2026 - Q1 - LP Letter
Dear Investor,
Software and semiconductor - sectors in which the fund is meaningfully overweight - were particularly out of favor during Q1. As a result, the fund declined 8.14%, underperforming the S&P 500 (down 5.16%) and the Nasdaq (down 6.92%) as measured by SPY and QQQ.
We used the Q1 decline to increase positions in high-conviction holdings, including Alphabet (GOOG), Taiwan Semiconductor (TSM), and ServiceNow (NOW), and we reopened positions in Microsoft (MSFT) and Salesforce (CRM). Following Q1, approximately 16% of the portfolio is allocated to SaaS businesses if cybersecurity is included, and roughly 7% if it is not. We may increase our SaaS positions - excluding cybersecurity - to 15% of the total. Because this is a meaningful position in a category currently out of favor, an explanation is in order.
We are leaning into specific SaaS companies despite the narrative that AI heralds a "SaaS-pocalypse." Competition will get fiercer and the future of many SaaS companies will dim. But those that survive will thrive as essential infrastructure of an AI-driven economy. The central question deserves a direct answer: in a world where AI can clone software cheaply and where agents may perform work directly, why is SaaS investible?
The challenge to SaaS is two-fold: First, AI lowers switching costs enough to enable nimble competitors to quickly exploit product white space. Second, AI agents may absorb the workflow layer entirely. Both threats are real for the workflow layer itself. Neither is fatal to the substrate beneath it, because the SaaS moat lives below the visible product and rests on dominant positions over four key strategic areas:
Status as the authoritative system of record that agents must read from and write to.
Ownership of the permission and governance rules that keep agents within enterprise guardrails. (You wouldn't let the suspect write the police report!)
Embedded institutional process knowledge that agents must learn from the system itself.
The liability, security certifications, and procurement standing that incumbents accumulate over years.
The workflow becomes commoditized. The substrate beneath it becomes more valuable, not less.
The AI shift also creates two opportunities for SaaS vendors holding this position. First, they can participate directly in the productivity gains AI creates rather than ceding them entirely to customers. Second, value-based pricing becomes more defensible as outcomes become measurable. ServiceNow is already showing that it can move customers to this new pricing model, and we expect Salesforce and Microsoft will too.
Our SaaS positions reflect this framework. Microsoft holds the strongest substrate position, sitting across identity, productivity, cloud, and AI distribution. ServiceNow has built a system-of-record role for workflows that span multiple enterprise systems, and we expect that orchestration role to grow more valuable as multi-agent deployments become standard. Salesforce is the most exposed of these names because customer data is more portable than employee or IT data, but the current discount, in our view, compensates for that risk. Alphabet, while not a pure SaaS investment, anchors the broader AI infrastructure thesis and benefits from many of the same dynamics.
We believe the Q1 selloff left these substrate-position companies meaningfully over-sold. The market appears to be pricing a shorter timeline for disintermediation than the underlying moats actually warrant.
Sincerely,
Nick Carpenter
Managing Partner
NJC Horizon Fund