Dear Partners,

For the month of September, Caravel returned +4.85% compared to +4.52% for the benchmark (+3.64% for the S&P 500 & +5.40% for the SPTSX)¹. This brings the year-to-date total net return to +23.67% for the fund and +19.35% for the benchmark, respectively.

September was driven by broad performance from most strategies within the portfolio, with commodities (+4.46% gross), equity long-short (+0.92% gross), merger arbitrage (+0.91% gross), & fixed income/convertibles (+0.89% gross) all contributing. Our shorts & hedges (-1.05% gross) were material drags against a backdrop of strong momentum for stocks and many commodities.

The fund’s exposure to uranium and gold companies was helpful last month. Our top pick coming into this year, CanAlaska Uranium (TSXV: CVV), finished September +27.5% at $1.16 per share. This brought its year-to-date performance to +70.6% through Q3 2025. We took the opportunity in September to realize some profits before redeploying cash into additional CVV shares as part of a C$15 million equity financing in October, which was priced at $1.00. More recent (but already meaningfully sized) additions to the portfolio, including IsoEnergy (TSXV: ISO) and District Metals (TSXV: DMX), also had strong performance last month, up 26% and 28% respectively. Our gold portfolio gains were led by Probe Gold (TSX: PRB) and Thesis Gold (TSXV: TAU), two Canadian mine developers we have written about in the past, which returned 12% and 30% respectively in September. We mention the individual performance of these stocks to highlight that while our commodity portfolio continues to contribute substantially to our overall returns, we are pleased to have achieved this while maintaining low net exposure to these often-volatile assets. The fund’s allocation to the materials + energy sectors is currently <15% in aggregate, and overall net equity exposure is <25%. We believe this keeps us in a strong position to capitalize on any substantial dislocations in stocks, should they arise, especially in the industries where we have the most expertise. We are, as Warren Buffet has counseled, and the Blue Jays have heeded, waiting patiently for a fat pitch.

One special situation I’d like to highlight, which drove material gains in our merger arbitrage book, is Telus International (NYSE: TIXT). TIXT was spun out of Telus Corp (TSX: T), the major Canadian telecommunications provider, in 2021. The company raised over US$ 1 Billion at $25 per share through a syndicate of major global investment banks in a high flying IPO. Unfortunately, TIXT shares fell from a peak of $39.69 in October 2021 to a low of $2.13 in April 2025 (-95%), all while parent company Telus maintained a majority stake. What began as a major triumph gradually transformed into a distraction (and we are sure, to some extent, an embarrassment). This led to Telus making a non-binding offer to re-acquire the shares of TIXT it did not already own in June 2025 at a proposed price of US$ 3.40 per share.

While we typically do not get involved in mergers before they reach the stage of a definitive agreement, the unique dynamics mentioned above caused us to take a closer look at this case. After our due diligence, for which I must give my partner Glen most of the credit, we initiated a position in TIXT at approximately US$ 3.50.

Our analysis consisted of both our own work and extensive outreach to our network of various analysts and experts on the two companies and their industries. We worked diligently to reach a conclusion at speed, as we generally do in merger arbitrage situations (entry points are often most attractive on the first day a deal is announced). We ascribed probabilities to the possible outcomes as follows:

A) Deal breaks ($0.70 per share downside, ~10% probability).

B) Deal goes through on original terms ($0.10 per share downside, ~30% probability).

C) Deal goes through on improved terms ($2.00 per share upside, ~60% probability).

Skip this paragraph if you are bored by statistics. Investing is ultimately an exercise in estimating probabilities. This is especially true of merger arbitrage, where outcomes are more discrete (often binary). A helpful framework for evaluating such opportunities is the principle of ‘expected value’. The idea here is that you can weigh possible outcomes by their associated probabilities to determine whether an investment is profitable or not in expectation. The last part is key, as the exercise is purely theoretical. The expected value (i.e. profit) of this trade, assuming we had correctly estimated the likelihood and price impact of scenarios A, B, and C, was +$1.10 per share 🡺 (10% * -0.70) + (30% * -0.10) + (60% * 2.00) = (-0.07) + (-0.03) + (1.20) = 1.10. Paradoxically, the expected value of a trade is rarely the value you expect it to produce. In this instance, we either expected to A) lose $0.70 per share, B) lose $0.10 per share, or C) make $2.00 per share. Hence, the theoretical nature of the $1.10, an outcome we did not expect at all in practice. Relative to TIXT’s share price of $3.50, $1.10 is a very high expected value. An investor who can accurately estimate such probabilities over time should attempt to put trades like this on as often as possible. If they did so 10,000 times, for example, they should expect to return >30% on average. Given the 3-4 month timeline of this trade, which is common in merger arb, this is a highly attractive profile (>100% annualized returns).

In the end, our nose was right on the direction but wrong on the price. While Telus did end up improving their offer for TIXT in September, they increased it by ~$1.10 vs. the $2.00 we had estimated. Still, we exited our position with a 30% win in just under three months. ‘Bumps’ in merger arbitrage are rare, but can add significant alpha when they do occur.

We continued deleveraging our portfolio in September and entered a net cash position for the first time this year. We would characterize our current market strategy as cautious, patient, and opportunistic. Financial markets have defied our expectations in terms of their resilience so far this year, especially since April. We are still seeing ample opportunities to achieve the returns we target for ourselves and our partners. We look forward to updating you on future developments in our fund.

September marked the beginning of Caravel’s tenth year in business. We count our blessings every day to be able to do this for a living, and for our many friends and partners who make it possible. Thank you all so much for your many years of support. We are just getting started.

Jack and Glen

Managing Partners, Caravel Capital

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