Vulcan Value Partners reviews the Focus Plus strategy for Q1 2026, highlighting new positions in TransUnion and SAP SE. Read the full analysis for more details.
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Focus Plus Review As of 03/31/2026
INVESTMENT STRATEGY QTD YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR Since Inception VVP Focus Plus (Gross) -19.1% -19.1% -8.0% 13.6% 9.0% 15.2% 12.4% VVP Focus Plus (NET) -19.1% -19.1% -8.6% 12.5% 8.0% 14.2% 11.3% Russell 1000 Value Index 2.1% 2.1% 15.9% 14.3% 9.4% 10.6% 7.7% S&P 500 Index -4.3% -4.3% 17.8% 18.3% 12.1% 14.2% 10.5% Inception 03/31/2007
We did not write any options contracts during the quarter. We use options to lower risk. Equity-like returns are possible when option prices reflect higher levels of implied volatility. If exercised, these options give us the right to purchase stakes in companies we want to own at a lower price than the market price at the time the option was written. We would like for these options to be exercised and have set aside cash for that purpose. We employ no leverage. In effect, we are being paid while we wait for lower prices and a corresponding larger margin of safety. We also use options to exit positions. Generally, we write covered calls with the strike price being our estimate of fair value. As with our puts, we are being paid to do something we would do anyway at a given price.
We purchased two new positions during the quarter: TransUnion (TRU) and SAP SE (SAP).
We sold two positions during the quarter: CoStar Group, Inc. and Salesforce, Inc.
There were no material contributors to performance.
There were seven material detractors to performance: Ares Management Corporation (ARES), Ryan Specialty Holdings, Inc., Microsoft Corporation (MSFT), Salesforce, Inc., UnitedHealth Group Incorporated (UNH), Amazon.com, Inc., and SAP SE.
TransUnion is one of the three leading credit bureaus in the US. Over 95,000 lending institutions self-report their consumer lending and payment data to TransUnion. That data is then aggregated as a credit report and credit score and sold back to lenders to evaluate the creditworthiness of borrowers. The combined revenue that the three credit bureaus generate from selling mission critical proprietary credit data accounts for just three basis points of total US household debt of $19 trillion.
TransUnion has also used its existing data on consumers to expand into new verticals, including marketing, fraud, identity verification, insurance and tenant screening. The company has evolved from being solely a credit bureau to being a global data and analytics company. Depressed volumes in mortgage lending, as well as investor concerns over AI disruption, have weighed on the stock price, giving us an opportunity to own its shares.
We believe that TransUnion will benefit from AI and that AI disruption fears are misplaced.
TransUnion's non-public consumer data is proprietary, regulated, and highly sensitive. Therefore, it is impossible for a new entrant, using AI or any other method, to replicate. TransUnion's data and decisioning solutions are also embedded in lenders' workflows, making it costly for customers to switch.
TransUnion historically has grown its organic revenues at a high single digit rate. The company has an attractive 30% operating profit margin, generates very high returns on capital, and produces strong free cash flow. They have been successfully deleveraging their balance sheet and are now placing a much greater emphasis on share buybacks. We have followed this business for many years and are happy to own it with a substantial margin of safety.
SAP SE is the global leader in enterprise resource planning (ERP) software, which serves as the operating system for many of the world's largest companies. SAP's software manages many functions across an organization, including financial accounting, supply chains, customer relationships, human capital, and procurement. SAP and Oracle dominate the global ERP market. We have owned both businesses in the past and we are thrilled to have the opportunity to own SAP again with a substantial margin of safety.
We believe SAP is one of the best businesses in the world. They have over 425,000 customers, including 98 of the 100 largest companies globally. SAP's ERP solutions often have decades of embedded data, business processes, and software customizations. It is extremely rare for companies to switch ERP vendors due to the cost, time, and disruption risk that switching creates, particularly for large, global enterprises that make up SAP's core customer base.
SAP's stock price is down significantly due to concerns about AI disruption. SAP is the system-of-record for its customers. All their business data, context, and business logic sits within SAP. AI-enabled agents do not work without this data and business context. Customers would be taking on significant risk by using AI to recreate business processes that SAP already handles well. SAP's core customers are global businesses with enormous complexity, thousands of employees, and a vast web of customers, suppliers, and distribution networks, in addition to many different tax and regulatory jurisdictions. The time and difficulty to replicate all this using AI is enormous. SAP is currently investing in agentic AI solutions that enable their customers to be more productive. As the incumbent with a broad array of software solutions, SAP is in a superior position to develop AI agents that work effectively across an organization in an integrated fashion. Even if SAP's customers adopt third party AI agents instead of SAP's agentic agents, we believe that SAP will still benefit. The ERP system drives AI. Any enhancement to the ERP system increases its value which makes SAP even more competitively entrenched. Either way, we believe that SAP will ultimately be an AI beneficiary, helping to make themselves more efficient internally while also creating more value for their customers.
CoStar Group is a premier information services provider to the commercial and residential real estate industries. Its core businesses are dominant, have high barriers to entry, produce copious amounts of free cash flow, and historically have grown at a double digit rate. We bought CoStar because of these businesses. Several years ago, after we purchased CoStar, the company bought Homes.com. They have taken virtually all of the company's free cash flow and reinvested it into Homes.com in an attempt to disrupt the residential brokerage portal industry. Stated simply, it has not worked and the company continues to reinvest virtually all of its free cash flow into Homes.com,
which management now says will not be profitable until 2030, 8 years after it launched the business. We no longer qualify CoStar Group for investment because of poor capital allocation. Following our discipline we sold it to reallocate capital into more discounted companies with better management teams.
We sold Salesforce to fund the purchase of SAP. Our goal is to always lower risk in our portfolios. SAP and Salesforce have similar price to value ratios. However, while we continue to like and own Salesforce in Large Cap and All Cap, we believe that the risk of AI disruption to SAP's business model is the lowest of any software company that we follow. To use an analogy, in terms of risk, we think that Salesforce is an investment grade bond and that SAP is a risk free treasury.
Ares Management Corporation is an alternative asset manager widely considered to be the leading private credit provider globally. Its value has compounded at double digit rates while we have owned it. Its stock price declined 6.2% last year and 31.6% during the first quarter on AI related fears. Specifically, bears are worried about its exposure to software companies and about clients allocating capital away from ARES because of AI related fears about that same software exposure. Let us dissect both related arguments.
First, ARES exposure to software is a relatively small proportion of its portfolio. Second, its exposure is in credit, so ARES has the most senior position if the companies begin to struggle. Their loan to value ratio is approximately 37%. The companies are not struggling, and default rates are close to zero. The average duration of their loans is about three and a half years so they will get all of their money back or refinance relatively soon, before AI causes financial stress, if it ever does. ARES has been aware of AI risks for many years and has been very selective in the types of companies in which they invest. Assuming we are wrong and 15% of their software loans default we estimate it would only reduce the company's growth rate by 3% or 4% for one year and that ARES would continue to grow at a double digit rate.
Second, ARES has a very impressive track record minimizing credit losses going back to the financial crisis. Most of the funds they manage are institutional, which provides stability. Their assets under management continue to grow nicely. Their primary "wealth channel" or "retail" related assets under management comes from ARCC (ARCC), a business development company that acts like a closed end fund. Investors can sell ARCC's stock but they cannot force ARES to liquidate ARCC's loans. Bears have cited meaningful fund withdrawals at Blue Owl, a smaller ARES competitor that is much more retail oriented with less stable capital than ARES, as a reason to sell ARES. We looked at Blue Owl several years ago and decided it did not qualify for investment precisely because its structure is inferior compared to ARES. We believe that fears expressed by the bears are not supported by facts so that ARES' value is stable and that its stock price decline represents a compelling buying opportunity. We have been buying.
Microsoft Corporation is the world's largest software company with a broad range of offerings including Microsoft office, gaming, Azure cloud computing, LinkedIn, and more. Microsoft also has a large investment in OpenAI which allows them to have full access to all of OpenAI's intellectual property. We think Microsoft is one of the most competitively entrenched businesses in the world and will be a beneficiary from AI.
Microsoft delivered another strong quarter, with revenues up +15% and operating profits up +19% on a constant
currency basis. Our value grew nicely. Microsoft's cloud business, Azure, grew at a robust +38% constant currency rate. Microsoft continues to invest heavily in capital spending as it continues to build cloud capacity to meet customer demand, which continues to outstrip supply. Despite this heavy capital spending, which has attractive returns, free cash flow remains very robust.
We believe the company is trading at a remarkably attractive valuation. We believe we are paying roughly fair value for its intelligent cloud business, including Azure, and getting the software business for free. Alternatively, we are paying roughly fair value for the software business and getting its intelligent cloud business for free. We think we own Microsoft with a substantial margin of safety.
Salesforce is the world's leading SaaS vendor for customer relationship management (CRM) and salesforce automation (SFA) software, including AI agents. Salesforce's stock price has been negatively impacted by AI disruption fears. Salesforce largely has a seat-based subscription model. Bears fear that AI agents will replace human beings and that Salesforce's seat count will decline. We believe that AI will enhance incumbent platforms such as Salesforce, which are also in the best position to keep software updated and maintained in the future. We also believe that Salesforce will be a net beneficiary if seats do decline as clients adopt its agentic AI solution, Agentforce. For example, on average Salesforce charges approximately $2,000 per seat for its product suite. A typical user might make $40,000 per year. Salesforce is able to charge approximately 10-20% of the cost of a human for Agentforce. If that human user is replaced by Salesforce's AI agent, Salesforce's revenue will increase 2x to 4x to approximately $4,000 to $8,000.
The evening before UnitedHealth Group reported fourth quarter earnings, which were in line with our expectations, the Centers for Medicare and Medicaid Services (CMS) released its 2027 Medicare Advantage Advance Rate Notice. The notice called for a 0.1% payment increase. Cost trend in Medicare Advantage is running high-single-digits. The 0.1% increase is clearly inadequate relative to cost trend. This announcement put pressure on the entire industry and UnitedHealth Group was no exception. On April 6, CMS released its 2027 Final Rate Announcement of 2.48% and UnitedHealth Group's stock price has rallied since then. We believe that UnitedHealth Group serves a critical function in the healthcare system in the U.S. and that its role is entrenched despite short-term volatility associated with Medicare Advantage funding headwinds. We believe that value-based care must play a critical role in bringing down the cost of healthcare in the United States. In our opinion, no company is better positioned to drive better outcomes at lower cost through value-based care than UnitedHealth Group.
Amazon reported strong results for its fiscal year and fourth quarter. During the fourth quarter, AWS's revenue increased 24% and highly profitable advertising revenue grew 22%. AWS is benefitting from AI driven demand for its cloud services and its growth is accelerating. In addition, Amazon is aggressively building out its promising Leo satellite service that will compete with Starlink. As a result, Amazon's capital spending is forecast to increase over 50% in 2026 to approximately $200 billion. We expect a solid return on this capital spending. Bears believe that Amazon is investing too much money in capital spending. Our view is that it is a darn good problem to have and that Amazon will become even more competitively entrenched as the leading cloud services provider in the world.
As mentioned above, we purchased SAP during the quarter. It was also a material detractor. We continued to add to our position in SAP throughout the quarter. We believe that we own one of the best businesses in the world with a substantial margin of safety.
In the discussion that follows, we generally define material contributors and detractors as companies having a greater than 1% impact on the portfolio and should be viewed in context with the performance information provided for each strategy. With respect to the discussion of contributors and detractors or the performance of any individual holding shown here, no individual investment is intended to be representative of any particular strategy. For a complete understanding, please see the performance and accompanying disclosures at the end of this letter. Important Definitions DISCLOSURES Opinions and views expressed constitute the judgment of Vulcan Value Partners as of the date shown and may involve a number of assumptions and estimates which are not guaranteed and subject to change without notice. No representation is being made with respect to their accuracy on any future date. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material when entering any financial transaction. Vulcan focuses on long-term capital appreciation; purchasing publicly-traded companies that we believe are competitively entrenched and emphasize a margin of safety in terms of price as compared to our estimation of their intrinsic value. Value is our estimate of the intrinsic worth of a company based on our assessment of certain quantitative and qualitative factors. Vulcan defines risk reduction as reducing the portfolio's price to value ratio by either buying (or adding to existing positions) high quality companies which are trading well below fair value as estimated by Vulcan or selling positions which are trading at or near their fair values. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. There is no assurance that any securities discussed herein will remain in the composite or that the securities sold will not be repurchased. The specific securities identified and described are not representative of all the securities purchased, sold, or recommended for client accounts. Actual holdings may vary for each client and there is no guarantee that a particular client's account will hold all of the securities described. The securities discussed do not represent the composite's entire portfolio. It should not be assumed that any of the securities transactions or holdings discussed will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. There may be market or economic conditions which affect our performance, or that of our relevant benchmarks, that may have changed Vulcan Value Partners' views regarding the prospects of any particular investment. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities discussed in this letter. Vulcan buys concentrated positions for our portfolios, at times averaging 5% in our model portfolios, which may make our performance more volatile than that of our benchmark indices, and our performance may diverge from an index, positively or negatively, as a result. Our focus is on long term capital appreciation, so our clients should consider at least a five year time horizon for an investment with Vulcan. The S&P 500 Index is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index. The Russell 1000® Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The Russell 2000® Index includes the 2000 firms from the Russell 3000® Index with the smallest market capitalizations. The Russell 2000® Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Index figures do not reflect deductions for any fees, expenses, or taxes. Investors cannot invest directly in an index. Peer ranking information sourced from eVestment using Vulcan Value Partners Large Cap, and Focus Plus Composites versus peer group of US Large Cap Value Equity Universe, Vulcan Value Partners Small Cap Composite versus peer group of US Small Cap Value Equity Universe.
TERM VULCAN DEFINITION* Competitive Advantage/PositionMoat or Economic Moat A company's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Discount The difference between Vulcan's estimated intrinsic value and the market price of a company. EBITDA EBITDA is earnings before interest, taxes, depreciation, and amortization. Fair Value/ Intrinsic Value/ Value/Intrinsic Worth Vulcan's estimate of the price a willing buyer would pay and a willing seller would accept, assuming neither was compelled to enter into a transaction. Firm Assets Vulcan's fully discretionary assets under management. Free Cash Flow The amount of cash that a company has left over after a company has paid all of its expenses, including investments. Free Cash Flow Yield (FCF Yield) A company's free cash flow divided by its market price. High Quality Business A company that meets Vulcan's standards for investment. Investment Team Vulcan's Investment Team includes members from both its Research and Trading Teams. Investment Time Horizon Investment holding period considered by Vulcan when evaluating a potential investment. Macro Factors The general economic and business environment. Margin of Safety A favorable difference between the price of a company's shares and Vulcan's estimated fair value of those shares. A quantitative Margin of Safety is measured by discount (defined above). Qualitative Margin of Safety is measured by our assessment of the quality of a business. MVP List A proprietary list of qualifying businesses that Vulcan believes have identifiable, sustainable competitive advantages and the ability to consistently produce free cash flow through Vulcan's five-year investment lens. This list includes Vulcan portfolio companies in addition to others but is not representative of any existing Vulcan client accounts, composites, or funds. Name Turnover The number of companies bought plus the number of companies sold divided by 2 and then divided by the average number of companies in the portfolio during the relevant time period. Portfolio Improvement Overall improvement of the quality of the businesses in the applicable portfolio. Position Size A security's weight in the applicable portfolio or composite. Price to Value Ratio A calculation that compares the price of a company's stock to our appraisal of the company's intrinsic value. Risk Reduction/ Risk Management Reducing the portfolio's price to value ratio by either buying (or adding to existing positions) high quality companies which are trading well below fair value as estimated by Vulcan or selling positions which are trading at or near their fair values. Stable Value Companies Companies with intrinsic values that Vulcan believes will remain stable over its investment horizon of five years. Total Addressable Market (TAM) Also referred to as total available market, is the opportunity that would be available to a product or service if 100% market share was achieved. Value Growth The sum of the growth in a company's profitability and its free cash flow yield.
References
- *These definitions should be referenced in the context of Vulcan commentary and do not necessarily represent the meanings that are used in all contexts.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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