2025 June CAD

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2.75% MTD

11.12% YTD

Dear Partners,

For the month of June, Caravel returned +2.75% compared to +4.00% for the benchmark (+5.08% for the S&P 500 & +2.91% for the SPTSX)¹. This brings the year-to-date total net return to +11.12% for the fund and +8.20 % for the benchmark, respectively.

Risk assets continued the impressive recovery in June that began in April. We have little to add regarding the macro backdrop that we didn’t articulate in last month’s letter. We maintain an elevated level of hedges to protect against moderate to severe pullbacks in a market we believe is priced optimistically.

Instead, this month we’d like to discuss the topic of asset allocation and conduct a mid-year check-in on some names we have mentioned in past letters.

What to Buy

There are several characteristics of an investment that determine its suitability for a given investor. These qualities generally fall into one of two categories – risk or return. The two are, of course, related. When investors say risk, they mean variability of future returns. So really, in a way, asset allocation is all about (expected) returns. Specifically, an investor, or someone allocating capital on behalf of one, needs to consider how willing they are to lose money in the pursuit of returns above the ‘risk-free’ rate. The ‘real’ risk-free rate, or the return on risk-free investments like government debt, less the rate of inflation, has been near zero (between -1.0% and +2.5%) for the last 20+ years. Accordingly, going out the risk curve to some degree has been table stakes for most everyone who hasn’t already accumulated enough wealth to last them the rest of their lives. As a result of this, riskier asset classes have soared in popularity. For example, conventional wisdom for much of the last 50 years has been a simple allocation of ‘60/40’ for a pre-retirement age investor; 60% stocks & 40% fixed income. Now, massive institutions like pensions, endowments, and sovereign wealth funds have made significant and structural shifts to their portfolios to include things like real estate, infrastructure, private equity, and, most recently, cryptocurrencies. These asset classes are ‘risky’ for different reasons, ranging from their use of leverage to their lack of liquidity to their inherent volatility characteristics.

I give this rather boring preamble as context for what I actually wish to discuss.

The Problem with Harvard

Harvard University’s endowment fund is the largest in the world at over USD $50 Billion, bigger than the economies of more than 100 countries. The purpose of the endowment is to support several initiatives both within the university and without, such as student financial aid, facility construction and maintenance, research, arts, philanthropy, etc. These obligations are both near and long-term in nature.  A core goal of asset allocation is to ensure an investor will have enough cash to satisfy both, when they need it.

Which brings me to the point. I was shocked when I read that 40%...fourty, as in four-zero percent of Harvard’s gargantuan endowment is invested in private equity funds. 

Much can and has been written about private equity as an asset class, but for the purposes of this letter, all we need to focus on is one of its defining characteristics – illiquidity. Private equity funds often won’t return investors’ capital to them for ten years or more. So, if you’re sending cash to a private equity fund, you better be sure you won’t need it over the next decade. The tradeoff for this lack of liquidity (risk) is, of course, the promise of superior returns over the long term.

Pulling The Orange Rug

For reasons I will not try to adjudicate here, President Trump has recently threatened to pull all federal funding from Harvard and several of its peers. This is akin to an investor losing their job (near-term liquidity) and needing to rely on their savings and investments (long-term liquidity) to get by. And so, Harvard and other Ivy League schools have explored the PE secondaries market to generate the cash they need. This entails selling their interests in private equity funds to third parties, usually at discounts that, in some cases, can wipe out much of the return they were hoping to generate in the first place. This is like trying to sell your house when every prospective buyer knows you’ve just lost your job, or sterilizing your wound with saltwater that Jaws just happens to be swimming in.  Whether the President is justified in pursuing this action is beside the point – 40% is an absurdly high number, and you better be aware of the risks before committing to it. We doubt the allocators at Harvard were, and rather suspect that they got pulled out by the riptide of the risk curve in search of higher returns than the alternatives under consideration.

To be clear, we have nothing against private equity as an asset class. ONEX Corp, the longest tenured holding in our portfolio, is in this business, along with many of our friends and colleagues. It is a wealth-generating machine when executed correctly. It can also be a disaster. The same could be said of hedge funds. Like all good things, you can have too much – just ask Harvard. 

We maintain our commitment to a highly liquid portfolio so that we might learn from these mistakes, rather than live them. So far, we have not noticed an adverse impact on our returns from doing so.

Shifting gears, we’d like to give a quick update on three stocks we have previously mentioned.

Artemis Gold Inc. (TSXV: ARTG) – We initially wrote about ARTG back in our April 2024 Letter, with shares then trading around C$9.00. Since then, gold has been on a tear, rising from around $2,000 to the current $3,300 per ounce, or +65%. As we would have hoped, ARTG has significantly outperformed the gold price over this period, rising +190% to over $26.00 per share. We attribute this to much more than their torque to the commodity price, as their team executed and derisked the Blackwater project just about as well as could have possibly been expected, before achieving commercial production earlier this year. With a current market cap of ~$6 Billion, we now believe ARTG to be about fairly valued. We recently exited this position with a sentimental tear in our eye. They grow up so fast!

Kraken Robotic Inc. (TSXV: PNG) – We first flagged PNG in our July 2024 Letter, with the stock around the C$1.40 level. The company has continued to build its backlog and, importantly, advance its new battery production facility in Halifax that will meaningfully increase its manufacturing capacity. It has arguably done an even better job of getting its message out to the investment community, with several large international funds taking positions in the market and through primary financings over the last twelve months. The confluence of these factors, along with a robust defence spending market (80% of PNG’s business), has driven PNG’s stock up about +150% to $3.50 per share. We have taken some profits in this position on the way up, but still own it and are on the lookout for pullbacks to add more.

MDA Space Ltd. (TSX: MDA) – First mentioned in our September 2024 Letter with shares around C$21.00, we have owned this aerospace contractor since Q1 2024.  Though the stock has had some speed wobbles this year related to tariffs, competition from Starlink, and the US federal budget, it has maintained its footing by continuing to execute in its core business lines. MDA shares, though sitting around $41.00 (+95% since October), are still quite attractively valued at 13-14x 2026 EBITDA. We maintain a position here with a similar M.O. to PNG.

Our top pick coming into the year was CanAlaska Uranium Ltd. (TSXV: CVV). Though up +44% year-to-date, we believe the best is yet to come for this stock, and it remains a core position. We are also working on several other opportunities in the equity long-short book that we look forward to writing to you about in the future. For now, we retain low net equity market exposure having brought gross aggregates down from ~130% to ~100%. We also take great comfort in a  ~65% combined allocation to our credit and merger arbitrage strategies, as well as our hedge book. All said, we will continue to look for stocks we think can outperform in any market, and have amassed a war chest of dry powder to redeploy if a dislocation presents itself.

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}