Karsan Value Funds: Q3 Results

For the third quarter ended September 30, 2012, KVF lost $1.02 per share, bringing the value of each share to $11.66. This was the worst quarter in the fund's young history both in absolute and relative terms, for three main reasons. These three reasons accounted for 103% of the fund's negative performance last quarter.

Strong CAD Hurt KVF
First, the strength of the Canadian dollar continued to batter the market value of the portfolio's U.S. holdings. Had the CAD/USD exchange rate finished the quarter at the same level at which it started the quarter, earnings per share would have been 32 cents higher. The strong Canadian dollar has been a drag on returns since the fund's inception three years ago.

Unfortunately, adverse currency movements are only the tip of the iceberg when it comes to describing this quarter's frigid results. The second (and third) reason for the fund's negative performance has to do with the price performance of two troubled retailers that saw dramatic declines in price during the quarter. It is as yet too early to tell if the market is correct about the fate of these two firms, but for now they remain portfolio holdings as I believe each has the distribution and marketing scale which should allow for continued profitability. That said, predictions about the future are rife with error, which is why the fund holds only low multiple (e.g. low P/E, low P/B) stocks, including these two.

Such adverse price movements come with the territory when it comes to value investing. Stocks can stray out of line with their intrinsic values for years at a time, which makes patience a must for successful investing. Unfortunately, it's not always possible to decipher between investing too early in an unpopular stock and being wrong about its future prospects.

No Knee-Jerk Selling
One thing that will not occur in the portfolio is the selling of shares simply in reaction to a falling price. Only when the underlying business has been impaired will a sale be considered. This can certainly occur (for previous examples, see here), but far more common are price falls that push investors into panic-sales; we are the buyers of panic sales, not the sellers (unless business conditions are permanently impaired).

The only good news about having such a poor quarter is that the odds of repeating this performance are low. Thank you to shareholders for your patience through this difficult period.

KVF's income statement and balance sheet are included below (click to enlarge). Note that securities are marked to market value, and amounts are in $CAD: