2023 July CAD

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1.57% MTD
-4.02% YTD

Credit: AZ Quotes

Dear Partners,

For the month of July, the Caravel CAD fund was up 1.57%, bringing the total net return for 2023 to -4.02%.

In July, the Caravel Fund continued to generate material gains from holding CI Financial and our investment in Onex Corp. Both investments have been highlighted in our previous letters. We have added to our newest Alpha investment in 5-year adjustable-rate preferred shares, which we originally highlighted in our May letter. We have since added other high-quality bank issuers besides TD to these holdings at attractive levels. Systematic hedges, which we hold to reduce general market exposure, caused the major headwind to the fund’s performance.

Recent economic releases continue to show that the intensity of inflationary pressures from wages and other input costs is abating. We believe this trend will continue into 2024, allowing North American Central Banks to pause future rate hikes this year and begin the slow process of reducing overnight lending rates in early 2024. Depending on the measure one uses to gauge inflation, the trailing 12-month inflation rate is 4.7%; however, the current pace is more important. The latest data released early in August and late July showed inflation running in the mid-3 % range. This level is down anywhere between 600-700 basis points from a year ago. Keeping this point simple - that is a major accomplishment. Based on this, we expect stock prices to remain elevated, albeit a rotation has begun out of costly tech stocks into more reasonably valued and economically sensitive sectors.

Based on the above, we are fundamentally very bullish on rate-sensitive investments like the preferred shares trading at 75 to 90 cents on the dollar, whose coupons are about to reset 100% higher, corporate bonds issued by companies that are generating massive free cash flows and repaying debt, and convertible securities. We feel many fixed-rate securities of well-run businesses are exceedingly mispriced. We believe when overnight rates drop over the next 6-9 months; investors will move quickly toward these securities and to securities in more cyclical industries that are enjoying stable economic conditions. This opportunity will succeed even in a 1-1.5% GDP growth environment.

As always, we welcome a call from our partners at any time. We love to hear what you are thinking.

We thank you for your continued confidence and capital,

Jeff and Glen

Monthly Performance (net of all fees)

JanFebMarAprMayJunJulAugSepOctNovDec YTD

Risk vs. Return Comparisons Across Indexes

Month Return YTD Return Volatility Sharpe Sortino Beta Best Month Worst Month Annualized
S&P 5003.21%20.64%16.42%0.891.290.112.82%-12.35%13.44%

Growth of $1000 since inception

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