Dear Partners,
For the month of September, Caravel returned 1.82% compared to 2.64% for the benchmark ¹ (2.14%for the S&P 500 & 3.15% for the SPTSX).1 This brings year to date total net return to 7.08% for the fund and 19.74% for the benchmark, respectively.

September played out similarly to August, with markets starting on a shaky footing before regaining their stride to finish the month higher. The rotation of capital from technology giants into a broad range of smaller sectors continued, which benefited the fund’s equity long-short strategy. As a proxy, the SPTSX outperformed the S&P 500 by over 100 basis points in the month (and nearly 500 in the quarter) as it continued to close the performance gap for the year.

The fund saw gains across most strategies in September, with the exception of small losses in oil & gas (which were dampened by our hedges) and preferred shares. We have officially closed out our preferred share positions after an incredible run and will continue to monitor the market for future dislocations and investment opportunities.

On the positive side, the fund’s gains for the month were driven primarily by the equity long-short book (in particular two long positions we will highlight) and a bounce back in the Uranium thematic, which has continued strongly so far into October.

September saw strong performance from two Canadian industrial stocks, Kraken Robotics (PNG) and MDA Space Ltd (MDA). PNG continued the strong run it has been on all year and finished the month up over 20%. In October, the company took advantage of the strength in their stock price and completed a C$50 million equity financing. We used this as an opportunity to add to our position by participating in the financing which was massively oversubscribed with large orders coming from south of the border. This raise positions the company very well to execute on its robust pipeline of growth opportunities, the nature of which we wrote about in our July letter.

MDA is a stock the fund has held since April of this year. We began our due diligence when shares were trading around C$11.50 (h/t Sapna Murthy @ Canaccord for flagging it originally). MDA is a manufacturer and supplier of critical technologies and components to the space industry, including satellites, robotics, and geointelligence equipment. The company has a deep competitive moat and is being propelled by the tailwinds that private sector investment has brought to this industry. Specifically, companies like SpaceX have lowered the cost of launching hardware into the sky, keeping it operational there, and even returning it safely to land, by orders of magnitude over the last decade. This has created novel commercial and strategic use cases for MDA’s products, resulting in a massive backlog (in excess of $4.8B) and compelling growth trajectory. Given these well understood facts, we were surprised to find that MDA was trading at a very modest (single digit) multiple. Our average cost on the position is about C$14. Shares closed September at $17.38 and are currently trading >C$21. Though we have reduced our position into the recent strength in order to manage risk, it remains a core holding.

We have continued to monetize positions to crystalize gains and protect against a turn in sentiment, which is currently complacent at best and frothy at worst. To be clear, we are still finding lots to do, but we are cognisant that asset price correlations tend to converge towards 1 when panic sets in. Given still heightened (and possibly escalating) geopolitical tensions, a consequential yet uncertain election next month in the US, and demanding consensus expectations on both EPS growth and central bank easing in 2025, we are keeping our guard up. We estimate we have sacrificed 150 basis points of return so far in 2024 in order to keep our tails hedged and portfolio volatility low. We would, and will, do it again.

If you have any questions about our fund, strategies, or just want to catch up, we are available via phone or email to our partners at any time.
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}