Friday, October 6, 2023

Karsan Value Funds: 2023 Q3 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 third quarter ended September 30th, 2023, KVF gained $3.25 per share, increasing the value of each share to $55.79. This represents a 8% pre-tax return, while the returns of the S&P 500, Russell 2000, and S&P/TSX were all negative on the quarter. In addition, currency losses hurt returns by $0.31 per share in the quarter.

The excellent quarter was partly due to a couple of stocks with standout returns, but was mostly due to not having any major losers. When selecting a stock, the focus is always on protecting the downside. If one can avoid the downside, the upside usually takes care of itself. I haven't always done a great job avoiding losers, nor am I likely to stop making errors in the future, but in the last few quarters we have been on a roll, with few major losers. Luck has played a role here without a doubt.

One example of a major loser from a few years ago was NAHL Group (NAH.L). A regulatory change caused a major fall in its stock price, and I thought the company would be able to adjust to its new environment. I was wrong, and the stock fell further as the company struggled to regain its footing. This quarter, I finally gave up on it, selling all of KVF's shares and realizing the loss which had already been on KVF's books for years.

The positive returns this quarter came from ADF Group (DRX.CA), which continues to reap the benefits of automation and a healthy backlog, and Perdoceo (PRDO) a long-hated stock that finally received some love this quarter after an improvement in its retention rates.

Though valuations have somewhat improved as stocks generally fell in the quarter, there aren't a ton of screaming bargains out there in my view. While some companies may look cheap based on their earnings of recent years, some of those earnings are on the backs of shortages or supply-constraints that drove revenues and margins to unsustainable levels. It's important to avoid extrapolating such conditions into the future lest one be left holding the bag when conditions return to normal.

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:

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