Arquitos Capital Partners letter to investors for the first quarter ended March 31, 2018 excerpt.
Klarman 2017 letter on
- Bitcoin
- the danger of Chinese leverage
- Discipline while value investing in bubby times
- Value investing is not dead
- Radicalization of politics
- Dangerous FAANG valuations
Q1 hedge fund letters, conference, scoops etc
Self-education is, I firmly believe, the only kind of education there is. — Isaac Asimov
Dear Partner:
Arquitos Capital Partners returned -9.1% net of fees in the first quarter of 2018. Our annualized net return since the April 10, 2012 launch is 30.2%. Please see page six for more detailed performance information.
A few announcements before a discussion about the portfolio:
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Launch of our offshore fund – Arquitos Capital Offshore, Ltd.
We launched an offshore fund for overseas investors on March 1. Domiciled in the British Virgin Islands, Arquitos Capital Offshore, Ltd. is the exact same portfolio as the onshore fund. It is set up as a master-feeder structure where both Arquitos Capital Partners, LP (our U.S. onshore fund) and Arquitos Capital Offshore, Ltd. feed into the master portfolio. There will not be any changes for our current investors.
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Q1 2018 and Westaim
The results from our first quarter are a good example of how a small (or short) sample size can be misleading. I am thrilled about the operational results from the vast majority of our holdings. The companies we own continue to be reasonably priced, even after the fund’s 81% gain from 2017.
Since the beginning of the year, MMA Capital (MMAC) was involved in a transformational transaction, Boston Omaha (BOMN) raised another $161 million at $23.30 per share, which is higher than where it trades today, and Sitestar (SYTE) announced strong earnings and book value growth.
Even more notably, Westaim (WED.V) made two significant announcements that have not been fully appreciated by investors.
Some background: Westaim owns a specialty insurance company and a credit-focused asset manager. I was introduced to the company by my friend, Toby Shute, who is an analyst at Paradice Investment Management. Toby is a star and a tremendous person. I originally had an in-depth conversation about the company with him while he was putting together a detailed write-up that was published in the Manual of Ideas in January 2015. I liked the story. Then, I sat on my hands for nearly two years, though I followed the company closely. I finally pulled the trigger and bought shares in December 2016. I have been adding to our position since then. Our average purchase price is C$2.99. Shares currently trade at C$3.07. They are worth much more.
More recently, there was a thoughtful write-up on the company in late March 2018 by another friend, Steve Vafier. Steve is also a tremendous guy and someone whom I have enjoyed talking stocks with through the years. You can find his write-up here.
On April 16, 2018, Westaim announced that their insurance subsidiary received interest from several potential acquirers. The press release indicated that Westaim “may consider opportunities to enhance the growth and value of HIIG [the insurance subsidiary]” in light of the unsolicited interest. A sale would produce a windfall for Westaim investors considering that shares currently trade near book value.
Fairfax Financial, the large Canadian insurer run by Prem Watsa, owns preferred stock in Westaim and warrants with a strike price of C$3.50 per share. Fairfax also has assets in Westaim’s credit fund. I was at the Fairfax annual shareholder meeting last week and asked their president about their Westaim ownership. He indicated, with no inside knowledge, that his perception was that they were entertaining offers for the insurance subsidiary. That may be, but another interpretation is that Westaim’s insurance subsidiary could be an acquirer. That was my original take when reading the press release because there was also language in it about how the organization was prepared for larger scale. I viewed this as an invitation to other, smaller insurance companies to come forward to Westaim.
Time will tell which direction they go, but both possibilities should be a huge positive for Westaim and its stock.
A second major piece of news, which has been totally overlooked by investors, was a key hire by Westaim’s asset manager, Arena Group. About a month ago, Arena announced the hiring of Parag Shah to head up their marketing efforts. Parag had previously been the head of marketing at Bridgewater and with the firm for approximately 15 years. He helped build assets under management to more than $160 billion.
Incidentally, Parag has been a long-time shareholder in Sitestar. While I have exchanged emails with him occasionally through the years, I have really only gotten to know him well over the past year. To say I am impressed is an immense understatement. Parag is a unique talent and a special person. I am certain that he will be successful at Arena. His—and their—success will be hugely beneficial to our ownership interest and investment return in Westaim.
Parag will be at our investor day event in Omaha on May 5. Come by, say hello to him, and thank him for joining Arena and Westaim.
Westaim shares had dropped 9% during the first quarter. This gave us another great opportunity to buy more. You can see why I was happy to do so, and why the market results for the company, and the fund, were not representative of reality during the time period.
The network effect
I value these relationships so much. They have enriched my life, and they have enriched the performance of the fund. We have such a great group of Arquitos investors, of staff at Sitestar, of investment analysts (both formal and informal), and of friends of the fund and the company.
How great is it that a friend originally introduced me to a company like Westaim? It took me a while to get comfortable enough to buy it, but when I did, I found other smart people had joined as owners, as well. They then provided me and others with their insightful analysis. Then, another immensely talented friend of Sitestar, took a position there to help the company grow. Of course, I have gotten to know many of the other people who work for the companies we own and, in some cases, bought into a company because I personally knew and liked their leaders.
Unintentionally, I used to underestimate the unique value of some of these relationships with smart, driven, ethical people. No more. We can harness so much intelligence, creativity, and energy in this network that everyone benefits. Some other people, especially in the investment field, are selfish, take advantage of others, and have a zero-sum perspective. This group of people that Arquitos and Sitestar is a part of is generous, curious, and independent-thinking. The whole is far greater than the sum of the parts. I am blessed to have found such great people and humbled to be included.
Believe me, you as an investor in Arquitos have benefitted greatly from them. I have also benefitted greatly from you. Your investment has allowed us to expand this tremendous network, especially through our association with, and ownership in, Sitestar.
Your trust and commitment have helped us build something special with Arquitos and with Sitestar. I hope you take pride in being part of our community, and I hope our investment portfolio’s success grants you financial security and freedom.
Thank you again for your commitment. I look forward to continuing to compound funds on your behalf.
Best regards,
Steven L. Kiel
Arquitos Capital Management
