Bonhoeffer Capital Management Q3 2025 Letter

J Studios/DigitalVision via Getty Images Dear Partner, Throughout the third quarter of 2025, Bonhoeffer Fund 1) continued to sell slower-growth firms, 2) purchased durable, faster-growing firms in temporarily depressed sectors and 3) identified similar opportunities in new industries. Our new holdings align with our longer-term growth themes of consolidation (serial acquirers), buyers from forced sellers, insurance operations, financial compounders, distribution, infrastructure investors and housing construction. In addition to the investments above, I continue to identify and analyze opportunities especially in the following areas: banks, insurance, natural resource royalties, distributors, logistics companies, housing, and specialty finance. New investments have a combined expected growth rate (return on equity ( ROE ) * (1-payout ratio)) plus earnings yield of at least 30 to 40%, a metric of deep value incorporating growth. Currently, about 35% of the portfolio is exposed to cyclical end markets. As a result, I will continue to diversify the portfolio to minimize exposure to potential risks of firms servicing cyclical end markets. While in the process of executing this ongoing transformation, I have examined the sectors and stocks that have worked well over time in my non-Bonhoeffer holdings. Before I started Bonhoeffer, I held a portfolio of primarily media, telecom and finance (bank and insurance) stocks. Media and telecom stocks were prevalent in many of the early Bonhoeffer portfolios but for the most part have been removed due to the competitive markets and declining nature of many of these firms. Recently, banks have appeared in the Bonhoeffer portfolio. We have also added select insurance companies including Fairfax Financial ( FFH:CA ), the subject of this quarter's case study. I have studied Fairfax for over 20 years, including attending most of their annual meetings in Toronto. One ideal way to manage a portfolio is to invest in a set of potential investment winners, let the market work, retain the firms that maintain or increase return on invested capital ("RoIC"), and replace lagging investments with new potential investment winners. Warren Buffett has managed his portfolio this way. Examining Berkshire's resulting portfolios, the retained firms continue to grow their earnings over time. Bonhoeffer has gone through two sets of potential winners at this point. With the first set of telecom and media, I was too patient in holding onto firms with declining RoICs for too long in the past. With the second set, I have begun to remove firms that have declining RoEs and few catalysts to increase RoEs over time. For example, Citizens Bancshares Corp. ( CZBS ) was recently replaced in the portfolio with newer firms that have directionally high ROEs and multiple catalysts for higher RoEs (Fairfax Financial being one example). The Bonhoeffer Fund returned a gain of 1.3% net of fees in the third quarter of 2025. In the same time period, the MSCI World ex-US, a broad-based index, returned a gain of 6.7%, the S&P 500 returned a gain of 8.1% and the DFA International Small Cap Value Fund ( DISVX ), returned a gain of 10.7%. A...

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