Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2020 | 0.41 | -.20 | -1.91 | .74 | 1.66 | 2.25 | 1.26 | 3.13 | 1.10 | 0.57 | 2.04 | 3.15 | 15.02% |
2019 | 1.72 | 1.79 | 3.13 | 1.15 | 1.35 | -0.75 | -1.54 | -1.34 | 0.04 | -1.45 | -2.57 | 1.39 | 2.76% |
2018 | 6.36 | 4.81 | 0.95 | 0.71 | -0.85 | -1.07 | 2.50 | 1.69 | 3.53 | 0.67 | 0.02 | -0.18 | 20.58% |
2017 | 0.27 | 0.05 | 0.35 | 0.25 | 1.39 | 1.45 | 1.77 | 0.12 | 3.27 | 3.61 | 13.96 | 1.96 | 31.51% |
2016 | 1.59 | 3.30 | 1.53 | -0.82 | 5.67% |
Month Return | YTD Return | Volatility | Sharpe | Sortino | Beta | Best Month | Worst Month | Annualized | |
---|---|---|---|---|---|---|---|---|---|
Caravel | 3.15% | 15.02% | 8.59% | 1.87 | 6.51 | 1.00 | 13.96% | -2.57% | 17.07% |
S&P 500 | 3.84% | 18.39% | 15.82% | 1 | 1.25 | 0.1 | 12.82% | -12.35% | 15.72% | S&P/TSX | 1.72% | 5.60% | 14.27% | 0.56 | 0.54 | 0.06 | 10.79% | -17.38% | 7.43% |
Plan your Work, then Work your Plan
Dear Partners,
For the month of December the Caravel Capital Fund Ltd was up 3.15%
After a year unlike any we have previously experienced, stating what is known will serve us well before providing any prognostication. From the knowns, we find our go forward plan for 2021.
Over the past nine months, Caravel has relied on known facts to provide the foundation for our return in 2020, and equally important allowed us to avoid a massive drawdown in Q1. We expect this same approach will serve us well in the future. However, we did not start 2020 with the above knowledge, in fact nine months ago Caravel pivoted and embraced change.
“Change before you have to.” - Jack Welch
Adapting to change is essential for a successful business. Adapting before you have to is what separates the good from the great. For much of his career, Warren Buffett avoided making investments into companies that didn’t fit into his value template. It was only after long conversations with his partner Charlie Munger that Berkshire bought Coca-Cola in the late 80’s, a more growth oriented stock. More recently his friend Bill Gates convinced him after 2009 to pivot and look at tech companies that both fit his rigorous standards and had strong growth prospects. From 2016 to 2018 Berkshire bought 960 million shares of Apple. They paid $30 Billion for it. Yesterday that investment was worth $130 billion, Buffett’s biggest gain on any one investment in his almost 70 year career. Change before you have to, indeed.
Caravel is a market neutral fund. We endeavour to execute on our mantra: “above market returns with below market risk.” In early 2020 we identified risk and acted before we had to. We were rewarded like the other funds that took defensive stances into a frothy market. What separated Caravel was our knowledge that when governments put their shoulder into affecting change, CHANGE COMES.
In March and April we changed before we had to:
We believe 2021-2022 will see a steady and lengthy rotation from high multiple growth stocks into value trades as the 5 knowns we listed above take effect. We know 10 year rates have a cap at or below the Federal Reserves targeted 2% average inflation rate. Increasing the cost to borrow from 0.50% for 10 years to 1.50%-2.00% lowers the value of growth companies’ future earnings substantially. When 10 year money costs 0.50% per year, the present value of their future earnings is almost equal to the sum of their actual earnings (all other things being held equal). Most of a growth company’s earnings show up 5-10 years in the future, so based on their current small earnings, the multiple the shares trade at today seems elevated. If 10 year rates were to move up however, growth company’s values drop the most - simple math. Higher interest rates lead to a steeper discounting of far-in-the future cash flows. Think downside on Zoom, Tesla, Shopify, etc. We believe valuation multiples will drop for growth names as their share prices fall or stay the same, and will rise for value names as corporate earnings massively rebound later this year into a hot economy... so in the words of Sheryl Crow, “A change would do you good.”
We see incredible opportunities this year in the markets for Caravel’s investors. As we mentioned in our November letter, we have decided to reopen the fund and accept new investments for February 1st. We will be reaching out to determine current investor interest prior to accepting capital from new investors who inquired while we were closed. We will be accepting up to C$ 40 million.
We thank you for your continued confidence and capital,
Glen & Jeff - Caravel Capital