For the first quarter ended March 31st, 2020, KVF lost $6.64 per share, reducing the value of each share to $20.93. This represents an eye-popping reduction of 24% per share, compared to the -20%, -22% and -31% posted by the S&P 500, S&P/TSX and Russell 2000 indices, respectively.
This was a disappointing return considering KVF's portfolio entered the quarter with a significant cash position and had little exposure to oil, airlines, hotels, retail and other industries that are the hardest hit by the current pandemic. KVF's portfolio is also generally absent heavily indebted companies, which are (rightfully) the hardest hit during recessions, as some never recover.
So what happened? It was the sharp sell-off in small-caps that sideswiped the portfolio. Over the last few years, I've discussed several times how valuations in small-caps were remarkably depressed compared to their large-cap brethren. As a result, KVF's portfolio has been skewed towards small-caps, because that's where the largest margins of safety could be found.
Over time, I would have expected (and still do expect, by the way) that difference in valuation to show up in the form of increased returns. But when the panic-selling began, valuations didn't matter, as is often the case. Some of our positions got sold down to their net cash positions, but if the seller needs to pay his mortgage/rent or meet a margin call, that doesn't really matter. The Russell 2000, the most popular small cap index, is trading near its 2013 prices.
The good news is a lot of the cash KVF held has now been put to work at panic-level prices. The total portfolio is now as undervalued as it has been for many years. The odds of having good returns in the coming years have improved tremendously.
Currency gains added $0.59 per share this quarter. 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 thousands of $CAD:
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