Value is emerging in a broadening market.
Maxam Diversified Strategies – Q3 2024 Commentary
Dear fellow investors,
The Maxam Diversified Strategies Fund1 gained +8.9% in the third quarter of 2024 to finish the first nine months of the year up +20.7%. Over the last 12 months the fund gained +28.7%.
The fund’s strong performance during the quarter was driven by two takeouts and general strength across the portfolio as capital continued to shift and search for value beneath the surface of the mega caps.
Top-down attentive.
While our investment process is primarily bottom-up in nature (company first), we are macro-aware – taking account of the forces at play.
The third quarter was positive for risk assets overall, however there were two notable bouts of equity market volatility. First in early August when interest rate cut discussions in the U.S. collided with concerns over rising interest rates in Japan, leading to a flash unwind in the Yen carry trade2 – The Bank of Japan subsequently quelled these fears saying it would not raise rates amidst unstable markets. The second spell of volatility came in early September when anxieties flared over recent economic news and the upcoming FOMC3 meeting.
Constructively, each episode of market weakness was met with buying that sent markets upwards to fresh highs.
The U.S. Federal Reserve reduced the fed funds rate by 50bps in mid-September, an event that the markets had been anticipating for some time. Then in late September China announced various stimulus measures to support their struggling economy. The rate cuts and stimulus measures have been welcomed by investors, notably drawing some focus to interest rate-sensitive sectors and cyclicals – which are well-represented in the Canadian market.
Interestingly, while short-term rates have come down due to recent central bank policy actions, longer-term bond yields have been creeping upwards. Rising longer-term yields potentially reflect some concern over government debt levels and worries that inflation will pick up again – and they can also suggest that investors are shifting their portfolios towards riskier assets, such as equities.
While some volatility is always to be expected, numerous headwinds are transitioning to tailwinds that are broadly supportive of equities – the elements are in place to draw investor attention towards the many quality companies that have lagged, are growing, and trade at attractive prices.
Bottom-up focused.
Performance was generally positive across the portfolio during the quarter, notable positive contributors included: Hamilton Thorne, Heroux-Devtek, MDA Space, Kraken Robotics, VitalHub and Cipher Pharmaceuticals.
MDA Space, mentioned above, is a relatively new addition to the portfolio – we first acquired shares of MDA in September 2023 and have recently added to our position. MDA provides robotics, satellite systems, and technology to the space industry.
We have experience investing in the space industry, with previous successful investments in Norsat International, COM DEV International and exactEarth4. This industry is enjoying a resurgence again and MDA is benefiting from it. The company has a large and growing backlog of business and trades at an attractive valuation.
We were quite active during the third quarter, adding to some existing holdings when volatility presented us with opportunity, and initiating some new ones. We have also taken profits in some holdings where the catalysts or events we were targeting have occurred, and reduced or exited some names where we believe the risk-reward equation is no longer weighted in our favour.
M&A giveth (and taketh away).
Early in the quarter, two of our core holdings announced that they had agreed to be acquired by private equity funds. First, Heroux-Devtek, an aerospace manufacturer that specializes in landing gear for civil and military aircraft, said that it had agreed to be acquired by Platinum Equity, a U.S. based private equity firm. A little more than a week later, long-time holding Hamilton Thorne announced that it would be acquired by European private equity firm, Astorg Partners.
As Col. John “Hannibal” Smith of A-Team fame said: “I love it when a plan comes together”5. But, if you ever watched this 1980’s TV series, you’ll know that ‘the plan’ rarely went smoothly!
We of course have a plan, a thesis, for each of our holdings, but equities rarely move in a straight line. For example, we have owned Hamilton Thorne for several years and mentioned it in our quarterly commentaries on at least 10 different occasions – sometimes we mentioned it was additive to performance, and other times subtractive.
It is nice to see a short-term boost to performance, but it is somewhat bittersweet to have Hamilton Thorne leaving our portfolio as we believe its go-forward prospects are in excess of what we are realizing today.
While Hamilton Thorne’s business (lab instruments, consumables, and services for the assisted reproductive technology industry) is quite different from H2O Innovation’s (water infrastructure and technology), the up and down and up journey, concluding with an eventual takeout (discussed here), was quite similar.
Hamilton Thorne’s share price had recently come under pressure – getting no love from investors, albeit in a still difficult environment for smaller companies – resulting in a valuation that we believed was disconnected from its long-term value. We had begun to add to our position again, and then, like with H2O, private equity swooped in.
If you are noticing a theme…
M&A activity is highlighting where the value is. With many quality, small and mid-cap companies trading at unreasonably low valuations, or material discounts to their larger peers, we expect to see an uptick in M&A. Either the market will provide deserving businesses with a reasonable valuation, or an opportunistic acquiror will.
Value is emerging in a broadening market.
In our previous quarterly commentary, we stated that the ingredients were largely in place for the market to continue broadening beyond the mega-caps that dominated equity markets in 2023 and early this year. Cooling inflation and now interest rate cuts should help support that shift.
There are risks out there, as always, but we will work to selectively take advantage of any volatility with our company-specific and value-oriented approach – an approach that we believe is particularly well-suited to this shifting environment.
We continue to see attractive value in specific names and certain segments of the market – and we look forward to growth and catalysts on the horizon for our holdings.
Thank you for your trust and confidence. Please reach out with any questions.
Sincerely,
Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.
1 Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com.
2 Explainer: What is the yen carry trade? https://www.reuters.com/markets/asia/what-is-yen-carry-trade-2024-08-07/
3FOMC: Federal Open Market Committee. https://www.federalreserve.gov/monetarypolicy/fomc.htm
4 We wrote about each of these names in previous commentaries. Contact us if you’d like to read them.
5 The A-Team was an action-adventure TV series in the 1980s. https://en.wikipedia.org/wiki/The_A-Team
This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. Important information about the Fund is contained in the Fund’s Simplified Prospectus, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This document is not intended to provide legal, accounting, tax or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Diversified Strategies Fund prior to investing.
Insights
Fund commentary and our latest thoughts.
Maxam Diversified Strategies Fund – Q3 2024
Value is emerging in a broadening market.
Maxam Diversified Strategies – Q3 2024 Commentary
Dear fellow investors,
The Maxam Diversified Strategies Fund1 gained +8.9% in the third quarter of 2024 to finish the first nine months of the year up +20.7%. Over the last 12 months the fund gained +28.7%.
The fund’s strong performance during the quarter was driven by two takeouts and general strength across the portfolio as capital continued to shift and search for value beneath the surface of the mega caps.
Top-down attentive.
While our investment process is primarily bottom-up in nature (company first), we are macro-aware – taking account of the forces at play.
The third quarter was positive for risk assets overall, however there were two notable bouts of equity market volatility. First in early August when interest rate cut discussions in the U.S. collided with concerns over rising interest rates in Japan, leading to a flash unwind in the Yen carry trade2 – The Bank of Japan subsequently quelled these fears saying it would not raise rates amidst unstable markets. The second spell of volatility came in early September when anxieties flared over recent economic news and the upcoming FOMC3 meeting.
Constructively, each episode of market weakness was met with buying that sent markets upwards to fresh highs.
The U.S. Federal Reserve reduced the fed funds rate by 50bps in mid-September, an event that the markets had been anticipating for some time. Then in late September China announced various stimulus measures to support their struggling economy. The rate cuts and stimulus measures have been welcomed by investors, notably drawing some focus to interest rate-sensitive sectors and cyclicals – which are well-represented in the Canadian market.
Interestingly, while short-term rates have come down due to recent central bank policy actions, longer-term bond yields have been creeping upwards. Rising longer-term yields potentially reflect some concern over government debt levels and worries that inflation will pick up again – and they can also suggest that investors are shifting their portfolios towards riskier assets, such as equities.
While some volatility is always to be expected, numerous headwinds are transitioning to tailwinds that are broadly supportive of equities – the elements are in place to draw investor attention towards the many quality companies that have lagged, are growing, and trade at attractive prices.
Bottom-up focused.
Performance was generally positive across the portfolio during the quarter, notable positive contributors included: Hamilton Thorne, Heroux-Devtek, MDA Space, Kraken Robotics, VitalHub and Cipher Pharmaceuticals.
MDA Space, mentioned above, is a relatively new addition to the portfolio – we first acquired shares of MDA in September 2023 and have recently added to our position. MDA provides robotics, satellite systems, and technology to the space industry.
We have experience investing in the space industry, with previous successful investments in Norsat International, COM DEV International and exactEarth4. This industry is enjoying a resurgence again and MDA is benefiting from it. The company has a large and growing backlog of business and trades at an attractive valuation.
We were quite active during the third quarter, adding to some existing holdings when volatility presented us with opportunity, and initiating some new ones. We have also taken profits in some holdings where the catalysts or events we were targeting have occurred, and reduced or exited some names where we believe the risk-reward equation is no longer weighted in our favour.
M&A giveth (and taketh away).
Early in the quarter, two of our core holdings announced that they had agreed to be acquired by private equity funds. First, Heroux-Devtek, an aerospace manufacturer that specializes in landing gear for civil and military aircraft, said that it had agreed to be acquired by Platinum Equity, a U.S. based private equity firm. A little more than a week later, long-time holding Hamilton Thorne announced that it would be acquired by European private equity firm, Astorg Partners.
As Col. John “Hannibal” Smith of A-Team fame said: “I love it when a plan comes together”5. But, if you ever watched this 1980’s TV series, you’ll know that ‘the plan’ rarely went smoothly!
We of course have a plan, a thesis, for each of our holdings, but equities rarely move in a straight line. For example, we have owned Hamilton Thorne for several years and mentioned it in our quarterly commentaries on at least 10 different occasions – sometimes we mentioned it was additive to performance, and other times subtractive.
It is nice to see a short-term boost to performance, but it is somewhat bittersweet to have Hamilton Thorne leaving our portfolio as we believe its go-forward prospects are in excess of what we are realizing today.
While Hamilton Thorne’s business (lab instruments, consumables, and services for the assisted reproductive technology industry) is quite different from H2O Innovation’s (water infrastructure and technology), the up and down and up journey, concluding with an eventual takeout (discussed here), was quite similar.
Hamilton Thorne’s share price had recently come under pressure – getting no love from investors, albeit in a still difficult environment for smaller companies – resulting in a valuation that we believed was disconnected from its long-term value. We had begun to add to our position again, and then, like with H2O, private equity swooped in.
If you are noticing a theme…
M&A activity is highlighting where the value is. With many quality, small and mid-cap companies trading at unreasonably low valuations, or material discounts to their larger peers, we expect to see an uptick in M&A. Either the market will provide deserving businesses with a reasonable valuation, or an opportunistic acquiror will.
Value is emerging in a broadening market.
In our previous quarterly commentary, we stated that the ingredients were largely in place for the market to continue broadening beyond the mega-caps that dominated equity markets in 2023 and early this year. Cooling inflation and now interest rate cuts should help support that shift.
There are risks out there, as always, but we will work to selectively take advantage of any volatility with our company-specific and value-oriented approach – an approach that we believe is particularly well-suited to this shifting environment.
We continue to see attractive value in specific names and certain segments of the market – and we look forward to growth and catalysts on the horizon for our holdings.
Thank you for your trust and confidence. Please reach out with any questions.
Sincerely,
Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.
1 Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com.
2 Explainer: What is the yen carry trade? https://www.reuters.com/markets/asia/what-is-yen-carry-trade-2024-08-07/
3FOMC: Federal Open Market Committee. https://www.federalreserve.gov/monetarypolicy/fomc.htm
4 We wrote about each of these names in previous commentaries. Contact us if you’d like to read them.
5 The A-Team was an action-adventure TV series in the 1980s. https://en.wikipedia.org/wiki/The_A-Team
This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. Important information about the Fund is contained in the Fund’s Simplified Prospectus, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This document is not intended to provide legal, accounting, tax or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Diversified Strategies Fund prior to investing.
Categories