Quarterly Review
This review includes the first quarter of 2025 and April, as it proved to be a particularly dynamic month. The first four months of the year were challenging for the markets and our Strategy experienced significant volatility during a rapidly changing economic and policy landscape. The quarter and beyond were dominated by the leadup and announcement of the Liberation Day tariffs, which significantly exceeded market expectations and created widespread uncertainty across global markets.
Despite these headwinds, we were active during the period, completing transactions across 11 portfolio positions. We also added two new companies while exiting one, once again using our tested process to capitalise on volatility.
Liberation Day tariffs became the primary driver of performance during the period, with policy uncertainty disrupting normal pricing mechanisms and causing most companies to be valued based on worst-case scenarios. Our preliminary analysis suggests the average tariff impact across our portfolio holdings is moderate, with individual companies experiencing varying degrees of direct and economic exposure. We provide a further study in the portfolio review.
Our portfolio delivered significantly improved results this quarter, with 65% of companies (11 out of 17) meeting or exceeding earnings expectations—a marked turnaround from the previous quarter when only 22% of companies (4 out of 18) met targets. The shift towards short-term, algorithm-driven trading over the past few years has fundamentally altered how markets respond to quarterly results. Missing expectations can create asymmetric risk profiles where portfolios capture less upside while remaining vulnerable to the full downside from disappointments. This structural change in market behaviour means that even a 65% earnings success rate generates muted alpha during reporting periods.
Despite experiencing earnings shortfalls relative to expectations over recent quarters, our portfolio continues to deliver solid EPS growth, substantially outpacing broader market indices and remains aligned with our long-term performance targets.
Portfolio valuations have experienced compression due to successive market regime shifts—initially from the AI revolution, momentum-driven trading, Magnificent Seven dominance, and more recently from Liberation Day Tariff implications. We maintain a firm conviction that these represent cyclical rather than structural challenges and that fundamentals will ultimately drive valuation recognition over the longer term.
Portfolio Review
We employed a disciplined approach to portfolio management during the first quarter, using the market volatility to establish attractive entry points in new positions while rebalancing existing holdings. Our currency positioning proved particularly valuable, as we tactically adjusted currency weightings to capitalise on market dislocations—a strategy CDAM has successfully deployed during several market stress periods, including 2008, 2011, and 2015.
Portfolio Composition: We ended the quarter as owners of nineteen companies across diverse sectors and geographies, with 60% of the names being acquirers. Our geographical exposure remains concentrated in Canada (35%), the United States (30%), and Europe (35%), providing exposure to different economic cycles and policy environments. In our opinion this should act as a tailwind. From a sector perspective, we maintain significant exposure to Industrials (28%), Information Technology (23%), and Consumer Discretionary (18%), reflecting our focus on companies with strong competitive positions and growth prospects.
Valuation Metrics: Our portfolio continues to trade at compelling valuations relative to both historical levels and broader market indices.
Long-Term Performance Drivers
Despite near-term challenges, we remain confident in the long-term prospects of our portfolio. The Strategy trades at a 30% discount to its historical average valuation, creating compelling risk-reward dynamics for patient investors.
The valuation spread between our portfolio and broader market indices remains at levels not seen since March 2008, marking the widest gap in 18 years. Despite experiencing earnings shortfalls relative to expectations in recent quarters, our portfolio continues to deliver EPS growth that substantially outpaces broader market indices.
Earnings Growth Engine: Our portfolio's average reinvestment rate of 82% (compared to the MSCI's 33%) combined with an 18% return on equity implies sustainable earnings growth of approximately 15% annually. This significantly outpaces broader market expectations, positioning the Strategy for superior long-term returns.
Expected Returns: Third-party estimates suggest an attractive three-year Total Shareholder Return, driven by earnings growth, potential multiple expansion, and modest dividend yields. This projection becomes even more attractive considering the additional return our companies typically generate through acquisitions.
Asymmetric Risk-Reward Profile: Based on current valuations, the portfolio has an asymmetric risk-reward profile, with potential upside 20 times greater than downside risk when measured against historical P/E ratios. This compelling risk-reward dynamic reflects the market's current pessimism toward quality growth companies trading at reasonable valuations.
Tariff Impacts on Portfolio
The Liberation Day tariffs significantly exceeded market expectations, creating policy uncertainty that disrupted normal pricing mechanisms across global markets. Our comprehensive analysis indicates the average tariff impact across our portfolio is manageable, with most companies able to diversify their supply chains within approximately two quarters.
Portfolio Impact Assessment: We have assigned tariff impact scores ranging from 1 to 10 across our holdings, with a portfolio average of 4. Our highest-exposure holdings include companies with significant manufacturing operations in affected geographies, while our lowest-risk holdings are primarily service-based businesses with limited direct exposure.
Mitigation Strategies: Discussions with our portfolio companies indicate they are actively pursuing supply chain diversification, supplier negotiations, and strategic pricing adjustments to offset incremental costs. We anticipate tariff rates will eventually converge toward more moderate levels as policy uncertainty diminishes.
Closing Remarks
While the first quarter presented significant challenges, we believe the foundation for superior long-term returns remains intact. Current trough multiples, even accounting for tariff impacts, present the most favourable upside/downside ratio since the Global Financial Crisis.
We are adjusting the portfolio by introducing new positions and rebalancing existing holdings to enhance the potential for upside capture. Markets are currently pricing assets to worst-case scenarios due to heightened uncertainty, but multiple expansions will occur when markets regain the necessary components to price assets effectively.
The combination of higher-quality holdings at lower valuations, strong management teams with significant ownership stakes, and compelling long-term growth prospects position the Strategy well for the recovery we anticipate in the coming quarters.
Thank you for your continued support during this challenging period. We remain committed to our disciplined investment approach and confident in our ability to generate superior long-term returns for our investors.
Please let us know if you have any questions.
Note
This is a redacted version of CDAM's Q1 2025 Investor Newsletter. Should you be interested to learn more, please contact us by emailing ir@cdam.co.uk.
Disclaimers
This document and any attachments are intellectual property owned by CDAM (UK) Limited and are protected by applicable copyright and trademark law.
Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.
This material is not an invitation to subscribe for shares or interests in any fund and is by way of information only. The information is as of the date(s) indicated in this document, is not complete, is subject to change, and does not contain certain material information regarding any CDAM investment strategy, including tax consequences and risk disclosures. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment.