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Pricey Companions,
Fairlight Alpha Fund’s second quarter 2025 returns have been 9.3% internet of charges. This compares to 10.9% for the S&P 500 Whole Return (SP500TR) index. Total, since inception the fund has returned 684.6% internet of charges and 38.4% on an annualized foundation. These outcomes are introduced for informational functions solely and don’t symbolize a solicitation or supply.
Efficiency vs. the S&P 500
We observe the web asset worth of Fairlight Alpha Fund (the “Fund”) over time as calculated by our fund administrator based mostly on our portfolio positions and costs over time on a greenback foundation. The fund financials are additionally audited every year by an unbiased auditor with the help of the Fairlight administration firm and the fund administrator.
Market and Portfolio Efficiency
Fears regarding the U.S. tariff modifications and what has to date turned out to be a V-shaped restoration dominated the primary half of the quarter. Our portfolio adopted the overall sample of the market, however our efficiency got here from particular concepts, akin to sure expertise names and the junior gold miners. The perceived elevated threat and uncertainty additionally appeared to push the value of gold from the $3,000/ozarea to above $3,300/ozthroughout the quarter.
Alongside this got here the potential for returns from AI and AI-adjacent names, just like the infrastructure companies. We noticed many traders take observe, and took rising discover ourselves, of the rising circulation of funding into the development of AI information facilities. Companies that offer computing energy and power to those information facilities had already risen quite a bit, however some names remained low cost, akin to these supplying pipes, cooling programs, and concrete constructions for these buildings. A number of of those names have benefitted from will increase generally infrastructure funding.
Total within the quarter the S&P 500 index gained by 10.6% (excluding dividends). The index has now reached an earnings valuation a number of of 27.6 2. That is excessive relative to historic averages. From the Second World Warfare to the Nineteen Nineties the PE sometimes assorted within the vary of 10-20x, rising subsequently, after which spiking within the International Monetary Disaster because the E within the ratio fell precipitously. The ratio has typically been rising since then, excluding the Covid interval when it spiked and fell again.
As well as, corporations in high-growth sectors usually report artificially low earnings as a result of R&D and gross sales and advertising and marketing, that are actually investments in future development, are expensed instantly. In consequence, the S&P 500 immediately accommodates extra companies immediately the place reported income are structurally suppressed relative to underlying money era, serving to to clarify why headline P/E ratios seem greater than historic norms.
Alternatively, one may argue that greater PEs nonetheless mirror real threat: not all R&D and gross sales spending delivers returns, and a few corporations could also be investing aggressively with out clear paths to profitability. From this attitude, immediately’s valuations embed not solely structural accounting results but additionally optimistic assumptions in regards to the long-term success of development companies. In the end earnings are an estimate, so it could be an attention-grabbing train to calculate an proprietor earnings PE determine for the S&P 500.
We had a number of drivers for returns within the quarter, and though our returns weren’t that dissimilar to the general market, the elements for these returns have been very totally different. We gained via the junior mining shares, from a mix of improved outcomes, will increase within the gold value, and a few re- ranking. Through the interval we refocused on new thought era to create a richer set of concepts to contemplate, and specifically we arrived at a number of infrastructure and AI-adjacent names. For instance, TSS, Inc. (TSSI) had a really enticing valuation earlier within the quarter.
In late April we wrote a submit about TSS, Inc. when it was buying and selling at $7.53, giving it a market worth of $189 million. Revenues had grown 172% from 2023 to 2024, pushed by a 264% year-on-year enhance within the programs integration phase via This autumn 2024. Assuming extra reasonable development and related margins, the inventory was buying and selling at 12–13x ahead earnings, or within the excessive single digits below extra aggressive assumptions. The title re-rated inside weeks, helped by shifting sentiment throughout the tariff reduction rally, and additional accelerated on Could 15 when Q1 outcomes confirmed revenues of $99 million, up 523% from the prior-year quarter.
The inventory re-rated to above $30 by late June, pushing the valuation above $750 million. This was a tough scenario to evaluate with a quickly rising firm. On the one hand, development had been distinctive; on the opposite, such momentum hardly ever lasts indefinitely, and we believed it was solely a matter of time earlier than it slowed. At that time, the earnings-based valuation appeared far much less enticing. We subsequently offered the place however continued to observe the title together with a number of different AI infrastructure shares, significantly these with a number of enterprise segments that may help gross sales development over a protracted horizon.
As of the time of writing, TSS, Inc. has fallen to the $17 space, partly because of outcomes that dissatisfied the market and partly because of a public providing of widespread inventory priced at $17 per share. Q2 revenues of $44.0 million have been decrease than Q1, however nonetheless represented a 262% year-on-year enhance. Revenues stay lumpy at this stage within the firm’s life cycle, however the total development has been extraordinary. We are going to proceed to look previous short-term noise round these sorts of shares and frequently examine the value introduced by the market to our evaluation of the elemental worth of the enterprise.
Offshore
We have now constructed up a number of positions and are investigating extra in what could be known as the “offshore commerce”. This can be a various set of companies and sub-sectors tied to exercise on the seas and oceans protecting 71% of the earth’s floor. Valuations seem very low throughout many of those names in differing enterprise areas, despite strong medium-term demand drivers which can be producing excessive development. These embrace the enlargement of navy and protection capabilities at sea, the rising want for marine power manufacturing and associated infrastructure, and the continued build-out of telecoms and information connectivity. This can be a fertile floor for mispriced securities, though the theme has introduced itself to us in reverse as we discovered an rising variety of low cost, rising names in the identical space via quite a lot of searches. We are going to discover this theme, the precise corporations we consider are greatest positioned to carry out, and a few particular concepts in additional element in future letters.
Elsewhere within the portfolio, Logic Instrument continued to ship sturdy working outcomes, supported by the advantages of latest M&A exercise. In circumstances like this, it’s usually essential to belief administration’s steering, supplied they’ve a document of honesty and accuracy. Right here, now we have an organization that’s projecting income development from just below €30 million final yr to just about €50 million this yr.
Whereas the corporate barely missed steering final yr 3, even a shortfall this yr, say to €44 million, would nonetheless symbolize a 57% enhance in revenues. As now we have written beforehand, Logic Instrument advantages from a group of partial moats which collectively present significant safety for the enterprise and are driving development.
The corporate is a subsidiary of Archos (OTC:ACOSF), run by Loïc Poirier, and there are rising indicators that the kid is outgrowing the dad or mum. In 2018, revenues at Archos have been €63.4 million in comparison with €11.2 million at Logic Instrument; by 2024, Archos had declined to €31.4 million whereas Logic Instrument had grown to €27.4 million. If Logic achieves something near its gross sales goal this yr, it’s more likely to surpass the dad or mum when it comes to the dimensions of its earnings assertion.
Considerations across the dad or mum’s historical past of dilution and lack of profitability are doubtless having a miserable knock-on impact on Logic Instrument’s valuation. Archos has little or no moat, competing within the extremely saturated shopper cellular and pill market dominated by Samsung, Apple, and others. Against this, Logic Instrument operates within the far more area of interest rugged system offshoot of the system market, the place its opponents embrace Getac, Durabook, MilDef, and Panasonic’s Toughbook line. Its moat stems from geography (a European base serving native protection and industrial markets), historical past (an skilled salesforce with long-standing relationships), and technical experience (assembly demanding navy and industrial specs).
Not All Moats are Constructed Equally
A lot has been written about moats; which corporations have them, which don’t, the weather of their building, and whether or not these moats are rising or shrinking. To us, the black-and-white distinctions which can be generally drawn don’t seize the total image. Each sustainable firm has a moat of some sort: a sturdy purpose why it continues to exist. Moats take totally different types: some are huge, international, and compounding; others are small, native, and fragile. And there are additionally corporations whose moats are shrinking quickly, once-protected companies the place the benefit has eroded to the purpose of being vanishingly small 4.
Moat 1
An instance of a small moat could be an area enterprise that’s profitable inside its native area of interest. Image your native neighborhood, nearest village, city, space of suburbia, or metropolis middle. Is there a restaurant, store, or service enterprise that which is all the time full, has nice service, implausible meals, pleasant workers, and retains you coming again time and again? Others doubtless really feel the identical, and you could end up pondering,“I want I owned this place!”
The place I’m pondering of has a multi-decade historical past, is domestically well-known, and I can’t think about it ever closing until the proprietor themselves went bankrupt. Even in that case, I’m sure the very same enterprise would switch to a brand new proprietor and stay simply as profitable, in reality it could be exhausting to disrupt it sufficient to make it fail.
Nonetheless, I doubt it could work in most cities, and it has by no means opened one other department. In enterprise phrases, it most likely solely grows a bit over inflation, however the income are doubtless very wholesome. This type of enterprise has a moat, however a really particular, localized, and restricted one. To try to compete with it and open an identical enterprise subsequent door, could be very silly, and the recipe for achievement wouldn’t work elsewhere. However an proprietor may function it for many years and reside very nicely off the proceeds. Does it have a moat?
- Model → Atmosphere and design: the precise vibe and inside of the placement.
- Operational/Enterprise → The restaurant works nicely throughout brunch, lunch, dinner and late night, preserving it busy all through the day and maximizing income relative to fastened prices (constructing, workers).
- Model/Product → Social power and personal rent: well-known domestically, it attracts events and has a cachet that will take years to copy. Product → Good meals: the core enterprise requirement is met.
Moat 2
Now consider one other enterprise that operates as an area chain. Once more, it may very well be a restaurant, retail, or service firm. I’m pondering of 1 native to us. It has grown like a weed, does one thing particular, began off within the native space and area, however now appears set to broaden nationally. Should you like cupcakes, Magnolia Bakery might come to thoughts, a enterprise that began domestically however is now acknowledged nationally. Its moat?
- Model → New York-style cupcakes, featured on Intercourse and the Metropolis.
- Product → Easy to copy at scale, with lengthy shelf life, and seasonal editions.
- Operational → Flagship shops and management throughout places.
Moat 3
Lastly, let’s consider a really well-known, international enterprise; extremely profitable, with a moat that appears apparent. However even right here there are obstacles it can’t cross. For instance, let’s select Apple, Inc. It’s exhausting to argue with the corporate’s success, money circulation era, development, and uniqueness. In enterprise phrases, Apple is extraordinary, having grown via a number of phases to develop into one of many largest corporations on this planet, significantly within the second Steve Jobs period, from 1997 onwards till his passing.
The moat throughout this era?
- Model → Probably the most precious manufacturers ever created. Design with emotional resonance, ecosystem and consumer expertise (“it simply works”), iconic advertising and marketing and storytelling.
- Product → Seamless hardware-software integration, Apple ecosystem lock-in, and ease in kind and performance.
- Operational/Enterprise → Vertical integration and end-to-end-control, provide chain mastery and exclusivity, Apple Shops and the Genius Bar.
So how a lot moat does every of those corporations actually have? The restaurant has a reasonably sturdy product and branding, however might solely work within the native space, not being that well-known outdoors of a small radius. It additionally suffers from the problem of solely with the ability to present service bodily to prospects domestically, it’s unlikely to obtain orders nationwide!
The second moat is stronger, with nationwide recognition and a few uncommon product and model options. However we are able to simply think about opponents getting into the area, meals fashions altering, or the corporate making a misstep.
The ultimate moat is the widest and, from 1997 onwards, was increasing quickly. By 2010 Apple had constructed a large nationwide moat and had prolonged it globally. But even on this case it confronted rising competitors in Southeast Asia, though these opponents needed to copy a lot of Apple’s expertise, design concepts, and product advances to compete.
Returning to Logic Instrument, it might at first seem to have little or no moat. Its essential moat lies in its the area of interest merchandise, however even there it has opponents. Nonetheless, if globalization reduces, and merchandise — particularly these linked to navy utility — develop into extra regional, that might enhance its moat. The corporate has additionally received a number of contracts that show, as the corporate itself has famous, that its salesforce is deeply embedded in sure markets and buyer relationships. Additionally the corporate’s ISO certifications and exacting specs of its rugged gadgets additionally create limitations to entry, since creating applied sciences that meet such necessities takes vital time and experience. Taken collectively, these elements quantity to a a lot bigger moat than could also be seen at first look.
A comparability from the actual world could be the moat of Bourtange within the Netherlands. Photos of this fortress present a sequence of waterways and boggy floor partially stopping entry. Though entry was technically potential for an attacking military, the fortress remained uncaptured for hundreds of years after building. Its advanced sequence of partial moats made it basically inconceivable to assault. Like Bourtange, which was by no means captured after its completion in 1593, Logic Instrument’s protection doesn’t relaxation on a single towering wall however on a sequence of layered moats that collectively make its place much more resilient than it first seems.
Gold Name Choices
Gold has now risen into the $3,400/ozarea (as of the time of writing). Though the costs of junior gold miners have risen total, they nonetheless look like lagging the implied valuation of their companies. There’s a extensive margin of security between the costs of those shares, if one thinks of them as a sequence of quarterly name choices struck on the AISC 5 for every enterprise, and with the gold promoting value as the value of the underlying. Gold December futures now stand at $3,404/ozand, at these ranges, the companies we personal are nonetheless buying and selling on an earnings a number of of 3-4x; low cost, particularly given the anticipated development in manufacturing.
Final summer season, once we started to note the junior gold miners, the value of gold was round $2,500/oz. An instance miner had an AISC round $1,900/oz, and set to lower prices to $1,800/oz. That implied a promoting margin of $600/oz, and the corporate was producing 10,000oz per quarter.
This equated to an working revenue of $6 million per quarter, or $24 million per yr. On the time it was worth at $75 million and seemed set to have money of $20 million by the top of the yr. Low cost on the face of it, or conversely, exhibiting a big margin of security towards a fall within the gold value.
This identical enterprise is now producing 11,000oz per quarter, doubtless rising to 12,000oz earlier than year-end. At a gold promoting value of $3,200/oz, with no AISC enchancment, the margin could be $1,300/oz, implying annual working revenue of $62.4 million. It’s now valued at $244 million and has internet money of $25 million, doubtless rising nicely above $30 million by year-end. On an enterprise valuation of $214 million, it nonetheless trades at 3.4x; a fantastic enterprise even after the share value has risen has risen 220%. To reply the query the reader could also be asking at this level: Serabi Gold plc (OTCQX:SRBIF).
But it surely’s not the one one. There are lots of different related shares within the gold and broader treasured metals area, with a standard theme of underpricing relative to present gold ranges and sustaining prices, alongside development alternatives from exploration.
At all times Be Looking
We’re persevering with with our common Substack posts, the place we are going to take deeper dives into new names we’re researching and markets that we predict are attention-grabbing. The tougher we glance, the extra alternatives we discover. We are going to preserve looking out as exhausting as we are able to, throughout a few of the least expensive and fastest-growing markets, sectors, and corporations on this planet.
The tables under present the S&P 500 whole return and partnership internet returns, after charges, for every year 2019-2025 (YTD), adopted by the compounded returns over the identical interval, in addition to the annualized positive factors.
Annual Returns
|
12 months |
Fairlight Alpha Fund |
S&P 500 (Whole Return) |
Distinction |
|
|
2019 1 |
…………………………… |
38.1% |
17.9% |
20.1% |
|
2020 |
…………………………. |
26.3% |
18.4% |
7.9% |
|
2021 |
…………………………. |
146.5% |
28.7% |
117.8% |
|
2022 |
…………………………. |
15.8% |
-18.1% |
33.9% |
|
2023 |
…………………………. |
6.9% |
26.3% |
-19.4% |
|
2024 |
…………………………. |
13.6% |
25.8% |
-12.2% |
|
2025 (YTD) |
…………………………. |
29.8% |
5.5% |
24.2% |
Compounded Returns
|
12 months |
Fairlight Alpha Fund |
S&P 500 (Whole Return) |
Distinction |
|
|
2019 1 |
…………………………… |
38.1% |
17.9% |
20.1% |
|
2020 |
…………………………. |
74.4% |
39.6% |
34.7% |
|
2021 |
…………………………. |
329.9% |
79.7% |
250.2% |
|
2022 |
…………………………. |
397.9% |
47.2% |
350.7% |
|
2023 |
…………………………. |
432.2% |
85.9% |
346.4% |
|
2024 |
…………………………. |
504.6% |
133.8% |
370.8% |
|
2025 (YTD) |
…………………………. |
684.6% |
146.8% |
537.8% |
|
Annualized Achieve |
…………………………. |
38.4% |
15.3% |
23.1% |
The S&P 500 returns symbolize the full return index, i.e., with dividend reinvestment included. Will increase in worth come up from inventory value appreciation in addition to dividend reinvestment. This gives a fairer comparability to the fund. The Fairlight Alpha Fund efficiency is proven internet of partnership charges and bills.
The fund has outperformed the S&P 500 whole return for the primary half of 2025. Despite the volatility over the quarter we maintained the outperformance of the fund and took benefit of value modifications to rotate to be able to optimize the portfolio. We are going to focus on the markets and the portfolio particularly within the following sections, together with updates on a number of of those companies and what we consider to be their future outlook.
Yours,
Chief Govt Officer: Andrew Martin
Head of Advertising and Investor Relations: Michael Saunders
|
Footnotes 1 The Fairlight Alpha Fund was launched on 01-Mar-2019 and so the 2019 efficiency and returns are introduced for a 10-month interval. 2 That is the Value Earnings ratio of the index as calculated by Refinitiv. 3 This was because of some final minute delays in fulfilling orders thereby shifting again some income recognition. 4 Consider Eastman Kodak, whose moat shrank quickly with the appearance of digital print and images applied sciences. Though it nonetheless had a powerful model moat and is even immediately trying to reinvent itself. Has the branding part of its moat in the end assured its survival? 5 All-in sustaining price, which is supposed to seize all prices in mining gold, in addition to operating the corporate, a proxy for the prices of the enterprise. THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN FAIRLIGHT ALPHA FUND LP (THE “FUND”). ANY SUCH OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS OF A CONFIDENTIAL OFFERING MEMORANDUM AND ONLY IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW. AN INVESTMENT IN THE FUNDS IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR WITHDRAWAL, REDEMPTION AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE ACCESS TO CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS EXPECTED TO DEVELOP. THE FEES AND EXPENSES CHARGED IN CONNECTION WITH THIS INVESTMENT MAY BE HIGHER THAN THE FEES AND EXPENSES OF OTHER INVESTMENT ALTERNATIVES AND MAY OFFSET PROFITS. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR THAT AN INVESTOR WILL RECEIVE A RETURN OF ALL OR PART OF HIS OR HER INVESTMENT. INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER ANY GIVEN TIME PERIOD. THE PERFORMANCE DATA SHOWN HEREIN REPRESENTS THE PERFORMANCE OF THE FUND. THE RESULTS REFLECT THE DEDUCTION OF: (I) AN ANNUAL ASSET MANAGEMENT FEE OF 2%, CHARGED QUARTERLY; (II) A PERFORMANCE ALLOCATION OF 20%, TAKEN QUARTERLY, SUBJECT TO A “HIGH WATER MARK;” AND (III) TRANSACTION FEES AND OTHER EXPENSES ACTUALLY INCURRED BY THE FUND. THE RESULTS REFLECT THE IMPLEMENTATION OF THE INVESTMENT STRATEGY DESCRIBED IN THE FUNDS’ OFFERING DOCUMENTS AND APPLIED IN THE FUNDS’ TRADING ACCOUNTS. ALL INVESTMENTS INVOLVE RISK, INCLUDING THE LOSS OF PRINCIPAL. RESULTS ARE COMPARED TO THE PERFORMANCE OF THE S&P 500 TOTAL RETURN INDEX (THE “COMPARATIVE INDEX”) FOR INFORMATIONAL PURPOSES ONLY. THE FUND’S INVESTMENT PROGRAM DOES NOT MIRROR THE COMPARATIVE INDEX AND THE VOLATILITY OF THE FUND’S INVESTMENT PROGRAM MAY BE MATERIALLY DIFFERENT FROM THAT OF THE COMPARATIVE INDEX. THE SECURITIES OR OTHER INSTRUMENTS INCLUDED IN THE COMPARATIVE INDEX ARE NOT NECESSARILY INCLUDED IN THE FUND’S INVESTMENT PROGRAM AND CRITERIA FOR INCLUSION IN THE COMPARATIVE INDEX ARE DIFFERENT THAN THOSE FOR INVESTMENT BY THE FUND. THE PERFORMANCE OF THE COMPARATIVE INDEX WAS OBTAINED FROM PUBLISHED SOURCES BELIEVED TO BE RELIABLE, BUT WHICH ARE NOT WARRANTED AS TO ACCURACY OR COMPLETENESS. UNLESS NOTED OTHERWISE, THE RETURNS OF THE COMPARATIVE INDEX PRESENTED HEREIN DO NOT REFLECT FEES OR TRANSACTION COSTS, BUT THOSE RETURNS DO REFLECT NET DIVIDENDS, IF ANY. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor’s Notice: The abstract bullets for this text have been chosen by Searching for Alpha editors.
