Friday, April 8, 2022

Karsan Value Funds: 2022 Q1 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 first quarter ended March 31st, 2022, KVF gained $0.74 per share, increasing the value of each share to $42.65. This pre-tax 3% return was close that of the S&P/TSX over the period, and better than the -5% and -8% returns of the S&P 500 and Russell 2000, respectively.

Returns would have been higher but for the strong Canadian dollar over the quarter, which reduced returns by $0.45 per share. Currency fluctuations are likely to significantly influence quarterly results, but over the long-term their effects are expected to remain muted.

Taxes for the full-year 2021 were higher than originally estimated, and the difference between the actual charge and the estimated charge was expensed in this quarter. This tax adjustment reduced this quarter's earnings by $0.14 per share.

KVF's gains in the quarter were helped by a rise in the share price of Servotronics, which KVF has owned since December of 2020 at a cost of $7.50. Recently, KVF sold all its shares at just over $13. After the purchase, a lawsuit against the company revealed allegations of CEO misconduct. Since the purchase, the company has not turned in a profitable quarter. And yet, today the price of the company sits almost twice as high as it did in 2020. Sometimes, if you buy with a huge margin of safety because others are panicking, things can go poorly and still somehow work out.

It was an eventful quarter for many stocks, as the market took some growth-y companies' stocks to the woodshed. When the market throws a tantrum, small-cap value stocks usually take a big beating. But not this time, as KVF's stocks managed to get through relatively unscathed.

The bad news, however, is that there weren't a lot of opportunities to pick up stocks at a discount either. If a growth stock falls from 20x revenue to 10x revenue, that hurts the index but it doesn't create a buying opportunity for us.

Rest assured, KVF will take its fair share of beatings in the future; that's just the nature of the business we are in.

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:


Amit said...

Hey Saj,

Long time reader. I'm curious if you have a view on ASC842, a 2019 accounting rule change which required companies to record leases on the balance sheet. Specifically interested in your thougths on how it relates to evaluating a margin of safety from an NCAV perspective.

ASC842 drives down NCAV for any company where leases amount to a material percentage of assets because they add the entire lease amount to current and non-current liabilities but only add a right-of-use asset as a non-current asset.

Hope you're well. Congrats on the continued success,

Saj Karsan said...

Hi Amit,

Before they appeared on balance sheets as a result of the accounting rule change, I used to capitalize them manually anyway. It would, for example, disqualify a lot of retailers from my net-net estimates, and rightly so!