2023 June CAD
2.22%
MTD
-5.50%
YTD
Monthly Performance (net of all fees)
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | -3.42 | -.95 | -0.11 | -0.07 | -3.19 | 2.22 | -5.50% | ||||||
| 2022 | 1.15 | 1.02 | .93 | .10 | -1.61 | .82 | -1.61 | -0.33 | -8.49 | 0.06 | -.09 | 0.68 | -7.5% |
| 2021 | 3.40 | 3.99 | 3.75 | 1.27 | 1.30 | 1.54 | 0.22 | 1.51 | 4.89 | 3.70 | 0.50 | 1.20 | 30.78% |
| 2020 | 0.41 | -.20 | -1.91 | .74 | 1.66 | 2.25 | 1.26 | 3.13 | 1.10 | 0.57 | 2.04 | 3.15 | 15.02% |
| 2019 | 1.72 | 1.79 | 3.13 | 1.15 | 1.35 | -0.75 | -1.54 | -1.34 | 0.04 | -1.45 | -2.57 | 1.39 | 2.76% |
| 2018 | 6.36 | 4.81 | 0.95 | 0.71 | -0.85 | -1.07 | 2.50 | 1.69 | 3.53 | 0.67 | 0.02 | -0.18 | 20.58% |
| 2017 | 0.27 | 0.05 | 0.35 | 0.25 | 1.39 | 1.45 | 1.77 | 0.12 | 3.27 | 3.61 | 13.96 | 1.96 | 31.51% |
| 2016 | 1.59 | 3.30 | 1.53 | -0.82 | 5.67% |
Risk vs. Return Comparisons Across Indexes
| Month Return | YTD Return | Volatility | Sharpe | Sortino | Beta | Best Month | Worst Month | Annualized | |
|---|---|---|---|---|---|---|---|---|---|
| Caravel | 2.22% | -5.50% | 8.78% | 1.41 | 1.92 | 1.00 | 13.96% | -8.49% | 12.71% |
| S&P 500 | 6.61% | 16.88% | 16.5% | 0.87 | 1.26 | 0.1 | 12.82% | -12.35% | 13.09% | S&P/TSX | 3.41% | 5.76% | 13.84% | 0.61 | 0.68 | 0.09 | 10.79% | -17.38% | 8.1% |
"Waiting for a fat pitch takes patience and discipline."
-Warren Buffet
Dear Partners,
For the month of June, the Caravel CAD fund was up 2.22%.
During the month of June, the Caravel Fund generated material gains from our holdings in CI Financial (CIX) and our hedged investment in Onex Corp (ONEX). While we maintain our positions in these investments, we have adjusted the risk profile to minimize potential losses in case of a market correction. We maintain a strong conviction in both names and believe they will continue contributing to our returns in the near to medium turn.
This month, we will provide a concise commentary supplemented with visual aids. As they say, a picture is worth a thousand words, and since it's a beautiful summer, we encourage you to spend the time you would have allocated to reading our letter enjoying the outdoors.
Over the first six months of 2023, the S&P 500 Index has risen by 16%. However, as shown in the chart below, more than 100% of this rise can be attributed to stocks becoming more expensive. Investors seem to be assuming a significant rebound in earnings over the next 12 months. To justify today's valuations, earnings must increase by at least 15% or more. We must ask ourselves whether investors are paying too high of a price for what they expect to receive.
The above chart was provided by Strategas, one of the two excellent macro research providers whose work we will feature in this letter.
Based on the information provided below, our answer is a resounding YES! It's a mathematical fact: bond yields have an inverse relationship with stock values. However, stock investors often become overly focused on stocks and fail to notice what's happening in other investment areas. Currently, stock investors are disregarding the shrinking availability of credit and increasing household fiscal tightness that will continue throughout the second half of 2023 and likely the first half of 2024. This is a result of higher borrowing costs and slower economic growth.
Source: Alpine Macro
We believe the chances of a 15% increase in earnings for 2024 are slim to none, and slim just left for his summer vacation. However, we acknowledge that markets can remain irrational longer than we can remain solvent, so we position accordingly.
In my experience, when stocks reach valuations like today's, the corrective action is swift and violent. We have already surpassed the point where Mr. Market should have taken notice of elevated bond yields and deteriorating earnings. Therefore, Caravel has positioned the Fund with systematic and stock-specific protection.
Source: Alpine Macro
We firmly believe that the North American economy will either experience a mild recession (40%) or a period of slow economic growth (60%) as a direct result of consumers entering the post-pandemic period with ample cash reserves, approximately $6 trillion. The pandemic stimulus and the central banks' bond-buying through "Quantitative Easing" have effectively created a safety net against a severe recession, similar to how the New Deal pulled the US economy out of the Great Depression in 1933. Due to the lack of debt, we believe that higher interest rates are slowing demand rather than killing it (as no one wants to take on debt with high costs), and only a few are experiencing severe financial strain from elevated interest expenses. Consequently, we anticipate that overnight and short-term interest rates will remain higher for an extended period as the North American Central Banks remain vigilant against the risks of entrenched inflation. They are committed to avoiding the mistakes made in the 1970s when interest rates were lowered before inflation was brought under control. Based on these assumptions, we continue to de-risk the portfolio by selling into strength or "feeding the ducks," as I like to call it, and purchasing downside protection on either a macro or individual basis. However, the Fund is ready to seize any significant opportunities that may arise if stocks were to experience substantial declines in line with our thesis.
If you would like to discuss anything at all, we welcome a call or email to speak with our partners at any time.
We thank you for your continued confidence and capital,
Jeff and Glen.