For the first quarter ended March 31st, 2026, KVF gained $11.39 per share, increasing the value of each share to $95.40. This represents a pre-tax gain of 18.9%, roughly splitting the returns of the S&P 500 (15%) and the Russell 2000 (21%), and outperforming the S&P/TSX (6%).
Normally, when the market goes on a tech heater like it did, KVF will struggle to keep up. We tend not to own the hot, momentum, story stocks that can capture the market's imagination. Nevertheless, a number of things went right for the fund, which made for this quarter's terrific absolute return.
First, ADF Group had a terrific quarter. For risk management purposes, KVF has sold shares of this stock, but it remains a significant part of the portfolio by virtue of its enormous appreciation since its original purchase.
Second, KVF did benefit from the AI boom, albeit accidentally. When KVF added shares of Silicom less than two years ago, it was because it traded for less than the value of its net assets, made up of things like inventory and cash. This quarter, Silicom became an AI stock, having positioned itself as some sort of beneficiary of the increasing need for AI inference. It still loses money, but now it has the aura and narrative to support a stock price that is multiples of its net assets. As a result, KVF has sold all its shares for substantial profits.
KVF also benefited from strong performances in the shares of Magellan Aerospace and NameSilo. These businesses have performed well over many years, and although they may continue to do so, the market has come to recognize this performance. This has provided an opportunity for KVF to divest extremely profitably from these businesses in order to re-deploy this capital into less popular businesses, that the market will hopefully similarly come to recognize in future periods.
KVF also exited basket positions in NN Group and EuroDry, as fears in these respective industries subsided and prices traded closer to intrinsic values.
Finally, weakness in the Canadian dollar also helped returns by $1.78 per share, as the weak CAD made our foreign holdings worth more.
But not everything went right. KVF's investment in Stellantis was an unforced error that has cost us dearly. One doesn't need hindsight to know investing in a capital intense, somewhat commoditized industry that is vulnerable to more efficient foreign competition is not smart. This should have been clear from the outset, but I'm embarassed to say that it wasn't. I was fooled by the company's strong earnings and cash flow at the time, which is exactly the kind of rookie mistake I'm paid to avoid. KVF has exited its shares at a substantial loss.
KVF has also sold its shares of Headlam Group at a loss. Initially, this company appeared to be a victim of a housing down-cycle. But as the dust settled, it became clear the problems were much worse. The company has been unable to right itself despite multiple rounds of cost cutting. In my opinion, this company has burned through so much of its assets that it's not clear they're going to get through this, so we exited with whatever we could.
General market prices are high, but there remain some pockets of value. KVF's focus remains on finding investments where the downside risks are low. When that's done successfully, the returns take care of themselves.
KVF's income statement, balance sheet and pre-tax/post-fee returns since inception are included below (click to enlarge). Note that securities are marked to market value, and amounts are in thousands of $CAD:
No comments:
Post a Comment