Narrow markets and low expectations convey significant opportunity.
Maxam Diversified Strategies – Q4 2023 Commentary
Dear fellow investors,
The Maxam Diversified Strategies Fund1 gained +6.6% in the fourth quarter of 2023.
Over the last few quarters, we have opined on the steep wall of worry that investors have faced – surging inflation, rising interest rates, recession fears, geopolitical conflicts – and on the narrow breadth that was a characteristic of the equity markets in 2023.
Facing the wall of worry, savers could invest in GICs and T-bills with little risk and, thanks to higher interest rates, earn a reasonable return. And, as you can see in the chart below, the Magnificent Seven2 left other segments of the markets far behind in 2023, most noticeably ramping higher post the U.S. regional banking crisis in March. Investors flocked to these mega cap technology stocks where growth, fueled by the artificial intelligence theme, was most readily assumed.
2023 was a strong bull market for mega cap tech stocks, and a relatively mediocre year for most other markets.
Narrow markets and low expectations convey significant opportunity.
While almost everything has lagged mega cap tech, the wall of worry has arguably impacted small and mid-capitalization companies the most. Smaller companies are generally perceived to be more sensitive to the economy, inflation, and interest rates – the devil is in the details of course, and that is part of the opportunity.
In addition, investor disinterest and outflows have resulted in small/mid-caps trading at material discounts to large caps. This valuation discount is in contrast to smaller companies historically trading at premium multiples, as can be seen in the chart below.
Positively, we observed an improvement in market breadth towards the end of the year. In our view, this may mark the beginning of a trend where companies beneath the surface of the mega caps start to re-rate higher. This is a segment of the market where we see significant value and opportunity.
At the end of the fourth quarter the fund was well diversified across all 11 sectors with the top 25 positions accounting for 54% of net assets. From a strategy perspective, fund exposures include 69% in fundamental longs, 28% in special situations, 4% in convertible debentures, 8% in arbitrage, and 1% gross exposure in short positions.
Many holdings contributed to performance in Q4, but notable positive contributors included H2O Innovation (we discussed H2O’s takeout in our Q3 commentary), Vitalhub, DRI Healthcare, Pollard Banknote, Kraken Robotics, Rogers Communications and Westaim. Some notable detractors from performance in the quarter included Hamilton Thorne, Vecima Networks and Ag Growth International.
Many of our holdings are not your typical household names – and we believe that is often where compelling opportunity can be found. Maxam Diversified Strategies Fund can provide investors with unique exposure to under-followed and mispriced companies.
We recently added to our position in Ag Growth International at prices that we believe reflect compelling value. Ag Growth is a global leader in providing equipment and infrastructure solutions to the agriculture industry. The company is trading at a near decade low multiple despite appearing to be poised for long-term growth driven by a multi-year ag infrastructure investment theme, with particular strength coming from international markets.
With so much negative macroeconomic news and low expectations already reflected in the security prices of many of our portfolio companies, we expect that – in addition to strong business results – moderating inflation and stabilizing (or declining) interest rates will increasingly support favourable valuation re-ratings.
Taking advantage of the opportunity set.
It is not just small and mid-cap companies where we see compelling opportunity, but the prolonged malaise and bear market that these companies have suffered through has resulted in some very attractive valuations.
As we detailed in the ‘Redux’ section of our Q3 commentary, aspects of the current market environment remind us of the set-ups we saw in 2000 and 2009, periods which resulted in multi-year outperformance for small caps.
Of note, we have already begun to see an uptick in small and mid-cap M&A as opportunistic acquirers take advantage of valuation dichotomies present in the marketplace. We expect this activity will continue.
We believe that we are in a very fertile investment environment – one that is particularly well-suited for our flexible approach and value-oriented style. We are excited about the potential returns ahead.
Thank you for your trust, patience, and confidence. Please don’t hesitate to reach out with any questions.
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 The Magnificent Seven stocks include Amazon.com (AMZN), Apple (AAPL), Google parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).
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.