Dear Partners,

For the month of January, Caravel returned +2.21% compared to +3.13% for the benchmark¹ (+2.78% for the S&P 500 & +3.48% for the SPTSX).

The fund’s gains in the month were driven primarily by our holdings in gold equities (collectively +133bps gross) and uranium developer CVV.CN (+128bps gross). CVV, which we highlighted in our November 2024 Letter, finished January +33% and we believe still has a long way to go. Merger arbitrage, equity long-short, and convertibles all had modestly positive performance contribution of between +20bps and +50bps gross while our shorts/hedges and high yield strategies were minor drags of -30bps and -60bps, respectively.

Only time will tell if the computer model that was released in January by 18-month-old Chinese tech startup Deepseek will prove to be, as some have called it, A.I.’s ‘Sputnik moment’. For now, while it certainly caused some market jitters and marked a change in sectoral leadership to begin the new year, stocks have generally shrugged off the news with major indices having recovered to fresh highs as of mid-February. The main implication for our portfolio has been the impact to energy stocks, both conventional (fossil fuels) and nuclear.

It would appear that some have interpreted Deepseek’s proclamation that it was able to build its flagship model for USD $6 million as a death knell for the future of energy demand. For reference, Microsoft, whose stake in OpenAI makes it a major player among the current American A.I. incumbents, plans to spend more than 10,000x this amount in 2025 alone on infrastructure supporting these technologies. As we noted in our June 2024 Letter, we have been skeptical about the businesses whose fortunes are most levered to future A.I. spend in the near term because of the insane numbers priced into current consensus. Interestingly, the SMH semiconductor ETF, used by many as a proxy for the ‘A.I. picks and shovels’ market, is down 1.5% since June 30^th. 

Despite these concerns, our research indicates that data centres currently account for less than 3% of global energy demand and are not expected to reach double digits until the 2030’s, if they do at all. So as far as we can tell, the potential disintermediation that Deepseek represents (namely their unverified claims of having built a competitive model for a small fraction of the cost) should be neither particularly surprising nor overly harmful to oil and gas or uranium companies. Conventional energy producers trade at undemanding multiples of pessimistically estimated future cash flows, which indicates that investors are not paying for very much growth. Meanwhile, the uranium thematic is as much (if not more) about the supply, energy density, and carbon emissions profile of the material as it is about the exact composition of overall energy demand in 5-10 years. We have added on weakness in both thematics. Our strategy remains the same – find and back underfollowed companies with exemplary management teams, who are developing high quality assets in stable and supportive jurisdictions.

The other major story in January that we expect to impact our investment universe was the announcement (and nearly immediate delay) of President Trump’s proposed tariffs on certain trading partners, including Mexico and Canada. Canadian industrial stocks, of which we own two, sold off aggressively on the news and have not fully recovered despite the appearance that Trump is willing to make a deal if he gets certain concessions and commitments from his political counterparts. While we certainly think it is in everyone’s best interest to reach a deal, we are not willing to bet money that such outcome will be reasonable, favourable, or expedient. We have accordingly conducted a thorough review and repositioning of the portfolio to minimize the direct impact of Trump’s unpredictable policies on our holdings. We continue to focus most of our time and energy on low volatility/market neutral strategies, which we expect to perform well on a relative basis while some of the uncertainties around global trade, interest rates, and inflation are worked through in the coming months.

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}