Friday, July 8, 2011

Karsan Value Funds: 2011 Q2 Results

Karsan Value Funds (KVF) is a value-oriented fund, as described here. Due to securities regulations, the fund is not open to the public at this time. Should that change in the future, there will be an announcement on this site.

For the second quarter ended June 30th, 2011, KVF lost $0.80 per share, reducing the value of each share to $12.97.

This was easily the worst quarter in the fund's young history. Though the broader market was generally down this quarter, KVF still under-performed most market indices over the last three months by somewhere between 200 and 500 bps, depending on the index chosen.

The performance of the stocks held by KVF this quarter was actually worse than these headline numbers would indicate, however, as the fund began the quarter with a significant cash position. This cash position was built up through sales in previous quarters; the cash was not fully deployed due to the high market prices that resulted in a lack of high-conviction buying opportunities. This cash position served to reduce the amplitude of the fund's losses this quarter.

The majority of stocks held by KVF fell this quarter, in varying degrees of magnitude. In most of these cases, the underlying companies generated positive cash flow and profits, and yet their prices still fell. The fund owns no companies with pie-in-the-sky valuations; it owns companies that are unfavoured and therefore trade at low prices relative to their assets and/or earnings.

Unfavorable currency movements between the Canadian and US dollars had a minor effect on results. Had the USD/CAD exchange rate finished the quarter at the same level at which it started the quarter, earnings per share would have been $0.04 higher.

Somewhat mitigating these negative results were strong, positive price movements in shares of H&R Block (spilling over from last quarter, discussed here), Jewett Cameron (discussed here), and KSW Inc. (discussed here), allowing the fund successful exits from each of these investments. KVF also exited its investment in Audiovox (with minor gains), for the reasons described here.

In the world of investing, gains are not made consistently (i.e. in a straight line). There will always be quarters (and even years) such as this one, though that knowledge doesn't make losses any easier to stomach.

The good news, however, is that as the prices of some assets (including assets the fund already owned as well as assets it did not) fell substantially this quarter, a large portion of the fund's aforementioned cash position was deployed towards buying securities at cheaper prices. (There was one exception to this, as the fund did exit one position this quarter due to deteriorating business conditions, in that of Orsus Xelent, as discussed here.) The vast majority of the securities owned by KVF are in companies with minimal debt and with positive earnings and cash flow. In the coming years, some of these investments will bear fruit because of their low current prices, while an adequate margin of safety hopefully protects the downside on those that don't.

KVF's income statement and balance sheet are included below (click to enlarge). Note that securities are marked to market value, and amounts are in $CAD:


Paul said...

Everyone has a not so great quarter or so. It looks like you're still confident about the future. Keep up the great work, Saj!

Anonymous said...


For these quarterly updates, how about showing the previous quarter's balance sheet in addition to the same quarter of the prior year?

- aagold

Saj Karsan said...

Thanks, Paul.

Hi aagold, I actually lean the other direction in that respect. For long-term oriented funds, quarterly differences are not that helpful. As the fund grows in age, I'd be posting more info on the long-term results rather than shorter.

mtnguy78 said...

Everyone has been taking a little bit of a beating. Keep you head up!

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