—through NATO, the WTO, and the UN—are losing their influence. Nationalism is on the rise globally, conflicts rage from Ukraine to the Middle East, and China is asserting itself as a peer power. The lack of a steady hand from the U.S. in foreign affairs has sent a clear signal to countries that previous norms and guarantees of U.S. protection may not apply to them in the future. This has prompted a fundamental reassessment in most countries’ defense postures.

Nations like Germany, Poland, Japan, and South Korea are embarking on multi-decade modernization efforts, with defense budgets rising to levels not seen in decades. The very definition of defense is expanding. Robotics, AI, cybersecurity, and data infrastructure are now central to national security. Firms like Palantir or L3Harris could continue to outpace traditional defense players as software and intelligence become the new weapons platforms.

Countries also want sovereign capacity, which means rebuilding supply chains, onshoring factories, and stockpiling critical components—trends that underpin a supercycle in capital spending and have large investment implications.

It’s not far-fetched to imagine the world’s next trillion-dollar companies emerging from the defense sector, and we are spending significant time evaluating opportunities.

We Are All Policy Analysts Now

There used to be a time when equity analysts could afford to ignore government policy. It just didn’t affect company fundamentals all that much. With the rise of industrial policy in the U.S., massive fiscal spending, and Trump’s willingness to reshape entire industries through bilateral deals—we don’t have that luxury anymore.

For example, “Buy America” provisions in the CHIPS Act, the Inflation Reduction Act, and the Infrastructure Bill have tilted the playing field in favor of U.S.-based manufacturers. Companies like Nucor, which produce steel domestically using lower-emission electric arc furnaces, have multi-bagged since. Many of the contracts Nucor has benefited from would have gone to cheaper foreign suppliers if not for this industrial policy.

Looking ahead, the current administration is poised to amplify these trends. Plans include further reducing the corporate tax rate for domestic manufacturers from 21% to 15%, expanding R&D tax credits, and implementing a broad tariff structure aimed at encouraging companies to produce goods within the U.S. Additionally, the administration is expected to continue and potentially expand “Buy America” initiatives, reinforcing the emphasis on domestic production.

De-Globalization Shocks Are the New Normal

Whether triggered by tariffs, shifting alliances, trade breakdowns, or currency friction, de-globalization shocks are no longer black swan events—they’re structural features of the investing landscape. Institutions once built to stabilize global order have weakened or become politically paralyzed. Even before Trump’s “Liberation Day,” these forces were in motion. His tariffs didn’t cause these shocks but accelerated them. And that gives us confidence they will persist, regardless of who’s in power.

Supply chains are harder to rebuild than they are to break. While some goods like textiles can be relocated relatively easily, industries like semiconductors, pharmaceuticals, and heavy equipment operate on timelines measured in years, not months. Diversification today means higher cost, lower redundancy, and more uncertainty.

In this environment, investing has gotten harder. Risks are far beyond the business cycle—they are increasingly political (both at home and abroad) and defense-related. Our goal is to remain patient, clear-eyed about the various risks, and continue evaluating and stress-testing the insights and trends we have confidence in.