Q. CAN YOU DESCRIBE WHAT IS GOING ON IN THE MARKET RIGHT NOW?

Will Preston, CFA®, Portfolio Manager, FAM Dividend Focus Fund:

Market conditions have varied greatly throughout the year. It may feel like a distant memory, but it was only seven months ago that investors were dealing with significant volatility and meaningful declines in the stock market over concerns about uncertain trade policy and proposed tariffs. The market bottomed in early April and since then, investor sentiment has reversed sharply from fear to euphoria, and we’ve enjoyed a strong market rally. For context, the S&P 500 is up roughly 37% since April 8^th despite being up only 16% year-to-date¹. This is a remarkable turnaround in a short period of time.

However, it’s important to understand the nature of this rally. This performance appears to us to be driven much more by a narrow speculative market rally as opposed to a broader economic boom. A small group of investments tied to themes like AI and other high-growth narratives have carried most of the gains, alongside a renewed wave of what we would characterize as very speculative activity. And outside of these pockets of investments, other parts of the economy have been more muted including signs of a weakening labor market, sluggish industrial activity, historically low consumer sentiment, and one of the more challenging housing turnover environments.

Q. WHAT IS DRIVING THE RALLY AND TO WHAT EXTENT DOES FENIMORE PARTICIPATE?

Paul Hogan, CFA®, Portfolio Manager, FAM Dividend Focus Fund:

Our view is that the current rally has been powered by a narrow group of high-profile themes, particularly anything tied to AI infrastructure build-out, but we also see investor enthusiasm in other speculative areas like space connectivity, commodities, digital assets and nuclear energy. This investment behavior, where excitement can run far ahead of fundamentals, is not unusual to see in parts of a bull market.

Fenimore can participate in these broader themes when a company meets our standards for quality, financial strength, and cash generation. We own some businesses like Amphenol and Trane Technologies² that have directly benefited from AI-related demand, but they were high-quality businesses well before the market realized how central their products and solutions would be to AI. What we do not do is identify exciting investment trends and then find ways to capitalize on it.

Importantly, this rally has been concentrated. For context, in the Russell Midcap Index, which has approximately ~800 holdings and is the benchmark for the FAM Dividend Focus Fund, the top 20 performing stocks account for about one-third of the Russell Midcap’s return since April 8th and are up ~250% on average³! In fact, one stock accounts for roughly 1/5th of the total return of the Midcap Index for the year, while almost half of the 800 stocks have negative returns for the year³.

We don’t have the luxury of investing in only bull markets, which is why we put an emphasis on preservation of capital and compounding over the long term. Of course, this means we often won’t capture speculative premiums or participate in these thematic-driven rallies. However, in the long run, it is profit growth, not enthusiasm, that drives returns, so it’s important for us to stay anchored to fundamentals. Today, we think those fundamentals remain intact.  Companies in the FAM Dividend Focus Fund are expected to grow earnings by ~10.4% on a weighted average basis in 2025, versus ~7.9% for the Russell Midcap⁴. 

Kevin Gioia, CFA®, Portfolio Manager, FAM Small Cap Fund, adds his perspective on the small-cap market:

These trends have been even more pronounced in the small cap universe. We believe this rally has been led by outsized gains in lower-quality small-cap stocks: companies with weak returns on capital, higher debt, and, in many cases, no profits at all. Areas like early-stage biotech, space and rocket ventures, niche metals mining, and other speculative pockets have surged. Those are not businesses we own, and they do not meet our quality, durability, and cash-generation standards.

More so than other asset sizes, small caps go through high-quality and low-quality cycles, and we’ve seen this before. In these speculative phases, lower-quality stocks can lead in the short term while disciplined strategies lag, but, in our experience, over full cycles profitability wins. For perspective, the FAM Small Cap Fund only invests in businesses that generate consistent profits, while many of the top-performing small-cap stocks this year are tied to companies that remain unprofitable.

Q. DOES THIS FEEL LIKE THE INTERNET BUBBLE?

Drew Wilson, CFA®, Portfolio Manager, FAM Value Fund:

In the late 1990s, investors were captivated by a promising new technology—the internet. Capital flooded into companies building the infrastructure (such as Cisco, Lucent, Level 3) and those developing applications on top (e.g., Pets.com, Webvan, eToys). Momentum accelerated as fear of missing out took hold, drawing capital away from traditional businesses. When it became clear that infrastructure had been overbuilt and adoption would take longer than expected, valuations in the “hyped” names collapsed and money flowed back to the “boring” ones.

Today, we see a similar surge of equity and debt into promising but still-emerging technologies tied to generative AI. Many companies are valued at high multiples based on perceived future potential. As in the internet era, investors are funding both the infrastructure and the applications expected to follow.

There are, however, key differences. The majority of public companies building today’s infrastructure are large, profitable, and well-capitalized—unlikely to face existential risk from overinvestment. Only a few “application” companies are priced for perfection (i.e. few obvious Pets.com equivalents), and valuations for those without a clear AI use case haven’t yet suffered as the “boring” companies did during the dot-com boom. If, however, we reach a point where we realize we’ve built enough—or too much—data-center capacity, and can’t power it economically, or fail to earn adequate returns on that investment, we could see a similar revaluation in stocks such as Nvidia, Microsoft, Vertiv, or Palantir, to name a few.

We are not predicting this. We are, however, cognizant of where investors are assuming very rosy scenarios in what they will pay for a stock. As we work to preserve and grow your capital, our focus remains on understanding how AI may enhance—or in some cases, challenge—the earnings power of the companies we own or are interested in. We love innovation, and with AI, as with all other technological advancements, we will invest in and around it patiently and with a long-term mindset.

Q. WHAT CAN INVESTORS EXPECT FROM HERE? HOW LONG WILL THIS ENVIRONMENT LAST?

John Fox, CFA®, Sr. Investment Analyst:

Barring any unforeseen circumstances, you should expect the long-term investment returns that Fenimore has delivered over the years. Over long periods of time stocks have outperformed cash and bonds. The three FAM Fund strategies have returned 9-10% since their inception⁵.

There’s no way to predict how long it will last. Cycles in investment performance can last for a while. There are historical periods where a trend continued for 18 to 24 months before a major change.

Through our three funds we look to own a collection of individual businesses that are profitable, growing, generating more cash than they need, and have solid balance sheets. When we look at the expectations for earnings growth, we expect that as earnings grow these companies will become more valuable over time.

LOOKING AHEAD

We intend to stick to our plan: only owning companies we understand deeply, with what we believe to be solid competitive advantages, profitability, and strong leadership. Our Research team remains busy and diligent with earnings calls, talking with management teams, and traveling for face-to-face meetings. We recognize it’s a fast-moving environment with a lot of change. At Fenimore, we remain dedicated to the principles and philosophy that have seen us through many market cycles over the past 50+ years.

STAY CONNECTED

If you have any questions, please reach out to us. Call 800-721-5391, email us at info@fenimoreasset.com, or stop by either our Albany or Cobleskill location.

Thank you for your ongoing trust and partnership.

¹ Returns data from FactSet as of 9/30/25.

² FAMEX weighting as of 9/30/25: Trane Technologies = 8.8% and Amphenol = 2.4%. Fenimore Dividend Focus Composite weighting as of 9/30/25: Trane Technologies = 7.23% and Amphenol = 5.46%.

³ iShares Russell Mid-Cap ETF Holdings webpage (www.ishares.com/us/products/239718/ishares-russell-midcap-etf) and returns data from FactSet as of 9/30/25.

⁴ Estimates are from FactSet as of 9/30/25.

⁵ Inception Dates: FAM Value Fund 1/2/87; FAM Dividend Focus Fund 4/1/96; FAM Small Cap Fund 3/1/12.

IMPORTANT DISCLOSURES

Securities offered through Fenimore Securities, Inc., Member FINRA, and advisory services offered through Fenimore Asset Management, Inc.

Performance data shown represents past performance and is not a guarantee of future results. FAM Dividend Focus Fund performance is compared to the Russell Midcap Index, a broad-based, unmanaged index of mid-cap U.S. stocks, solely for illustrative purposes. FAM Small Cap Fund performance is compared to the Russell 2000 Index, a broad-based, unmanaged index of small-cap U.S. stocks, solely for illustrative purposes. The index does not reflect the deduction of fees, expenses, or taxes, and is not available for direct investment. The mutual fund may differ significantly from the index in terms of holdings, risk profile, and investment strategy. Investors should carefully consider these differences when evaluating performance. For more information, please refer to the fund’s prospectus, which includes details on investment objectives, risks, charges, and expenses.

All investing involves risk including the possible loss of principal. Before investing, carefully read the fund’s investment objectives, risks, charges and expenses. FAM Funds’ prospectus or summary prospectus contains this and other important information about FAM Funds and should be read carefully before you invest or send money.

To obtain a prospectus or summary prospectus and performance data that is current to the most recent month-end for each fund as well as other information, please go to fenimoreasset.com or call (800) 932-3271.

The principal risks of investing in the fund are: stock market risk (stocks fluctuate in response to the activities of individual companies and to general stock market and economic conditions), stock selection risk (Fenimore utilizes a value approach to stock selection and there is risk that the stocks selected may not realize their intrinsic value, or their price may go down over time), and small-cap risk (prices of small-cap companies can fluctuate more than the stocks of larger companies and may not correspond to changes in the stock market in general).

Neither this presentation nor any of its contents may be distributed or used for any other purpose without the prior written consent of Fenimore. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds. This presentation may contain statements based on the current beliefs and expectations of Fenimore’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.