Dear Partners,

For the month of January, Caravel returned +1.99% compared to +1.14% for the benchmark (+1.44% for the S&P 500 & +0.84% for the SPTSX)¹. 

2026 largely picked up where 2025 left off, both for the broad market and for our fund.

Commodities to which the fund has positive exposure continued their strong run throughout most of January, before a sharp reversal in the final week of the month. Despite the market jitters, our investments in these sectors contributed +3.7% gross. Credit strategies and non-resource equities were neutral to performance, while merger arbitrage (-0.7%) and market hedges (-0.5%) were drags. Two of the merger spreads that widened in January have subsequently closed in February, such that all of last month’s unrealized loss has been recouped for this strategy, and then some.

The most significant development in financial markets since our previous letter was the nomination of Kevin Warsh to succeed Jerome Powell as Chairman of the US Federal Reserve. Warsh’s nomination was, as far as we can tell, the most prescient catalyst for a fairly significant shakeup that has since occurred in a number of sectors and asset classes.

Warsh was a name that had long been considered among the short list of possible candidates, but it’s fair to say he was not the consensus pick at the time of his selection. Markets did what they tend to do when faced with surprise. As we wrote in our July 2025 Letter,  Trump’s desire for lower interest rates is no secret. Warsh certainly shares this view, however he has historically been critical of the Fed’s other important form of stimulus – balance sheet expansion. Since the 2008 financial crisis, the Fed’s portfolio of financial assets has grown >600% and currently sits at around USD $6.6 trillion. Though down from its peak of ~$9 trillion in 2022, we believe a levelling off of balance sheet reduction had been the consensus view of the market since the Powell Fed formally ended QT in December 2025. Under Warsh, we think the consensus has shifted again to further balance sheet reduction in the future. 

This is relevant because the size of the Fed’s balance sheet is directly related to the liquidity in the financial system. To grow its balance sheet, the Fed exchanges US dollars, newly minted out of digital thin air, for financial assets such as government debt. This keeps the yields on these debt securities low while injecting cash into the banks and other institutions that would otherwise hold them. In overly simplistic terms, a larger Fed balance sheet translates to more liquidity, lower market interest rates (i.e. those not determined by Fed policy), and thereby higher valuations for riskier assets such as stocks. This, in turn, raises the risk of inflation, as most forms of stimulus do. A reduction in the Fed’s balance sheet of course invokes fears among investors of the opposite chain of events.

For what it’s worth, we do not expect a policy of aggressive quantitative tightening under a Warsh Fed, namely because we believe Warsh likely made assurances to Trump that he would not risk derailing financial markets in the event he was selected as the President’s nominee. Despite his outward messaging, we believe Trump cares deeply about the performance of financial assets, most recently exhibited by his rapid about-face in Q2 2025 regarding tariffs after markets threw a tantrum on Liberation Day.

Perhaps the most violent move in asset prices among those germane to our strategies was in silver, whose peak of nearly $120 per ounce almost perfectly coincided with the Warsh news. It has since lost a third of its value and is currently trading around $80 per ounce. We view this as a healthy correction given the feverish pace of the metal’s advance since Q4/25. Importantly, despite the volatility, the pace of silver’s price advance has far outstripped the price of input costs such as labour, fuel, and electricity. The same dynamic is true of other commodities like gold and copper, which have also pulled back aggressively from their highs. As such, we expect the margin expansion set to be printed by mining stocks in 2026 to take some market participants by surprise, particularly in the case of companies that are in the midst of mine restarts or are in the late stages of constructing new assets. This was largely the roadmap to the fund’s significant gains in Artemis Gold (TSX: ARTG) in 2024/2025. While a repeat of relative price performance in the metals complex in 2026 is not our base case, we believe there are significant returns yet to be harvested in the shares of the companies best positioned to capitalize on last year’s commodity price gains. The same dynamic also introduces a new set of development-stage opportunities for consideration that have previously been overlooked and capital-deprived due to their lack of appeal at lower commodity prices. We have excellent access to these management teams, enabling thorough due diligence and the opportunity to establish positions before broad institutional awareness takes hold. Our portfolio is as active as it has been in years as we meet daily with executives all over the world in pursuit of such opportunities.

We thank you for your continued support,

Jack and Glen
Managing Partners, Caravel Capital

 _{1 Benchmark = 50/50 weighting of S&P 500 & SPTSX Composite Indices}