2023 December CAD

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1.18% MTD

0.32% YTD

Dear Partners,

In December, the Caravel Capital Fund returned +1.18%, rounding off the year up +0.32%.  Despite the market's ebbs and flows and Caravel being down just over 7% for the first five months of the year, our strategic course adjustments allowed us to conclude the year on a positive note and in the black.

As we close the chapter on 2023 and set our sights on the financial horizon of 2024, we want to share a snapshot of our journey and a glimpse into what lies ahead for Caravel.

Review of 2023 Market Forecasts: Looking Back on our Predictions

The rise in overnight policy rates unfolded as the fund anticipated, in line with signals from central banks.  By the end of 2023, inflation tracked within the fund's predicted range of 2.5-3%.  Our decision to own shorter-term bonds proved to be a prudent move, though the trade was not without some volatility.  Lastly, we will point out that in the February 2023 letter, we made a specific stock call, which is somewhat rare.  We made the case that Onex Corp. was a “screaming buy” when the stock was at $64.  It closed on January 19^th at $103, or a +60% win to date.  We still hold it and expect the stock to have another strong year in 2024. 

However, not every forecast hit the mark.

From January to May we were cautious on stocks, if not outright negative.  We expected the economy to soften, causing earnings and multiples to contract.  Reality saw flat-ish earnings and stock valuations went higher.  We stated that we felt banks had material exposure to credit deterioration.  In March, a banking crisis occurred that spurred the Federal Reserve to bail out several US regional banks with over $500 billion of support.  Markets fell until the Fed stepped in, then ran hard on hearing of the rescue.  We were not sold that the regional banking issue had been fully contained and could not be certain there would not be further issues to arise that could take the market lower.  We did not participate in the optimism of the market and thus it moving higher so we got that wrong. 

Volatility: Where We Hang our Hat

The S&P 500 went up 9% in January and early February, fell 8% on the heels of the banking tremors, rallied 20% through July, dropped another 8% between August and October, and finally rose 14% over the final two months of the year.  Not making a judgment here, but we know we slept better without the volatility the S&P 500 experienced.  We intend to continue to deploy capital into lower volatility strategies and keep our restful sleep, albeit with much better returns than we saw over the past 12-18 months.

Lessons Learned:

Reflecting on the past year, we acknowledge the inherent challenge of timing the market's highs and lows. As the quote goes from one of our favourite books Reminiscences of a Stock Operator, "I never buy at the bottom, and I always sell too soon." We intend to continue compounding wealth for our partners, just not by buying the bottom or selling the top of any investment.

Our Outlook for 2024 is Optimistic

Considering we are in a lower interest rate environment coinciding with an election year in the US, it's hard for us not to be constructive overall on financial assets in 2024.  We do anticipate more market volatility, with a potential dip of 5% or more at some point this year.  The concentration of the S&P certainly makes us wary, and we would prefer to allocate capital to the Canadian benchmark, which trades at a substantially lower valuation.  With that being said, we continue to see good opportunities in our alpha and special situations strategies and have several compelling positions we have initiated in the last few months.  We will also continue to hold tail hedges against our portfolio.

We believe that a normalizing interest rate environment should bring capital markets activity back from the anemic levels seen over the last 1-2 years.  This should specifically benefit our merger and convertible arbitrage strategies, which have been difficult to allocate as much capital as we’d like due to a lack of sufficiently attractive opportunities aka above market returns with below market risk, sound familiar?  We also see commodities prospering in this lower-rate environment with the tailwind of several positive supply/demand dynamics.  At the time of writing we continue to see opportunities in the above-mentioned sectors and are deploying capital.  Of course, once the fund is invested, we will be happy to report what they are to all who read this letter.

Current Updates

Jeff was asked by his financial institution to refinance the building loan he has into a fixed interest rate loan.  He refused and had to repay his loan.  He did this by redeeming USD $4MM from his holdings.  Jeff continues to hold more than USD $4MM in the fund and intends to reinvest back into the business as soon as he can renegotiate suitable terms.  The fund is tracking +2.5% currently for January.  As you can imagine, Jeff has mixed emotions this month, but as we say that’s the cost of living in The Bahamas.

Jack Hidi, who has been with us for five years this spring, has been promoted to Partner.  We look forward to his further contributions to Caravel for many more years to come.  He has been a tremendous addition, and we are ecstatic to elevate his role on our team.

If you have any questions about the fund, or if you just want to say hi, we welcome a phone call from our partners any time. 

We thank you for your confidence and capital. 

Sincerely,

Jeff, Glen & Jack

Caravel Capital Partners