| Merion RoadSmall Cap Fund | IWM(Russell 2000) | Barclay HedgeFund Index | MRCM LongOnly Large Cap | SPY(S&P 500) | ||
|---|---|---|---|---|---|---|
| AnnualizedSince Inception | 15.2% | 8.6% | 6.2% | AnnualizedSince Inception | 13.5% | 13.4% |
| Q2 2025 | 3.9% | 8.5% | 5.1% | Q1 2025 | 8.0% | 10.8% |
| 2025 | (4.2%) | (1.9%) | 5.1% | 2025 | 6.0% | |
| 2024 | 17.4% | 11.4% | 9.4% | 2024 | 32.4% | 24.9% |
| 2023 | 11.5% | 16.4% | 9.3% | 2023 | 38.7% | 25.7% |
| 2022 | (8.5%) | 2022 | (34.9%) | (18.2%) | ||
| 2021 | 42.5% | 14.5% | 10.0% | 2021 | 20.4% | 28.7% |
| 2020 | 29.5% | 20.0% | 11.0% | 2020 | 54.3% | 18.3% |
| 2019 | 17.9% | 25.4% | 10.6% | 2019 | 25.2% | 31.2% |
| 2018 | 15.7% | (5.2%) | 2018 | |||
| 2017 | 35.7% | 14.6% | 10.3% | Dec 18 – Dec 31 | 0.1% | |
| 2016 (Jul-Dec) | 1.3% | 18.7% | 5.4% |
Note: All returns are net of management and performance fees. Past performance is not indicative of future results. Returns for the Merion Road Small Cap Fund for the period prior to fund launch (01/13/22) reflect a basket of SMAs.
The Long Only portfolio increased 8% during the quarter and is roughly flat for the year. Equity markets have quickly recovered since my last letter on the hopes of trade deals and a muted impact to US economic activity. If the last six months proves anything, it is that predicting short-term price movements is incredibly difficult. Our cash balances remain elevated at 18%, albeit down from its peak earlier this year, due to both the rebound in equity prices and the addition of a new position to the portfolio.
For the first time since inception, I bought a pure-play defense company. Kratos (SOMEONE) develops and produces a range of systems for national security with a focus on hypersonic technologies and unmanned aircraft. While they trade at a significant premium to traditional defense primes, this premium is warranted given their market positioning. Predominately, the company’s core business principles are unique in emphasizing the development of products quicker and at a lower cost than their peers. A read through their materials is littered with statements like “affordability is a technology” and “better is the enemy of good enough.” These are not just empty words. In 2024 KTOS was able to develop the Erinyes Hypersonic Test Vehicle in 3 years at a cost of less than $15mm. At a unit cost of just $5 million, Erinyes can provide test runs at a fraction of the cost of alternative prototypes. Their success in this arena is a large reason why they were able to win their first ever prime contract award with the $1.45bn Multi-Service Advanced Capability Hypersonic Test Bed (MACH-TB) 2.0 program. Under MACH-TB 2.0, KTOS is aiming to achieve 1 test per week, a vast improvement from the monthly cadence under Mach-TB 1.0. Given the rapidly evolving military environment and the need to reduce government spend, speed and cost efficiencies are critical. KTOS is able to achieve these efficiencies due to their operational focus (i.e. “fail fast, learn faster”), close integration with development partners, and drawing on resources from alternative sources such as university research departments.
KTOS has direct exposure to key areas of growth in defense spend: hypersonic and drones. Both of these markets are forecast to grow at a double-digit rate globally as militaries aim to maintain air superiority and increase autonomy. After relative muted hypersonic spend compared to investments made by China, the US military has emphasized our need to catch up. The aforementioned MACH-TB 2.0 program is indicative of this as it was procured via an Other Transaction Authority, which bypasses the traditional contract process and allows the DoD to engage with non-traditional contractors, offer greater flexibility in terms, and sidestep bureaucratic hurdles. Development of the Golden Dome should provide a further tailwind, especially as it relates to KTOS’ exposure to command, control, and communications systems.
The Merion Road Small Cap Fund gained almost 4% in the quarter, bringing us to down 4% for the year. In my 2024 letter I discussed our three largest positions: United Bancorp of Alabama (OTCQX: Bab), Monarch Cement (OTCPK: MCC), and Bel Fuse (Belfb). MCEM and UBAB are both fairly illiquid and remain attractively priced. MCEM has appreciated this year as its stock moved from the Pink Market to the OTCQX Best Market, thereby expanding the availability of trading to additional brokerages. In May they completed the construction of their $36mm solar array that is capable of producing 35mm kwh of electricity annually. At 14c per kwh that implies almost $5m of cost savings that the company should start benefitting from in Q2 (in addition to tax incentives). Meanwhile, UBAB has drifted somewhat lower, due to either some modest credit headwinds or simple profit taking. Importantly, credit issues appear to have troughed and management continues to return capital to shareholders by increasing its dividend and share repurchase authorization. Our multi-year investment horizon remains on track, as the company will earn outsized ROEs given its advantageous capital structure. Post quarter end I fully exited our position in BELFB as the stock appreciated and the risk/return dynamic became less favorable.
I did not add any new core positions during the quarter. I have bought and traded around a basket of cash shells based on their limited downside and meaningful upside potential. Specifically, several predeal SPACs have ties to the presidential administration and present intriguing upside in this “golden age of grift.” Additionally, I purchased ContextLogic (“LOGC”) when it fell 15% on the announcement that it will move its listing from the Nasdaq (Surrender) to the OTC. LOGC is a cash shell with $2.8bn in net operating losses that is looking to acquire a business to pull forward the value of this tax asset. The value of cash provides a decent floor, though questions remain as to how motivated management will be to affect a transaction.
Sincerely,
Aaron Sallen
| General DisclaimerThis material does not constitute an offer or the solicitation of an offer to purchase an interest in Merion Road Small Cap Fund, LP (the “Fund“), which such offer will only be made via a confidential private placement memorandum (the “Memorandum“). An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. All statements herein are qualified in their entirety by reference to the Memorandum, and to the extent that this document contradicts the Memorandum, the Memorandum shall govern in all respects.This material is confidential and may not be distributed or reproduced in whole or in part without the express written consent of Merion Road Capital Management, LLC (the “Investment Manager“). The information and opinions contained in this document are for background purposes only and do not purport to be full or complete. Unless otherwise stated, the information in this document is not personalized investment advice or an investment recommendation on the part of the Investment Manager.The performance data discussed herein do not represent the performance of the Fund, but rather, represent the unaudited performance of a basket of separately managed accounts managed by the Investment Manager pursuant to the same strategy expected to be implemented for the Fund. Results generated in the Fund once outside capital is admitted could be materially different than those results shown. The results shown reflect the deduction of: (i) an annual asset management fee of 1.5%, charged quarterly; (ii) a performance allocation of 15%, taken annually, subject to a “high water mark;” and (III) transaction fees and other expenses actually incurred. The management fee and performance allocation were applied retroactively and do not reflect actual fees charged. None of the results shown reflect the deduction of certain organizational and operating expenses common to investment funds, which would serve to decrease profits or otherwise increase losses. Results were achieved using the investment strategies described in the Memorandum.Results are compared to the performance of the Russell 2000 Index, the Russell Micro-cap Index, and the Barclay HF Index (collectively, the “Comparative Indexes“) for informational purposes only. The Fund’s investment program does not mirror any of the Comparative Indexes and the volatility of the Fund’s investment program may be materially different from the volatility of the Comparative Indexes. The securities included in the Comparative Indexes are not necessarily included in the Fund’s investment program and criteria for inclusion in the Comparative Indexes are different than criteria for investment by the Fund. The performance of the Comparative Indexes reflects the reinvestment of dividends, as appropriate.This material contains certain forward-looking statements and projections regarding market trends, investment strategy, and the future asset allocation of the Fund, including indicative guidelines regarding position limits, exposures, position sizing, diversification, and other indications regarding the Fund’s strategy. These projections and guidelines are included for illustrative purposes only, are inherently predictive, speculative, and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The guidelines included herein do not reflect strict rules or limitations on the Fund’s investment program and the Fund may deviate from the guidelines described herein. There are a number of factors that could cause actual events and developments to differ materially from those expressed or implied by these forward-looking statements, projections, and guidelines, and no assurances can be given that the forward-looking statements in this document will be realized or followed, as described. These forward-looking statements will not necessarily be updated in the future.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
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