Select Dividend Q4 2025 Investor Letter

2025 in Review: 

The "chattering class" spent much of 2025 debating the terminal rate of inflation, the softening labor market, and when (not if) the AI bubble would pop.

We remained focused on our disciplined investment process – objectivity and breadth, cash flows over earnings, accretive over destructive capital deployment – to build high conviction portfolios.

In 2025, our flagship Global Select Dividend strategy and our U.S. Select Dividend strategy delivered strong results thanks to our concentrated, high conviction positions. We believe this is the only way to outperform in today’s markets. The combination of quantitative factor modeling with bottom-up fundamental analysis provided a durable edge in 2025 that we expect to remain in the future.

10 Surprises for 2026

In homage to the late Byron Wien, we are releasing our "10 Surprises for 2026" list. We define a "surprise" as an event the market prices at less than a 33% probability, but which we believe has a better than 50% chance of occurring. 

We will be wrong of course on several but hopefully directionally accurate on most. Still, we view this as a useful thought exercise that helps shape our portfolio construction with a focus on tail-risk events.

1. Global Reacceleration
2. No AI Bubble
3. Private Market Bubble
4. The Fed is Not Captured
5. Europe Outperforms the U.S. Again
6. Blue Wave at the Midterm
7. Higher Structural Market Volatility
8. Deregulation
9. Oil Renaissance
10. Nuclear Fusion Breakthrough

Global Reacceleration

Resilient economic growth combined with productivity gains and fiscal stimulus in all major regions result in above consensus global GDP growth. The Chinese economy is likely to benefit in 2026 from fiscal support while a PBoC put should help offset the property drag and lift growth. German fiscal stimulus is expected to boost spending and B2B flows in Q1[1].

U.S. labor markets are in balance while leading indicators continue to improve. Inflation remains well anchored in all regions except the U.S. where consumers with extra cash could drive inflation higher. The combination of refunds and lower withholdings will frontload the benefits of OBBBA into 2026. US inflation may get sticker as the economy reaccelerates and the Gov stimulates struggling low-income consumers.

No AI Bubble

Market pundits are quick to toss around words like ‘bubble’ when they’ve missed the boat and underperformed. The latest narrative is that the AI boom is an unsustainable AI bubble. We disagree.

We believe 2026 will be the year AI efforts become less speculative and more focused on real-world applications. Generative AI is the general-purpose technology of our era—much like the steam engine or electricity—possessing the unique ability to improve over time and serve as a platform for new innovations. By the second half of 2026, we expect more news articles to reference "inflation" than an "AI bubble" as the accelerating economy generates sticky inflation and as AI efforts become more practical (and productive).

Private Market Bubble

We expect the Private Markets to underperform the Public Equity markets again in 2026 for the fourth consecutive year. Private Funds amassed huge war chests coming out of the Covid shutdowns and continue to deploy capital aggressively. For the fifth straight year, the private market asset class - including private equity and venture capital - is expected to see more capital calls than cash returns[2]. U.S. venture capital distribution yields sit near all-time lows as funds continue to call capital faster than they distribute it. The investment cycle is extended, delaying liquidity for LPs[3]. These trends indicate too much Private Market capital chasing too few good investment opportunities portending poor future returns.

European Breadth vs. U.S. Narrowness

In 2025, European equities nearly doubled the performance of the SPY, with the iShares Europe ETF returning +31.4% versus +17.7% for the U.S. While the U.S. remains a narrow "Tech story," Europe has become a story of breadth, with 8 of 11 sectors outpacing the S&P 500.

This outperformance is supported by a fundamental paradigm shift in Germany, which is abandoning a decade of fiscal austerity in favor of "fiscal excess". With the removal of its constitutionally enshrined debt brake, Germany intends to increase deficit spending to 5–6% of GDP, specifically targeting defense and infrastructure[4]. The broader European Union is also aiming to boost economic growth primarily driven by significant public spending on infrastructure, digitalization, and defense spending[5]. The tailwinds of fiscal coordination and rate cuts will likely result in positive economic surprises in the coming months in Europe. Combined with China’s fiscal support and a PBoC "put" to offset property drags, we believe the "Old World" is positioned to outperform the U.S. again in 2026.

The Structural Volatility Shift

Investors should prepare for higher structural market volatility as global GDP growth surprises to the upside. Higher-than-expected inflation results in fewer Fed cuts than the market expects as the Fed narrative turns from “how many cuts?” to “does the Fed hike?”. In this scenario, the 10-year Treasury trades closer to 5% than 4% as the bond market reacts to sticky inflation. Binomial events like the midterms and the Supreme Court tariff decision heighten policy volatility which will also causing the VIX to trade at higher levels.

What to Follow in 2026

• The Fed is Not Captured: Kevin Hassett is the next Federal Reserve Chair but is unable to muscle the Fed Funds rate lower as the FOMC returns to the more chaotic, pre-Greenspan decision making process. Fed independence is maintained, though at the cost of higher interest-rate volatility driven by more public dissents and policy pivots than in recent Fed-watching memory.
• Blue Wave at the Midterms: Trump loses his political superpowers and becomes a lame-duck President. Two or more cabinet members exit the admin as fallout from the GOP midterm losses. Public policy volatility increases as presidential powers are limited to executive orders and the Foreign Policy realm.
• Deregulation: Red tape is cut at pace across Financial Services, AI/Tech Services and the Energy sectors under the guise of National Security to prop up economic growth before the midterms. Great Financial Crisis capital requirements are watered down, benefitting banks the most.
• Oil Renaissance: Oil prices climb into the $60–70 per barrel range by Q4 2026 as demand drivers (e.g., corporates) exhibit firmer underlying consumption amid more constrained supply growth than widely assumed by a market that believes oil is oversupplied.
• Nuclear Fusion Breakthrough: The AI race catalyzes nuclear fusion research, with at least three private-sector companies achieving the Net Energy Gain milestone in the new year. One of them goes on to reach Sustained High-Power Density Operation in a manner viable for a fusion power plant by late 2026.

Go Global

Global growth prospects are looking up. Tariff uncertainty will likely fade in 2026 (releasing pent-up demand), combined with significant fiscal stimulus across three major regions and the lagged effects of lower monetary policy is likely to cause a reacceleration in the global economy.

This is a slow-moving multi-year process which is underappreciated by investors and a key reason why we remain very bullish on Global equities.

Disclosures:

Our ’10 Surprises for 2026’ are not intended as statements of fact. They are predictions that may or may not occur based on a variety of circumstances.

Past performance does not guarantee future results. Investing in securities involves risk, including the possibility of the loss of principal.

Please see Advisory Research’s Form ADV Part 2A, which is available upon request, for more information.

Certain information contained herein constitutes forward looking statements, projections and statements of opinion (including statements of financial market trends). Such information can typically be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, “continue” or “believe” or comparable terminology. All projections, opinions and forward-looking statements are based on information available to Advisory Research as of the date of this presentation, and Advisory Research’s current views and opinions, all of which are subject to change without notice. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in forward looking statements. Additionally, information and views presented herein may be drawn from third-party or public sources which are believed, but not guaranteed, to be reliable and which have not been verified for accuracy or completeness.

Advisory Research is providing this material for informational purposes only. The information provided is not intended to recommend any company or investment described herein and is not an offer or sale of any security or investment product or investment advice. Before making any investment decision, you should seek expert, professional advice and obtain information regarding the legal, fiscal, regulatory, and foreign currency requirements for any investment according to the laws of your home country or place of residence.

Advisory Research’s strategies are actively managed and not intended to replicate the performance of any cited index: the performance and volatility of Advisory Research’s investment strategies may differ materially from the performance and volatility of a cited index, and their holdings will differ significantly from the securities that comprise the index. You cannot invest directly in an index, which does not take into account trading commissions and costs.

Advisory Research is an investment adviser in Chicago, IL. Advisory Research is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Advisory Research only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Advisory Research’s current written disclosure brochure filed with the SEC which discusses among other things, Advisory Research’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

[1] Source: GlobalData TS Lombard Street as of 12/5/25.

[2] Source: Source: Pitchbook as of 9/30/25. https://pitchbook.com/news/reports/q3-2025-global-private-market-fundraising-report

[3] Source: Cambridge Associates as of 8/4/25. https://www.cambridgeassociates.com/insight/us-pe-vc-benchmark-commentary-calendar-year-2024/

[4] GlobalData TS Lombard Street as of 12/5/25. €500B in 12 years earmarked to “new projects”, €100B of which will go to an existing climate fund. Defense spending is virtually uncapped – a 5% NATO target would imply €225B/year in annual defense spending, equivalent to ~3% of GDP.

[5] European Commission as of 10/16/25. https://commission.europa.eu/topics/defence/future-european-defence_en