Vulcan Value Partners' Large Cap Composite experienced a challenging first quarter in 2026, with a net return of -14.1%, trailing both the Russell 1000 Value Index and the S&P 500. Despite this, the firm made strategic adjustments to its portfolio, acquiring new positions in SAP SE and ServiceNow, while divesting from six other companies. The report delves into the rationale behind these moves, particularly addressing the perceived risks and opportunities presented by artificial intelligence across various holdings. The investment philosophy remains centered on identifying and investing in high-quality businesses with strong competitive advantages at a significant discount to their intrinsic value, aiming for long-term capital appreciation.

During the first quarter, Vulcan Value Partners strategically integrated two new entities into its portfolio: SAP SE and ServiceNow. SAP, a dominant force in enterprise resource planning (ERP) software, is recognized for its deeply embedded systems that serve a vast global clientele, including 98 of the top 100 corporations. The firm views SAP's decline in stock value, attributed to AI disruption fears, as a prime entry point. They argue that SAP's extensive data and operational context make it an indispensable platform for AI agents, transforming potential threats into opportunities for enhanced efficiency and value for customers. Similarly, ServiceNow, a leader in automating enterprise workflows, saw its stock fall significantly despite robust financial performance in 2025 (21% revenue growth, 28% adjusted EBIT growth, and 33% free cash flow per share growth). Vulcan believes ServiceNow's platform is bolstered by AI, enabling more effective workflow automation and providing a substantial margin of safety at its current valuation. These acquisitions underscore Vulcan's commitment to investing in businesses with durable competitive advantages that can adapt and thrive amidst technological evolution.

The quarter also saw Vulcan Value Partners divest from CoStar Group, Diageo plc, Bureau Veritas SA, Stanley Black & Decker, Inc., Crown Holdings, Inc., and Qorvo, Inc. The sale of CoStar Group was primarily due to concerns over capital allocation, as the company continued to pour free cash flow into its Homes.com venture without achieving profitability targets. While Diageo still met investment criteria, the reallocation aimed to capitalize on more compelling opportunities. The other divestments were strategic moves to enhance the portfolio's overall price-to-value ratio. On the detractor side, Salesforce, Ryan Specialty Holdings, Ares Management Corporation, TPG Inc., SAP SE, and Microsoft Corporation were notable. Salesforce faced AI disruption fears concerning its seat-based subscription model, but Vulcan posits that AI agents, such as Agentforce, could ultimately boost Salesforce's revenue by enhancing productivity and generating higher per-seat value. Ryan Specialty Holdings experienced stock declines due to a softening insurance market and AI concerns, though Vulcan's due diligence suggests AI will improve RYAN's efficiency rather than displace its complex E&S brokerage services. Ares Management and TPG also saw their stock prices affected by AI-related anxieties around their software investments, but Vulcan maintains that these concerns are overblown, given the limited exposure, senior credit positions, and strong historical performance of these asset managers. Microsoft, despite a strong quarter with 15% revenue growth and 19% operating profit growth (constant currency), also acted as a detractor, which Vulcan views as an attractive valuation point for a highly entrenched business. The firm actively increased its stake in SAP throughout the quarter, confident in its long-term prospects and significant margin of safety.

Vulcan Value Partners continues to manage its portfolio with a keen eye on identifying businesses with sustainable competitive advantages, ensuring a robust margin of safety in its investments. The firm emphasizes that these strategic decisions are anchored in thorough analysis of quantitative and qualitative factors, aiming to build a portfolio that can withstand market fluctuations and capitalize on long-term growth trends. Despite short-term market pressures and the disruptive potential of new technologies like AI, the underlying investment philosophy remains steadfast: acquire high-quality companies at attractive valuations, fostering long-term capital appreciation for clients.