Lions Bay 2025 Year End Commentary — Opportunity Emerging from Dispersion
During the fourth quarter of 2025, the Lions Bay Fund declined by -5.22%, bringing returns for the full year of 2025 to +2.22%.
Looking back on 2025, our performance for the year was a tale of two halves. Lions Bay delivered across all our strategies in the first half, with strong performance from the Core Portfolio early in Q1 followed by the Hedging Portfolio successfully protecting investors from the dramatic volatility in early Spring, with the Fund remaining positive on the year through the worst of the sell-off.
The second half of the year was much more challenging, with our Core Portfolio underperforming against a backdrop of strong equity markets. During this period, a drag on our returns from our hedging strategy was not offset by corresponding gains in our long investments. The challenging performance of the Core Portfolio accelerated into year-end as many of our long-term investments fell victim to tax in late December, which we will expand upon at the end of this commentary. Entering 2026, the Core Portfolio is trading at extremely attractive valuations with strong prospective returns for the year ahead.
Since inception, Lions Bay has generated an annualized return of +14.91%. Both the current conditions in the market, and in our portfolio, give us a high degree of conviction that Lions Bay is poised for a return to generating profits in line or ahead of our long-term average after two disappointing years.
We are encouraged by what we have seen to start the new year. Markets have enjoyed a strong start to 2026, with the S&P 500 on track for a ninth straight month of gains. However, unlike last year, the year-to-date rally is much broader, which is benefiting our Fund.
After a period in which market leadership was heavily concentrated in a narrow group of mega-cap stocks, we are beginning to see early signs of rotation. Notably, the S&P 500 Equal Weight Index has outperformed the market cap weighted S&P 500 by 3.15% over the first six trading days of the year. We believe this outperformance is just getting started and has a long runway ahead.
Market Conditions
If we were to paint a picture of the market conditions that would present the greatest opportunity for our Fund to generate alpha through our hedging and active trading strategies, it would look precisely like the current state of the U.S. equity markets: a market at all-time highs, the cost of hedging at historical lows, and positioning and sentiment at bullish extremes.
Following three years of double digit returns for equities, and an unabated rally off the April lows, investor allocation to equities sits just 1% below the highest levels of the past 20 years, as shown in the chart below from BofA.
GWIM EQUITY ALLOCATION AT 65%
BofA private client equity holdings as % of AUM
Recency bias is driving a level of complacency toward risk that is reflected in the appetite for downside protection. VIX, which measures the demand for hedges on the S&P 500, closed below 14.5 on Friday, January 9th, well below its 5-, 10- and 20-year averages of 19.07, 18.21 and 19.03.
VIX – 20 YEAR CHART
We also note that positioning in VIX futures is now net short, and at the lowest levels since July 2024, levels which preceded a major volatility shock weeks later. It wouldn’t take much to spark a violent reversal higher in VIX. Such a move would be met with forced selling from the systematic investors we discussed in our last letter, whose equity exposure is tied to prevailing levels of volatility. The exposure of these investors is extended once again after the recent collapse in volatility levels, and they would be forced sellers on a move higher. The conditions are present for a large windfall for our hedging portfolio in the months ahead.
INSTITUTIONAL ASSET MANAGER POSITIONING IN VIX FUTURES
Portfolio Conditions
The reason we are so optimistic about the prospective returns for Lions Bay is that despite the ebullient market conditions we described above, we have been able to build an investment portfolio of stocks trading well off their highs and at a deep discount to their historical valuation levels. As shown in the chart below, quality stocks are underperforming the market by the most extreme levels of the past 30 years. Quality is defined by stocks that have strong free cash flow generation, high returns on equity and low balance sheet leverage.
QUALITY STOCKS UNDERPERFORMING
Note: Data is as of October 31, 2025.
Below is a sample of some of the high-quality investments we own. Two of these companies, Houlihan Lokey (HLI) and Ferrari (RACE), we’ve owned for a long time. Vail Resorts (MTN), which we profiled in our last letter, we started buying in late summer. Church & Dwight (CHD) and Proctor & Gamble (PG) we began buying in late December.
These are all high-quality stocks that generate strong free cash flow and boast high returns on equity. They are all trading well-off all-time highs and at a discount to their 3-year average price to earnings multiples.
Signs of Life in Housing Sector
As a complement to our core holdings in the quality businesses described above, many of which have defensive characteristics, we have continued to build on a position in stocks that are more cyclical in nature. These stocks are levered to a recovery in one of the few areas of the market still ignored by investors and discounting a deep downturn – the housing sector.
In our last commentary, we highlighted two of our investments in the lumber space, Canfor Corp (CFP) and West Fraser Timber (WFG). We took advantage of continued share price weakness last quarter to buy more, and both are now in our top 10 holdings. Following a multi-year downturn in the U.S. housing market and the tariff shock, these stocks are unloved and undervalued with tremendous upside to an inflection in the housing market.
We have been patient with these stocks amidst their recent underperformance because we believe you need to own them before the inflection takes place. We have followed these stocks for years and know that once the cycle turns, you won’t be able to buy them. In early 2017 for example, Canfor went up 44% in 12 days, the first leg of a +137% move into mid-2018. For the past twelve months, we have watched one commodity after another go parabolic in response to bottlenecks, supply shocks and financial speculation fueled by a weak dollar and excess liquidity in the system. We believe lumber prices could follow suit this year.
Last quarter, we also established a new position in RPM International (RPM). RPM manufactures specialty chemicals, paints, coatings, roofing and flooring systems that serve consumer and commercial customers. We first met RPM at an industrials conference over 10 years ago, have followed it ever since, and have owned it at various times over the life of the Fund.
One of the things we admire most about RPM is that despite the cyclicality of some of their end markets, the company has hiked their dividend for 52 straight years. This speaks to the quality of the management team and their ability to maintain financial discipline through cycles.
This discipline was further evidenced on their January 8th earnings call, with the company implementing over $100 million in annualized cost savings to help weather the ongoing slowdown in some of their end markets. The shares responded very positively to the earnings report despite missing estimates, telling us a lot of bad news has been priced in already.
RPM INTERNATIONAL – 1 YEAR CHART
We believe the long-awaited inflection point may finally be occurring. In recent weeks, the U.S. Administration announced several measures aimed at stimulating the U.S. housing market. On January 8th they announced that Fannie Mae and Freddie Mac would purchase $200 billion in mortgage-backed securities (MBS), which led to a 15bp drop in MBS yields and pushed mortgage rates down to 6%.
We expect they will continue to press efforts focused on housing affordability ahead of the mid-terms. The administration has countless levers to pull, and we wouldn’t be surprised to see more creative measures come forward in the form of tax incentives or changes to mortgage eligibility.
Our housing-related investments have responded well to recent news and are off to a strong start for 2026.
December Performance – Looking Through Year-End Dynamics
December performance was weaker than expected and we wanted to address the factors driving them.
Our nature is to hunt for investment opportunities in sectors that are unloved and undervalued. Over our career this has served us well, but this approach does suffer during a momentum-driven market like the one we’ve seen over the past eight months. Our Core Portfolio had a very challenging close to the year as a number of the contrarian opportunities we had invested in last quarter sold off sharply into year-end. This is due to a few factors that are largely technical rather than fundamental.
During a year in which the market enjoys strong performance, stocks that underperformed that year are sold by investors seeking to realize tax losses to offset gains.
Secondly, many of the fund managers that owned underperforming stocks face redemption pressure and are forced to liquidate these stocks to meet these demands.
Neither of these factors have anything to do with the fundamentals of the businesses being sold. Forced selling is almost always an opportunity for forward-looking investors. We were putting capital to work late in the year in a number of our portfolio holdings which experienced such selling pressure.
This dynamic is resolving as we expected so far in 2026. Houlihan Lokey, down 15% during Q4, sold off sharply into year-end to close near 6-month lows. Shares were then up close to 5% during the first 5 days of the year. Vail Resorts was down over 8% because Q4 faced similar selling pressure in the final weeks of the year to finish the 6-month lows. The stock was up close to 4% in the first 5 days of the year. RPM International, a stock we started buying in mid-December, was down 11% in Q4 and closed the year near 6-month lows. The stock is up over 6.5% YTD. We were buying more shares of all these companies during the final three days of the year.
In closing, we firmly believe that the prevailing conditions in the market are conducive to a strong year ahead for the Lions Bay Fund. We own a portfolio of investments in high quality companies with strong track records of compounding wealth for shareholders. These businesses are currently out of favour and are trading at levels that present a lot of upside for our clients. At some point in the cycle, we think soon, investors will once again be interested in management teams that are focused on free cash flow generation and being responsible stewards of shareholder capital.
We have balanced this defensive portfolio with positions in similarly out of favour companies which have tremendous upside should a housing recovery finally take hold following rate cuts, declining mortgage rates and a U.S. administration determined to improve affordability.
Lastly, we are taking advantage of historically cheap levels of volatility to layer on protection against systemic risk, to protect our clients from the next market shock.
We look forward to writing to you again following the close of Q1. Until then, please do not hesitate to reach out with questions, comments or ideas.
