Update for the month of February 2025. New positions include BMBL, TGI, VSTS. TD and KLG Puts closed out. No major long term changes to the portfolio
Marketable Securities
The top 5 marketable securities held in the portfolio include Sabre Inc., Visa, Fairfax Holdings, Kellogg, and the Logility Supply Chain Solutions merger arbitrage. Positions in TD and the $15 strike KLG US Put were closed out (Feb OpEx). A small position in TD Bank was taken earlier this year to capitalize on the recovery from the recent Anti-Money Laundering news flow that had hindered TD stock and the position was closed on receipt of the dividends and a satisfactory appreciation in price.
As previously mentioned, I believe that the KLG US stock was attractively priced when I had taken a position in the name in the portfolio with a minimal downside. There were various factors which affected my decision to write the put contract for the underlying, the chief among them being a nice annualized return (16.52%) owing to overvaluation of the options as well as creating a synthetic dividend of a 22% yield – if looked at from a premium collected vs underlying price perspective. It may be kept in mind that unless done so in isolation, writing put contracts needs to be compared to the prevailing risk-free and margin rates for the respective duration depending on the type of monies used (cash secured or monies).
February Performance
The cumulative performance of the fund since inception has been 24.87% as compared to the S&P 500 (Benchmark) yielding a total of 7.83%. The portfolio returned 6.02% in February as compared to the index, which returned -1.42% to index investors. It is my expectation that we continue to target a 10% CAGR over the long run for the portfolio by investing in a mix of long term compounders as well as some opportunistic opportunities.
General Portfolio Update
New positions in BMBL US and TGI US (merger arbitrage book) were added to the portfolio this month, along with a recent spin-off from Aramark (VSTS US), Vestis Inc. – A uniform business with attractive long term characteristics in a highly fragmented industry.
Merger arbitrage opportunities look fairly attractive at present compared to short and long term fixed income and similar opportunities given that a solid merger arbitrage deal is currently yielding close to 5.3% after tax (implying a pre-tax yield of above 8%), as compared to HY bonds returning an average of between 5.7 – 6% on a pre-tax basis. A small amount of the book may be allocated to short term arbitrage activities depending on the state of the markets.
It is my opinion that we might continue to see short term froth in the markets given that President Trump is keen on wanting the Fed to reduce its rates during his administration, without letting inflation running amok. The recent announcements of Tariffs on Canada, Mexico and undergoing talks with Ukraine and Russia may potentially be an attempt to clear out the market froth given the slightly elevated valuations currently being seen.
Either ways, although I continue to keep an eye out on the general news and state of the markets, the goal is to find undervalued businesses at attractive prices along with short term commitments offering attractive yields so as to park monies and avoid the short term market volatility.
Feel free to comment below or reach out to me.
Sincerely,
Sanket Karve