Fiduciary Management Inc. (FMI) employs a distinctive investment methodology, concentrating on acquiring robust enterprises valued below their inherent worth. Their recent insights for the fourth quarter of 2025 shed light on strategic portfolio adjustments, notably the inclusion of Mueller Water and the divestment of Genpact. This approach underscores a commitment to thorough fundamental research and a rigorous valuation process.
The investment philosophy at FMI is centered on a 'business owner's perspective'. This entails an exhaustive examination of a company's economic fundamentals and the competence of its leadership. This rigorous due diligence aims to pinpoint companies with enduring competitive advantages and the potential for long-term value creation.
A significant move in the fourth quarter was the integration of Mueller Water into the portfolio. Mueller Water, with a history spanning over 160 years, specializes in products for water transmission, distribution, and measurement. This acquisition was driven by the company's strong alignment with secular infrastructure spending trends, its organic growth prospects, potential for margin expansion, and an appealing valuation relative to the high quality of its business operations.
Conversely, Genpact was divested from the portfolio. This decision stemmed from concerns regarding the wide spectrum of potential outcomes associated with Genpact's transition to an AI-driven business model. FMI opted to reallocate capital to investments offering clearer risk-reward profiles, reflecting their cautious stance on technological shifts that introduce significant uncertainty.
The FMI Small Cap portfolio currently trades at a forward price-to-earnings (P/E) ratio of 17.7x for the first fiscal year (FY1) and 15.0x for the second fiscal year (FY2). This valuation metric highlights FMI's disciplined approach, prioritizing reasonable entry points while focusing on the potential for future earnings growth. Such a valuation strategy is integral to their overall objective of securing investments that promise substantial long-term returns.
The strategic decisions made by FMI in Q4 2025, including targeted acquisitions and divestments, reflect a steadfast adherence to their core investment principles. By focusing on intrinsic value and business quality, and meticulously assessing market dynamics, FMI aims to cultivate a resilient portfolio capable of navigating evolving economic landscapes and delivering sustained performance for its investors.