Friday, January 6, 2023

Karsan Value Funds: 2022 Q4 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 fourth quarter ended December 31st, 2022, KVF gained $7.58 per share, increasing the value of each share to $47.11. This 22% pre-tax return trounced the mid-single-digit returns generated by the S&P 500, Russell 2000 and S&P/TSX indices. Currency gains helped returns by $0.29 per share in the quarter.

There were several big gainers in KVF's portfolio this quarter but the largest contributor to this quarter's outperformance was MS International (MSI.L). The stock has been cheap for years, but the valuation began to look downright silly in recent quarters. I tweeted about the stock about 6 months ago to little fanfare (no replies, 7 likes, and a paltry 959 total impressions).

Finally, this quarter the stock doubled, and is a multi-bagger from the 2020 lows at which I added to my existing position. MSI represents a terrific example of a "boring" company in the microcap space that can stay cheap for long periods, but provide outsized returns relative to their risk.

Just as important as what KVF did own this quarter is what it didn't. With no exposure to either cryptocurrency or heady, growth names (and related industries), KVF was able to avoid a lot of turbulence as frauds were uncovered and interest rate increases made low/negative-profit companies less desirable. There are times when hype industries will once again outperform, so investors should not extrapolate this quarter's results into the future.

The work has begun towards finding new investment opportunities to replace those that have been sold. However, caution is in order: after a period of outperformance like this, overconfidence is common, leading to future periods of underperformance. The challenge is to maintain the same stringent standards and margins of safety. The cash position remaining low (albeit not nearly as low as it was entering the quarter) helps maintain current discipline as well.

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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