| Merion StreetSmall Cap Fund | IWM(Russell 2000) | Barclay HedgeFund Index | MRCM LengthySolely Giant 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% |
Word: All returns are internet of administration and efficiency charges. Previous efficiency isn’t indicative of future outcomes. Returns for the Merion Street Small Cap Fund for the interval previous to fund launch (01/13/22) mirror a basket of SMAs.
The Lengthy Solely portfolio elevated 8% through the quarter and is roughly flat for the yr. Fairness markets have rapidly recovered since my final letter on the hopes of commerce offers and a muted impression to US financial exercise. If the final six months proves something, it’s that predicting short-term worth actions is extremely tough. Our money balances stay elevated at 18%, albeit down from its peak earlier this yr, as a consequence of each the rebound in fairness costs and the addition of a brand new place to the portfolio.
For the primary time since inception, I purchased a pure-play protection firm. Kratos (SOMEONE) develops and produces a variety of programs for nationwide safety with a concentrate on hypersonic applied sciences and unmanned plane. Whereas they commerce at a major premium to conventional protection primes, this premium is warranted given their market positioning. Predominately, the corporate’s core enterprise rules are distinctive in emphasizing the event of merchandise faster and at a decrease value than their friends. A learn via their supplies is plagued by statements like “affordability is a know-how” and “higher is the enemy of fine sufficient.” These usually are not simply empty phrases. In 2024 KTOS was capable of develop the Erinyes Hypersonic Check Automobile in 3 years at a price of lower than $15mm. At a unit value of simply $5 million, Erinyes can present take a look at runs at a fraction of the price of various prototypes. Their success on this enviornment is a big purpose why they have been capable of win their first ever prime contract award with the $1.45bn Multi-Service Superior Functionality Hypersonic Check Mattress (MACH-TB) 2.0 program. Underneath MACH-TB 2.0, KTOS is aiming to attain 1 take a look at per week, an unlimited enchancment from the month-to-month cadence below Mach-TB 1.0. Given the quickly evolving army atmosphere and the necessity to cut back authorities spend, velocity and price efficiencies are vital. KTOS is ready to obtain these efficiencies as a consequence of their operational focus (i.e. “fail quick, study quicker”), shut integration with growth companions, and drawing on sources from various sources reminiscent of college analysis departments.
KTOS has direct publicity to key areas of development in protection spend: hypersonic and drones. Each of those markets are forecast to develop at a double-digit charge globally as militaries purpose to keep up air superiority and enhance autonomy. After relative muted hypersonic spend in comparison with investments made by China, the US army has emphasised our have to catch up. The aforementioned MACH-TB 2.0 program is indicative of this because it was procured through an Different Transaction Authority, which bypasses the normal contract course of and permits the DoD to interact with non-traditional contractors, provide higher flexibility in phrases, and sidestep bureaucratic hurdles. Growth of the Golden Dome ought to present an additional tailwind, particularly because it pertains to KTOS’ publicity to command, management, and communications programs.
The Merion Street Small Cap Fund gained virtually 4% within the quarter, bringing us to down 4% for the yr. In my 2024 letter I mentioned our three largest positions: United Bancorp of Alabama (OTCQX: Bab), Monarch Cement (OTCPK: MCC), and Bel Fuse (Belfb). MCEM and UBAB are each pretty illiquid and stay attractively priced. MCEM has appreciated this yr as its inventory moved from the Pink Market to the OTCQX Finest Market, thereby increasing the supply of buying and selling to extra brokerages. In Might they accomplished the development of their $36mm photo voltaic array that’s able to producing 35mm kwh of electrical energy yearly. At 14c per kwh that means virtually $5m of value financial savings that the corporate ought to begin benefitting from in Q2 (along with tax incentives). In the meantime, UBAB has drifted considerably decrease, as a consequence of both some modest credit score headwinds or easy revenue taking. Importantly, credit score points seem to have troughed and administration continues to return capital to shareholders by growing its dividend and share repurchase authorization. Our multi-year funding horizon stays on monitor, as the corporate will earn outsized ROEs given its advantageous capital construction. Put up quarter finish I totally exited our place in BELFB because the inventory appreciated and the danger/return dynamic turned much less favorable.
I didn’t add any new core positions through the quarter. I’ve purchased and traded round a basket of money shells primarily based on their restricted draw back and significant upside potential. Particularly, a number of predeal SPACs have ties to the presidential administration and current intriguing upside on this “golden age of grift.” Moreover, I bought ContextLogic (“LOGC”) when it fell 15% on the announcement that it’ll transfer its itemizing from the Nasdaq (Give up) to the OTC. LOGC is a money shell with $2.8bn in internet working losses that’s seeking to purchase a enterprise to tug ahead the worth of this tax asset. The worth of money offers a good ground, although questions stay as to how motivated administration shall be to have an effect on a transaction.
Sincerely,
Aaron Sallen
| Common DisclaimerThis materials doesn’t represent a proposal or the solicitation of a proposal to buy an curiosity in Merion Street Small Cap Fund, LP (the “Fund“), which such provide will solely be made through a confidential non-public placement memorandum (the “Memorandum“). An funding within the Fund is speculative and is topic to a threat of loss, together with a threat of lack of principal. There isn’t any secondary marketplace for pursuits within the Fund and none is anticipated to develop. No assurance will be on condition that the Fund will obtain its goal or that an investor will obtain a return of all or a part of its funding. All statements herein are certified of their entirety by reference to the Memorandum, and to the extent that this doc contradicts the Memorandum, the Memorandum shall govern in all respects.This materials is confidential and will not be distributed or reproduced in entire or partially with out the specific written consent of Merion Street Capital Administration, LLC (the “Funding Supervisor“). The knowledge and opinions contained on this doc are for background functions solely and don’t purport to be full or full. Except in any other case said, the data on this doc isn’t customized funding recommendation or an funding suggestion on the a part of the Funding Supervisor.The efficiency information mentioned herein don’t characterize the efficiency of the Fund, however fairly, characterize the unaudited efficiency of a basket of individually managed accounts managed by the Funding Supervisor pursuant to the identical technique anticipated to be carried out for the Fund. Outcomes generated within the Fund as soon as exterior capital is admitted may very well be materially totally different than these outcomes proven. The outcomes proven mirror the deduction of: (i) an annual asset administration price of 1.5%, charged quarterly; (ii) a efficiency allocation of 15%, taken yearly, topic to a “excessive water mark;” and (III) transaction charges and different bills really incurred. The administration price and efficiency allocation have been utilized retroactively and don’t mirror precise charges charged. Not one of the outcomes proven mirror the deduction of sure organizational and working bills frequent to funding funds, which might serve to lower earnings or in any other case enhance losses. Outcomes have been achieved utilizing the funding methods described within the Memorandum.Outcomes are in comparison with the efficiency of the Russell 2000 Index, the Russell Micro-cap Index, and the Barclay HF Index (collectively, the “Comparative Indexes“) for informational functions solely. The Fund’s funding program doesn’t mirror any of the Comparative Indexes and the volatility of the Fund’s funding program could also be materially totally different from the volatility of the Comparative Indexes. The securities included within the Comparative Indexes usually are not essentially included within the Fund’s funding program and standards for inclusion within the Comparative Indexes are totally different than standards for funding by the Fund. The efficiency of the Comparative Indexes displays the reinvestment of dividends, as applicable.This materials incorporates sure forward-looking statements and projections concerning market traits, funding technique, and the long run asset allocation of the Fund, together with indicative tips concerning place limits, exposures, place sizing, diversification, and different indications concerning the Fund’s technique. These projections and tips are included for illustrative functions solely, are inherently predictive, speculative, and contain threat and uncertainty as a result of they relate to occasions and rely upon circumstances that may happen sooner or later. The rules included herein don’t mirror strict guidelines or limitations on the Fund’s funding program and the Fund could deviate from the rules described herein. There are a selection of things that might trigger precise occasions and developments to vary materially from these expressed or implied by these forward-looking statements, projections, and tips, and no assurances will be on condition that the forward-looking statements on this doc shall be realized or adopted, as described. These forward-looking statements won’t essentially be up to date sooner or later.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor’s Word: The abstract bullets for this text have been chosen by Searching for Alpha editors.
Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please concentrate on the dangers related to these shares.