Baron Technology ETF | Q1 2026

During the first quarter, Baron Technology ETF® (the Fund) declined 6.90% (NAV), roughly in line with the MSCI ACWI Information Technology Index (the Benchmark), which fell 6.73%. The Fund’s performance trailed the Invesco QQQ Trust (the QQQ) and the S&P 500 Index, which dropped 1.77% and 4.33%, respectively.

On a trailing three-year basis, the Fund generated an annualized return of 29.15%, outpacing both the Benchmark and QQQ, which yielded 24.83% and 22.33%, respectively.

Market Backdrop

U.S. equity markets maintained positive momentum to begin the year, supported by investor enthusiasm about the pro-growth policies of the Trump administration, with an emphasis on reshoring and AI-driven productivity. Easing inflation pressures, resilient economic data, and strong corporate earnings also contributed to buoyant market conditions early in the quarter. At the same time, investors appeared unfazed by rising geopolitical risks associated with the U.S. military operation to remove Venezuelan President Maduro, President Trump’s threats to impose tariffs on several European countries that opposed his plans to take over Greenland, and Iran’s brutal crackdown on protests and the possibility of U.S. military intervention.

Market sentiment began to shift in February, with the early catalyst being widespread losses across a range of industries, including software, business services, and information services, owing to fears about AI-driven disruption. Anthropic’s release of specialized Claude Cowork plugins, which enable AI to function as domain-specific analysts across legal, finance/accounting, sales/marketing, and customer support, initially contributed to software and services weakness, as it caused investors to worry that AI agents could directly replace expensive human-led, subscription-based business workflows.

The sell-off worsened after the U.S. and Israel attacked Iran on February 28, killing the country’s Supreme Leader and other high-ranking officials. In response, Iran launched retaliatory missile and drone strikes against U.S. and Israeli interests, targeting areas in the Gulf, including Kuwait, Iraq, Qatar, and the United Arab Emirates. The conflict disrupted energy supplies and blocked shipping lanes in the Strait of Hormuz. With no clear signs of de-escalation in sight, investors became concerned about the potential for sustained inflation and reduced economic growth from surging oil prices and supply chain disruptions.

Against this backdrop, the dominant market trend was the continued rotation out of the Magnificent Seven, software, and other growth-oriented stocks into cyclical/commodity sensitive, defensive, and other value-leaning segments of the market. The Magnificent Seven complex declined 11.3%, accounting for about 90% of the S&P 500 Index’s losses. The group was hurt by concerns about earnings growth being pressured by substantial AI-driven capital expenditures. The non-Magnificent Seven stocks in the Index were down only 0.6% for the quarter. Sector performance was mixed for the quarter, with the gainers being defensive and cyclical/commodity sensitive sectors such as Energy, Materials, Utilities, Consumer Staples, Industrials, and Real Estate.
 

Performance

We manage the Fund with an unwavering focus on powerful technology trends disrupting industries and creating sustained, profitable growth opportunities — not short-term geopolitical disruptions or sentiment swings, like those that pressured markets and the Fund alike in the first quarter. Transformative technology disruptions, particularly AI, will shape the future and drive long-term investment returns.
 

Versus the Benchmark

The Fund performed in line with the Benchmark during the quarter. Within the Information Technology (IT) sector, the Fund outperformed, led by strong contributions from optical networking leaders Lumentum Holdings Inc. and Coherent Corp., along with semiconductor equipment leader Lam Research Corporation. Our underweight in Microsoft Corporation also contributed positively to relative performance.

These gains were partially offset by meaningful pullbacks in select software holdings, including PAR Technology Corporation (which was the Fund’s largest individual relative detractor) and Zscaler, Inc., as well as weaker performance from non-IT positions in Tesla, Inc. and Spotify Technology S.A. Lack of exposure to Samsung Electronics Co., Ltd. further detracted from relative performance. Our underweight in semiconductors was a modest additional drag.

In Communication Services, positions in Spotify, Alphabet Inc. — a significant new position initiated during the quarter — and, to a lesser extent, Meta Platforms, Inc. weighed on relative performance. In Consumer Discretionary, Tesla was the primary detractor, with a smaller detraction from Amazon.com, Inc. The Fund's exposure to Energy and Industrials contributed slightly positively to relative performance, while Health Care was a modest negative.
 

Versus the QQQ’s

The Fund also outperformed within IT relative to the QQQ. Lumentum, Taiwan Semiconductor Manufacturing Company Limited, and Coherent were the primary drivers of outperformance. Offsetting this strength were negative returns from PAR, Broadcom Inc., and Zscaler, as well as a lack of exposure to Applied Materials, Inc. and Intel Corporation.

Consumer Staples was the largest sector headwind, driven by the Fund's lack of exposure to Walmart Inc. and Costco Wholesale Corporation. Communication Services also detracted meaningfully, with weak performance from Spotify and, to a lesser extent, the initiation of a position in Alphabet during the quarter. In Consumer Discretionary, positions in Tesla and DraftKings Inc. — which we exited during the quarter — hindered relative performance. An underweight in Health Care, mainly due to a lack of exposure to biotechnology, and lack of exposure to Materials versus the QQQ were additional modest drags.
 

AI Update

Just over three years since the “ChatGPT moment” rang the opening bell of the age of AI, we find ourselves in the fastest-moving technology disruption we have experienced as investors. The pace of innovation across AI models, semiconductors, networking, and software is extraordinary. As we have written before, we are deep research, evidence-based investors — and in an environment moving this fast, we believe it is critical to be on the ground, meeting with the people building the technology, the companies deploying it, and the enterprises adopting it, rather than relying on second-hand analysis.

During the quarter, our team traveled to the West Coast to meet with senior leadership across semiconductors, software, infrastructure, and private AI-native companies. We attended NVIDIA’s GTC Conference and the Optical Fiber Conference, participated in expert panels and technical sessions, and spoke with IT teams at Fortune 500 companies and global systems integrators to understand firsthand how AI adoption is expanding across workflows and budgets. We also met with venture capital investors and domain experts focused on where durable AI value will and will not accrue. As our founder and CEO Ron Baron says, research starts with people — and this level of corporate access informs not just individual stock decisions but the broader analytical framework we apply across the portfolio.
 

AI Infrastructure: Silicon and Networking

Multiple AI scaling laws remain intact — across pre-training, post-training, inference-time compute, context windows, and memory — and frontier AI labs continue to demonstrate step-function improvements in model capability with each successive generation of compute. This insatiable demand has fueled an infrastructure buildout of historic proportions. Amazon, Alphabet, Microsoft, and Meta have collectively guided to approximately $650–$700 billion of capital expenditures in 2026, roughly triple the level from just two years ago, with the vast majority directed at AI data centers, chips, and networking.

NVIDIA Corporation remains the dominant platform for AI training and inference. At GTC, the company unveiled a more diversified product roadmap — including Vera CPU-only servers for agentic workloads and an expanded inference strategy — reflecting the organizational agility we look for in management teams. We continue to view NVIDIA as the leading merchant platform for bringing AI to the world, with a long runway driven by enterprise adoption and Physical AI.

The shift toward custom silicon is also accelerating. Broadcom confirmed an expanded agreement with Alphabet for next-generation Tensor Processing Units (TPUs) and a deal to supply approximately 3.5 gigawatts of compute capacity to Anthropic. Broadcom is the only partner capable of matching the annual development cadence hyperscalers and AI labs require at scale.

On the Amazon side, CEO Andy Jassy disclosed that its custom chip business — spanning Trainium, Graviton, and Nitro — has reached a $20 billion annual revenue run rate, growing at triple-digit rates. We are positioned to potentially benefit from this multi-architecture evolution through our ownership of NVIDIA, Broadcom, Alphabet, and Amazon.

In networking and optical interconnects, all component suppliers are supply constrained and the content opportunity is expanding as optics penetrate deeper into the data center. We hold positions in Lumentum and Coherent, well-positioned for this multi-year expansion, and in Arista Networks, Inc., whose software moat and hardware leadership make it a core long-term holding.
 

The Rise of the AI Labs and the ROI Inflection

A persistent question throughout 2025 was whether hundreds of billions of dollars poured into AI infrastructure would yield a meaningful return on investment. We are now seeing compelling evidence that an ROI inflection is underway. AI inference hit a step-function acceleration in late 2025, catalyzed by Anthropic’s Opus 4.5 release, triggering a surge in corporate AI adoption and token consumption. Anthropic’s annualized revenue run rate surged from approximately $9 billion at year end 2025 to over $30 billion as of early April 2026, with more than 1,000 enterprise customers spending over $1 million annually — a figure that doubled in under two months. OpenAI is now generating $2 billion in monthly revenue, ChatGPT’s weekly active user base exceeds 900 million, and its coding agent serves over 2 million users, up 5 times in three months. Both companies are investing aggressively in compute, with expected capacity buildouts of 5 to 6 gigawatts each by year-end. The ROI case we have been building is showing strong promise.

We are not just observers — our research teams are actively using AI models, agents, and purpose-built tools from all leading providers to enhance our process: accelerating earnings analysis, synthesizing filings and transcripts, building proprietary data trackers, and developing structured investment frameworks. I’m using Anthropic’s Claude to help edit this letter!
 

Navigating the Software Transition

While semiconductors and infrastructure are indisputable beneficiaries of the AI revolution, the software sector is experiencing its most dramatic valuation re-rating since the dot-com era. Year-to-date through March 31, the median public software company declined roughly 25%, with multiples compressing to 10-year lows. This decline has been largely indiscriminate — driven not by deteriorating fundamentals but by fear that AI will disrupt software incumbents. We take these concerns seriously, but we believe the selling has created an analytical opportunity. Not all software companies face the same AI risk. Some will be disrupted, some will prove resilient, and some will emerge as significant beneficiaries. We have used this sell-off to upgrade portfolio quality and position the Fund in businesses that can survive and thrive through the AI transition —companies that are market-share leaders growing faster than competitors, with pricing models aligned to usage or outcomes rather than headcount, leveraging AI and proprietary data to compound their competitive advantages, and led by founders with the authority and willingness to self-disrupt.

Samsara Inc. is the market-share leader in connected operations and fleet telematics, with cameras and sensors on millions of commercial vehicles generating 20 trillion data points annually —physical and data moats the AI labs cannot easily replicate. Shopify Inc. grew revenue 30% last year at nearly $12 billion in scale, with founders Tobi Lütke and Harley Finkelstein building the platform for agentic commerce. Datadog, Inc. has accelerated revenue growth for three consecutive quarters and is one of the largest commercial vendors to nearly every major AI startup; its consumption-based observability platform grows as AI workloads multiply. These stocks are down this year because the market sold the sector indiscriminately — yet all are bigger businesses, growing faster, with stronger competitive positioning than a year ago. We believe these are the types of companies that emerge intact on the other side of the AI transition — and at current valuations, the risk/reward is increasingly attractive.
 

Our AI Infrastructure Positioning

Our AI infrastructure holdings — NVIDIA, Broadcom, Alphabet, Amazon, Arista Networks, Lumentum, Coherent, and Datadog — span every critical layer of the buildout. We are particularly constructive on Alphabet and Amazon as the only two hyperscalers designing custom AI chips at scale, with Alphabet also developing frontier models — a vertical integration of silicon, infrastructure, and intelligence that we believe gives both companies a structural advantage the market does not yet fully reflect.

Beyond silicon and networking, we have been adding exposure to the power infrastructure underpinning this buildout. Energy has become a binding constraint on AI scaling, and we are positioned across the power value chain through Quanta Services, Inc., our long-standing holding in electric grid construction and hardening, as well as new positions in Solaris Energy Infrastructure, Inc. and Forgent Power Solutions, Inc., two companies addressing the co-location and distributed generation challenges that traditional utility infrastructure has been slow to solve.

Looking further ahead, the infrastructure stack required to sustain AI scaling — semiconductors, networking, hardware, and power — is deepening in complexity and capital intensity with each successive generation of compute. We believe owning critical enablers across each of these layers positions the Fund to capture the full breadth of what is shaping up to be the largest infrastructure buildout of the 21st century.

We continue to run a high-conviction portfolio with an emphasis on the secular trends cited and listed. Among others, during the first quarter we initiated or added to the following positions:

• Digital services: Alphabet Inc. and Spotify Technology S.A.
• Semiconductor equipment: Lam Research Corporation and ASML Holding N.V.
• Power and energy infrastructure: Solaris Energy Infrastructure, Inc. and Forgent Power Solutions, Inc.
• Software: Shopify Inc., Palantir Technologies, Inc., Rubrik, Inc., Snowflake Inc., and Guidewire Software, Inc.
• Digital health care: Heartflow, Inc.
• Public safety: Axon Enterprise, Inc.

Shares of Lumentum Holdings Inc., a photonics company delivering critical optical components and solutions to data center end markets, contributed to performance during the quarter. Lumentum occupies a distinctive position as the largest merchant supplier of indium phosphide-based lasers, arguably the most vital component in today's optical infrastructure. The company is capitalizing on an acute supply shortage in lasers, which is not only strengthening near-term financial performance through favorable pricing dynamics but also reshaping the long-term industry structure as Lumentum secures multi-year agreements with both volume and price commitments. Beyond its core laser franchise, Lumentum is broadening its reach by supplying silicon photonics-based transceivers to major hyperscalers, most notably Alphabet, while gaining traction in high-growth adjacencies such as optical circuit switches and co-packaged optics. Shares rose during the quarter on mounting optimism around optics penetrating into scale-up fabrics — the interconnect architecture that enables thousands of AI processors to function as a unified compute cluster — an emerging opportunity that significantly expands the addressable market for optical components and plays directly to Lumentum's strengths. Sentiment was further bolstered by a strategic investment from NVIDIA, underscoring the growing importance of photonics within the AI infrastructure stack and validating Lumentum's positioning at the heart of it. We continue to hold the stock and view Lumentum as a scarce asset — one of the few companies structurally positioned to potentially benefit as optical communication assumes an ever-larger role within data center architectures and the broader AI infrastructure buildout.

Shares of Taiwan Semiconductor Manufacturing Company Limited (TSMC), the world's dominant advanced semiconductor foundry, contributed to performance during the quarter as revenue growth again exceeded expectations, driven by surging AI demand. TSMC controls the cutting-edge manufacturing nodes that power AI servers, flagship smartphones, and autonomous vehicles, and benefits from a virtuous cycle in which its massive scale and profitability fund industry-leading research and development and capital investment, which in turn widen its technological moat and reinforce pricing power. As the ultimate picks-and-shovels provider of the AI era, the company remains insulated from competitive dynamics within the chip design ecosystem: whether hyperscalers deploy custom accelerators or merchant processors, nearly all advanced AI silicon is manufactured exclusively at TSMC's facilities. Arizona has become the centerpiece of the company's geographic diversification strategy, with its first domestic fabrication facility reportedly already shipping to customers, two additional facilities underway, and construction timelines accelerated as part of a $165 billion U.S. investment commitment. Early Arizona yields are tracking comparably to Taiwan, demonstrating the company's ability to replicate its manufacturing excellence internationally. Management has guided for long-term gross margins of 56% or higher through the cycle, and we believe leading-edge node pricing and the strategic value of Arizona capacity to customers could support margins above that level over time. We project strong earnings growth over the next five years, supported by secular AI-driven demand and an increasingly diversified manufacturing footprint.

Shares of Coherent Corp., a leading photonics company delivering optical solutions to data center and industrial markets, contributed to performance during the quarter. The company's growth is driven by two powerful tailwinds: the AI infrastructure buildout and the increasing penetration of optical communication throughout data center infrastructure. Coherent is the only major western optical transceiver manufacturer connecting servers within data centers, and its vertical integration spanning materials, lasers, and critical components not only supports its own modules but also supplies optical systems for customers across the AI infrastructure stack. Shares rose on several positive developments during the quarter, including continued strong demand signals for the coming years, growing confidence in new growth avenues such as optical switches for networking, participation in emerging technologies like co-packaged optics, and a strategic investment from NVIDIA Corporation. We continue to hold the stock and believe Coherent will remain one of the few primary beneficiaries of optical communication's expanding role in data centers and, by extension, the broader AI infrastructure buildout.

Shares of Broadcom Inc., a leading semiconductor and infrastructure software company whose solutions sit at the core of modern computing and networking, detracted from performance during the quarter as concerns emerged that the company's key customers, primarily Alphabet, are designing entire chips in-house and coordinating non-design elements directly with other vendors, potentially reducing their dependence on Broadcom over the long run. This narrative shift came even as Broadcom guided to a substantial ramp in revenues this year and next, with its largest customers signing increasingly larger contracts. We have long believed that AI labs and hyperscalers possess the scale to pursue their own silicon and systems over time, as the sheer magnitude of their demand necessitates silicon tailored to different workloads — but to realize this ambition, they must also develop systems comparable to those offered by leading merchant silicon providers while maintaining an annual development cadence to keep pace with rapidly advancing AI capabilities. Broadcom is the only proven silicon design partner that enables these large customers to pursue this vision at scale, and we therefore believe it is uniquely positioned to capture the large majority of the custom silicon market without facing any terminal risk to its business over the foreseeable future. We continue to hold the stock and believe Broadcom is well positioned to emerge as one of the largest technology companies in the world in the coming years.

Shares of Amazon.com, Inc., the world's largest retailer and cloud services provider, detracted from performance earlier in the quarter as the company guided to $200 billion in capital expenditures for the full year, well ahead of expectations. We have since grown more confident in the return path of Amazon's AI investment, driven by mounting evidence of significant customer demand. In April, Chief Executive Officer Andy Jassy disclosed that Amazon's AI business has already reached a $15 billion revenue run rate — 260 times larger than Amazon Web Services was at the same stage of its development — with a substantial portion of 2026 capital expenditures already backed by customer commitments and meaningful monetization planned for 2027 and 2028. This includes strong momentum in Amazon's custom chip business, where a significant percentage of the next two generations of chips has already been reserved by customers. OpenAI recently described demand for Amazon Web Services' managed AI service as "frankly staggering," citing the competitive advantages of Amazon's data infrastructure. On the retail side, Amazon continued to perform solidly at scale, and we believe its unmatched fulfillment network and vast consumer and logistics data position it uniquely well in an AI-first world — where the ability to anticipate demand, optimize operations, and personalize commerce at scale only deepens its competitive moat. We also expect Amazon to continue expanding operating margins across its North American and international retail businesses through improving cost discipline and further efficiencies in its fulfillment model. Long term, we believe Amazon should remain the dominant player in e-commerce, where it holds less than 15% penetration of its total addressable market, while also emerging as a leading force in cloud infrastructure and the broader AI ecosystem.

Shares of Tesla, Inc., which designs, manufactures, and sells fully electric vehicles, solar products, and energy storage solutions while developing real-world AI technologies and applications, detracted from performance this quarter as the stock consolidated following robust gains in late 2025, with investors awaiting robotaxi progress and digesting Tesla’s sizable investments in manufacturing and AI. Operationally, results were strong despite a challenging electric vehicle market: automotive gross margins rose materially in the fourth quarter of 2025, beating expectations and reaching their highest level in two and a half years, while energy storage margins approached 30%. Tesla continues to advance its AI and autonomy initiatives at full speed — the company anticipates meaningful robotaxi expansion in 2026, released a newer version of its autonomous driving software, and commenced production of its Cybercab, its first purpose-built autonomous transportation platform. Nevertheless, investors continue to scrutinize the pace of robotaxi deployment against Waymo’s ongoing scaling, and Tesla’s decision to more than double its annual capital expenditures — including its ambitious Terafab domestic chip manufacturing initiative — has heightened near-term perceived risk. We believe these strategic investments can materially strengthen Tesla’s competitive position in the AI-first world, and we remain confident in the company’s long-term growth across electric vehicles, energy storage, and autonomous driving. Looking further ahead, Tesla’s Optimus humanoid robot program may prove to be its most transformative initiative of all — Elon Musk has called it potentially the most valuable product in human history, and we believe the program’s progress warrants serious attention from long-term investors.

We invest in companies of any market capitalization that we believe will deliver durable growth from the development, advancement, and/or use of technology. We invest principally in U.S. securities but may invest up to 35% in non-U.S. securities.

At the end of the first quarter, the largest market cap holding in the Fund was $4.2 trillion and the smallest was $572.6 million. The median market cap of the Fund was $63.2 billion and the weighted average market cap was $1.2 trillion.

We had investments in 38 unique companies at the quarter-end.

Our top 10 positions accounted for 60.7% of net assets.

To end the quarter, the Fund had $143.5 million in net assets. Flows were positive in the first quarter.

* Individual weights may not sum to the displayed total due to rounding.

During the first quarter, we initiated a position in Alphabet Inc., the parent company of Google and one of the world’s most valuable technology franchises. After missing Alphabet’s strong run in the latter part of 2025, we took a fresh look at the competitive landscape across hyperscalers and frontier AI labs and concluded that Alphabet offers the most compelling combination of assets in AI at an attractive valuation. We believe that combination includes unmatched consumer distribution across Search, YouTube, Chrome, and Android — including seven products with over two billion users each — proprietary Gemini frontier models, custom tensor processing unit chips, owned data center infrastructure, and decades of unrivaled user and advertiser data. This fully integrated and cost-advantaged AI stack is funded by one of the most cash-generative business models in the world. Despite the rise of AI-native competitors, Search and YouTube continue to grow at double-digit rates at enormous scale and have not missed advertising revenue expectations once since the launch of ChatGPT in November 2022. Meanwhile, Google Cloud is accelerating (we are projecting over 60% year-over-year revenue growth for this segment), driven by demand from leading frontier AI labs and a growing base of AI-forward enterprise customers. We are also encouraged by management’s observation that AI features are deepening user engagement rather than disrupting it, with more complex and multimodal queries driving more time on platform. Alphabet is one of a very small number of companies in the world with the distribution, capital, proprietary data, and technical infrastructure to compete and win across multiple layers of the AI ecosystem simultaneously — and at a reasonable valuation, we see a compelling long-term opportunity for shareholders.

We added to our position in Shopify Inc., the leading global operating system for commerce, after shares pulled back in a broader software sell-off. Shopify is growing gross merchandise value (GMV) at roughly 30% — a remarkable rate at nearly $400 billion in scale — and we believe the business has many years of growth ahead. The most significant driver is the move up-market: Shopify is winning a disproportionate share of new and migrating enterprise merchants. International markets represent a second long runway, where penetration remains well below North American levels. Layered on top are several emerging initiatives — Shop Campaigns and the broader Shopify Partner Network, B2B, and offline POS — that are largely absent from consensus estimates and represent meaningful optionality. We also see Shopify as well positioned in the AI transition. The platform is the natural gateway through which brands will access LLM-driven distribution, and a transaction completed through an AI agent should be economically indistinguishable from one completed through any other Shopify storefront. AI displacement risk, in our view, is materially overstated: the value Shopify delivers to merchants is reinforced by deep switching costs across payments, fulfillment, and capital. Over time, we expect mix shift toward LLM-mediated discovery to disproportionately benefit the long tail of commerce — precisely where Shopify's share is highest — making AI a potential accelerant rather than a headwind.

During the first quarter, we initiated a position in ASML Holding N.V., a Dutch semiconductor equipment company and the world’s sole provider of extreme ultraviolet lithography (EUV) systems — the indispensable technology required to manufacture the most advanced chips at the smallest geometries. Without ASML’s machines, chipmakers cannot achieve the transistor densities needed to power artificial intelligence accelerators, flagship smartphones, autonomous vehicles, and other high-performance computing applications. This is not a temporary competitive advantage — the extraordinary complexity of EUV lithography and its sprawling global supply chain make it virtually impossible for any competitor to replicate, and we expect ASML’s monopoly position to endure for the foreseeable future. We exited our position in Nova Ltd. and redeployed the proceeds into ASML, where we see a more compelling long-term opportunity across several dimensions. As leading chipmakers race to expand advanced manufacturing capacity to meet surging AI demand, we expect ASML to benefit from rising EUV layer counts across advanced logic and memory, as well as the eventual ramp of its next-generation High-NA EUV, which offers superior resolution and enables continued transistor scaling. We are also entering a period of significant memory capacity expansion, driven by insatiable demand for high-bandwidth memory (HBM) in AI applications, and ASML is more directly levered to this buildout than Nova. Finally, ASML’s pricing power and increasing scale support significant gross margin expansion and strong double-digit earnings growth — and we believe it stands as one of the most competitively protected businesses in global technology.

During the first quarter, we added to our position in Lam Research Corporation, a leading provider of wafer fabrication equipment specializing in deposition and etch — two of the most critical and layer-intensive steps in chip manufacturing. We believe the semiconductor equipment industry is at an important inflection point, and that Lam is exceptionally well positioned to benefit. As CEO Tim Archer noted on the fiscal first quarter 2026 earnings call, “the surge in AI data center demand is creating billions of dollars of served available market expansion and share gain opportunity for Lam in the coming years.” To understand why, it helps to know that as chips become more complex, manufacturers must stack more layers of materials on top of one another — and each additional layer requires precisely depositing new materials and etching away unwanted ones. The proliferation of AI workloads, shrinking chip geometries, and the verticalization of chip designs are all driving a significant increase in layer counts, directly expanding demand for Lam’s core capabilities. Lam is competitively advantaged by decades of proprietary expertise in plasma etch and deposition, deep integration into its customers’ fabrication processes — which creates high switching costs — and a global installed base of over 100,000 chambers that generates recurring, annuity-like revenue, earning more over the life of a tool than from the initial sale itself. This advantage is perhaps most visible in HBM, where Lam holds virtually 100% market share for the highly complex precision etching required. We also believe the market is underestimating Lam’s earnings power as NAND memory (flash memory or non-volatile storage) capital expenditure spending recovers from one of its most severe downturns on record — having fallen approximately 50% from its 2022 peak — creating meaningful pent-up demand that we expect to benefit Lam significantly in the coming years.

We initiated a position in Solaris Energy Infrastructure Inc., the market leader in electricity-as-a-service for data centers, delivering gas-fired turbine behind-the-meter power through modular microgrids. Solaris has more than 3 gigawatts of capacity on order by 2029 (from less than 1 gigawatt today), contracted at fixed prices with increasingly long durations. The average payback on rented equipment is approximately 5 years, and we believe current market conditions will allow the company to contract incremental capacity at similar if not better economics. Solaris was chosen as the foundational power partner for xAI's Colossus data center in Memphis — subsequently upsizing that relationship into a 50.1%-owned JV supplying approximately 900 megawatts under a seven-year commercial contract. Most recently, Solaris signed a 10-year agreement to supply 500-plus megawatts to an affiliate of a global AI technology leader, with a framework to convert the arrangement into a long-term power purchase agreement. Data centers are complicated electricity loads to manage, and Solaris is the first-mover in the industry, having developed deep know-how, strong relationships with turbine suppliers, and a trained skilled labor base — all difficult to replicate. We believe the market is underappreciating Solaris' ability to continue creatively securing additional capacity — as evidenced by its most recent acquisition of generating assets and turbine delivery slots from a third party — and importantly, the company's ability to contract this capacity at favorable economics with increasing duration, which we believe will lead to continued upside in the stock over time.

We exited our underweight position in Apple Inc., as the company's pace of AI integration has lagged competitors and we see growing risk to its competitive positioning in an increasingly AI-driven consumer device landscape.

We exited our investment in Microsoft Corporation due to a combination of near-term execution shortfalls and longer-term structural concerns about its competitive positioning in AI. Azure revenue growth disappointed as capacity constraints weighed on results. With Copilot adoption remaining limited and nimbler competitors pulling ahead at the enterprise AI application layer, we believe Microsoft's historical moat — built on distribution, bundling, and enterprise entrenchment — is less durable than in prior platform shifts. We exited the position during the quarter but remain open to revisiting our view should competitive dynamics shift in Microsoft's favor.

We exited our successful investment in Nova Ltd. and utilized the proceeds to initiate a position in ASML, as described above.

We trimmed our positions in Tesla, Inc. and Lumentum Holdings Inc.
 

Looking Ahead

While the first quarter was mixed, we enter the second quarter with growing optimism. A subset of our semiconductor-related names delivered very strong performance, while several of our larger-cap positions underperformed. On the portfolio construction side, we consolidated our software holdings — exiting certain names and adding to our highest-conviction positions. We were also encouraged by the new names we identified during the quarter in areas like power and energy that meet our investment criteria and should position the Fund well going forward.

We remain focused on owning category-defining technology businesses that sit at the heart of durable, secular growth trends. Led by visionary, execution-driven management teams, these companies convert breakthrough innovation into expanding free cash flow. We believe this combination uniquely positions the Fund to compound our investors' capital over the long term.

Sincerely,