2024 May CAD

0.24% MTD
-0.09% YTD
11.84% ASI

Caravel Capital May 2024 Investor Letter

Dear Partners,

For the month of May, Caravel returned +0.24% vs. +3.87% for the benchmark (S&P 500 +4.96%; SPTSX +2.77%).

As the performance suggests, May was a mixed bag for the fund. Strong gains in our commodity-related positions, fixed income, merger arbitrage, convertible arbitrage, relative value arbitrage, and warrant arbitrage strategies were largely offset by losses in the equity long-short book as well as market hedges, as risk assets performed well across most markets for the month. We think of our hedges as a highly flexible insurance policy, which allows us to increase or decrease our premiums depending on valuations, sentiment, macro environment, and other considerations. We will continue to give up some prospective upside to protect tail risks as we always have.

The losses sustained in the equity long-short book were largely concentrated in three long positions in Canadian listed stocks. We believe the recent performance of these stocks has more to do with the upcoming increase of the capital gains tax rate in Canada than with their fundamentals, which remain strong. If you follow the Canadian market, this feeling may be familiar to you. Since the federal budget was announced on April 16th, the SPTSX is flat while the S&P 500 is up 8.4% (as of 06/25/24). This is despite the fact that the Bank of Canada has already begun cutting interest rates (the first cut of several, we’d wager), while there is still intense debate about whether the Fed will follow suit this year. At the risk of belabouring the point we haven’t even started to make, but we are sure is already percolating in your minds, here is a chart to summarize where things are at in Canada relative to our southern neighbours:

We are optimists here at Caravel, so let us leave our fellow Canadian readers with something we think is worth being hopeful about.

We do not believe that some inherent change occurred in 2015 that caused American labour and capital to become structurally more productive than our own. Rather, we believe poor policy decisions are largely responsible for the divergence. As such, we believe that better policymakers have the power to begin to reverse this trend by incentivizing the kind of ingenuity and entrepreneurship that has made the US economy what it is. And they may get a chance to do so rather soon. If you are curious about what, say, the election of a pro-business leader can do for a country’s stock market, we would point you to another chart:

That is the MSCI Argentina Stock Index stock market, which is up 200% in US dollar terms since Javier Milei announced his candidacy in June of 2022. It’s up 50% since just last August when he won the country’s primary election.

Are we saying the TSX will 3-bag if the PC’s win the next federal election? We hope so, but we wouldn’t bet on it. However, at just 13x estimated 2025 earnings (vs. the S&P 500 at over 20x), we would argue there is currently plenty of value to be found in Canadian stocks. We will keep looking and let you know what else we find.

Sincerely,

Jack and Glen

Growth of $1,000 Since Inception

2024 May CAD

0.24% MTD
-0.09% YTD

Monthly Performance (net of all fees)

JanFebMarAprMayJunJulAugSepOctNovDec YTD
20241.74-1.70-1.260.930.24-0.09%
2023-3.42-.95-0.11-0.07-3.192.221.57-0.222.06-0.762.211.180.32%
20221.151.02.93.10-1.61.82-1.61-0.33-8.490.06-.090.68-7.5%
20213.403.993.751.271.301.540.221.514.893.700.501.2030.78%
20200.41-.20-1.91.741.662.251.263.131.100.572.043.1515.02%
20191.721.793.131.151.35-0.75-1.54-1.340.04-1.45-2.571.392.76%
20186.364.810.950.71-0.85-1.072.501.693.530.670.02-0.1820.58%
20170.270.050.350.251.391.451.770.123.273.6113.961.9631.51%
20161.593.301.53-0.825.67%