Voyager 2024 Year End Commentary: Strategic Investments for a Changing World

Voyager Fund ended this year +15.90%, after being +18.37% in 2023, and -13.64% in 2022. Since its inception last decade, Voyager has compounded, after costs, by over 11.50% per year. According to investment history as summed up in Triumph of Optimists, equity markets around the world over the last century have compounded at a rate of mid-to-high-single digits, depending on the jurisdiction. Triumph’s definition of “optimism” is, “hopefulness and confidence about the future of the successful outcome of something.”  So, in essence, Voyager invests in optimism for the future of the well-managed businesses to which we have allocated your capital.  

Our primary focus at Wealhouse has always been to find businesses that have competitive advantages which will allow them to outgrow the markets in terms of earnings and free cash flow. We prefer to anchor the portfolio to companies that we believe can double or triple in size in the medium to long-term, and which have management teams with equity alignment–just like everyone at Wealhouse owns units across our different funds.   

Following the above investment philosophy, we made money in 2024 by investing in companies from many different industries and geographies. This helps us to achieve prudent risk management through geographic and industry diversification.  When we started Wealhouse in 2008, we judged every company from every industry on its technological strengths or weaknesses, to the purpose of assessing the inherent risks of disruption posed by competitors who excelled at technological development. Over the last couple of years, we have broadened our perspective in order to judge every business by its potential to be hurt or helped by Artificial Intelligence (AI). There is a scenario in which AI disruptions will be more fundamentally significant than even those posed by the internet beginning in the 1990s.  

As a result, Voyager will look to profit from those businesses along the AI food chain. AI is an industry that is not likely to see a recession for quite some time, despite many investors debating whether it has become overhyped. Based on our research process we can definitely say that, although some AI hype does exist, there are many signs that point to the ongoing development of AI resulting in real-world progress.  The chart below illustrates where companies sit along the AI-adoption curve. We believe it will take the rest of this decade for many companies to transition to Phase 3.  

THE AI ADOPTION CURVE

After hiring Devon as an analyst from the University of Waterloo, where he focused on studies in Physics and Science, we set him to work on an internal project over the summer of 2023. He began to build a framework within which will be identified those companies and industries that either win or lose from the accelerating adoption of AI as an industry standard. One example of a company he identified as a winner is called Fabrinet, which outsources engineering and manufacturing services from its operations in Thailand and Silicon Valley to companies like Nvidia. He also found a marketing services company called Zeta from New York, that helps companies to grow and retain clients more efficiently by using AI-enabled software and tools.  

This AI research effort also supported our conviction to allocate capital to copper and uranium producers and their customers in utility power-related businesses. These companies are second-derivative beneficiaries of the insatiable electricity demand that results when models are run for AI purposes. Indeed, it is not only the hyper-scalers and social media, trillion-dollar market cap companies such as Microsoft, Amazon, Alphabet and Meta that will grow because of AI. Stay tuned in the years ahead as we identify smaller companies that apply the advantages offered by AI in order to grow and become winners in industries such as software, healthcare, communications, cybersecurity, media, robotics, e-commerce, etc.  

Voyager continued to profit from companies that are still seeing a lagged return to pre-covid levels in this post-covid environment. For example, our contrarian investment from a couple of years ago in U.S.-listed IMAX, has reaped healthy returns from its powerful royalty business model, as moviegoers returned to theaters for blockbuster films. Similarly, our investment in Paris-headquartered Accor has seen its many global hotel brands rebound nicely as both leisure and business travel returned at levels as high or higher than before 2020. Canadians will likely recognize their Fairmont brand, and those who travel in Europe and Asia may be familiar with some of their other brands such as Raffles, Ibis, Novotel and/or Sofitel. In Canada, we profited from our 2022 investment in Chartwell Retirement Residences. It has seen occupancy rebound nicely, based on its ability to acquire assets from smaller-scale operators experiencing trouble in keeping up with rising costs associated with serving the elderly. 

There are many different ways to make money from investing. We feel that AI development is a secular trend that will be the gift that keeps on giving for many years to come. Indeed, we own some well-managed businesses that should double or triple in size over the balance of this decade. Investing in contrarian ideas that are out of favour is another way to generate profits. An industry out of favour does not necessarily mean it lacks potential, nor does a business facilitated by AI guarantee that it will fulfill its potential.  

With humility, we must admit that we had some below-average returns this year, for example from some investments in an interest rate-sensitive sector such as consumer discretionary. Our investment in a leading appliance e-commerce retailer, AO World from the UK, was flat on the year as economic uncertainty in the UK persists. Eventually, we believe our investment in AO World will pay off, since appliances eventually will break, as my wife and I experienced this past holiday season. We also invested in innovative wood pellet grill manufacturer Traeger that was trading 90% below 2021 highs. We in part entered the investment after seeing insiders buying shares personally in the spring of 2024. We don’t expect to see Traeger sales to return to stay-at-home Covid levels but much higher as they continue to gain share versus traditional propane/gas barbecues.  

In late 2024, we exited a very successful investment we made after the invasion of Ukraine, in the number one Austrian and Hungarian bank called, Erste Bank. Simply put, with higher interest rates it has been a good time to be a lender again. However, with sticky inflation, our investment in motor insurance company Sabre Insurance from the UK underperformed as higher-than-expected costs of claims hurt profits. We believe that they will be able to recoup these costs as they raise premiums in the year(s) ahead and inflationary pressures normalize. They remain a market leader with a very strong balance sheet and take some comfort that senior management has been buying shares personally.  

What I love about the investment process is the opportunity to meet smart management teams from around the world and determine which business plans will win. As the entrepreneurs who lead these companies become richer, we will in turn become wealthier by investing alongside them. I have included a sample list of companies at the end of these comments that either I and/or Devon have met in our offices or on the road, in order to better determine who meets our investment checklist.  

As more and more investors allocate capital to Exchange Traded Funds (ETFs), you can see in the chart below that we have been very pleased to experience the best time in our careers in terms of access to management teams. It is not uncommon for us to meet a company that is owned between 30-40% by ETF franchise leaders such as Blackrock, Vanguard and StateStreet. In many cases we find ourselves owning a company before it is owned by an ETF, since many ETFs will seek to own more of a stock only as it grows in size. As a result, we have noticed a new trend amongst some of our holdings, in which they will execute mergers of equals in part to grow in size and qualify for more ETF ownership. This results in a lower cost-of-capital which can allow them to grow even more organically or through additional mergers. For example, in 2024 we saw long-time holding Consol merge with Arch Resources, or Cedar Fair merge with Six Flags. In both cases, they grew from being $2-3 billion market capitalization companies to $5-7 billion companies, with synergy benefits and more ETF ownership to come. We would not be surprised to see more of this type of transaction.  

ETF AUM & MARKET SHARE MEANS LESS COMPETITION FOR ACTIVE MANAGERS WHO GENERATE ALPHA

The opposite of optimism is pessimism, and at this time last year, there was a lot to be worried or pessimistic about. Indeed, there were many signs that the global economy was slowing down and that it was at risk of entering a recession. Global bond-yield curves were inverted, which in the past often foreshadowed recessions. An inverted yield curve is simply when the yield on short-duration bonds, such as the 2-year, is higher than longer-duration bonds like the 10-year, and this often signals that growth is set to slow. Since major central banks started raising rates in 2022, certain geographies have struggled to grow and thus entered recessionary scenarios in my opinion. This includes China, Germany, and Canada. On a global scale, certain industries and/or subsectors within sectors have experienced a recession.  In particular, any geography or industry exposed to the auto sector has experienced a recession, as you can see in the below chart. Auto-loan delinquencies have also been increasing as a result of higher interest rates. Thus, industries that supply into the automotive sector, such as steel, auto-semis and auto-lenders, have also experienced a recession. 

60 DAY LOAN DELINQUENCY RATES

From my perspective, the job of a central bank is to raise the cost of money by raising rates when the world is too happy, and lower rates when there are signs of unhappiness–such as the growth of bankruptcies, job losses, lower inflation, etc. Lower rates in many ways are a sign to companies that is a safer time to invest in their own businesses for future growth, or to buy and merge with other companies.  

Voyager Fund benefitted in 2024 from six companies receiving takeover offers. In fact, we woke up on the last day of the year to find that Softchoice, a Canadian-based information technology software and hardware services company, received a bid to be privatized. Back in 2013, it was taken over when we were shareholders, and then again when it became public in 2021. This is its second iteration of a go-private transaction in just over a decade!  

We always have mixed feelings when a holding receives a takeover bid. Much research time is spent on analyzing a company, and then with a takeover premium the company disappears from our portfolio. We must then find another company in which to redeploy the proceeds. On the positive side, it does validate our investment process in being able to identify undervalued businesses that others want to own. It also confirms a big part of the original thesis for why we started Voyager Fund, in that we are able to identify a significant valuation dislocation between large, mega-capitalized companies, and small or mid-sized companies.  

Market is Ripe for Takeovers with Rates Falling and Smaller Companies Cheaper

The number of companies in the public markets has been shrinking since the 1990s. In fact, it has been cut almost in half. From a supply/demand standpoint, we believe that this is great for our portfolio of quality businesses that we feel are attractive takeover targets. As illustrated in the chart below, we are quite confident in the underpinnings of equity markets longer-term. Simply put, the supply of shares in good-to-great companies is shrinking. We love to own assets in which supply is decreasing while demand is staying flat or increasing.  

GLOBAL EQUITY SUPPLY IN SECULAR DECLINE – GOOD OMEN FOR GO-FORWARD RETURNS

U.S. Buybacks Contributing Mightily to the Lack of Supply of Common Stocks

The Biggest Firms Have Amassed $722Bn in Cash to Invest

We continue to hear from many CEOs and CFOs that, with regard to future mergers and acquisitions, opportunities will be much healthier for public companies this decade. This is in comparison to the last decade, when it was private equity companies that had unlimited access to cheap capital due to quantitative easing polices from global central banks. In many cases, we hear from management teams that they anticipate being able to buy companies from private equity general partners who outbid them in previous circumstances. This is a truly exciting trend we are hearing across all industries and geographies. As companies are able to add a chapter to their business plans and consummate accretive acquisitions, this should result in above-average earnings and free cash flow growth.  

In seeming support of this thesis, there are far more countries around the world in which interest rates have fallen year-over-year. The only G7 country to not see rates go lower in 2024 was Japan. As a result, their stock market crashed over 15% when they raised rates 15 bps in August, and it has been on hold ever since. According to cbrates.com, there were 195 rate cuts around the world. There were also 31 rate hikes, mostly in countries in which we have no equity holdings, such as Angola, Brazil, Egypt, Kazakhstan, Kenya, Nigeria, Russia, Turkey, Uganda, Ukraine and Zambia. As you can see in the chart below, emerging markets (EM) are places to avoid in comparison to developed markets (DM). This chart further supports the notion that interest rates are very correlated to stock market returns. 

EM VS. DM PERFORMANCE

Japan Continues to Manipulate Rates Below Inflation Levels – A Risky Proposition​

As I always say, interest rates are the most important thing in determining equity market returns. Since the covid pandemic, government spending has become, arguably, as or more important. If we focus on major countries where we have investments in equities, we see that rate cuts are correlated to positive returns from respective stock markets.  

We thought that we would share further illustrations in order to help explain the reasons why Canada has experienced the most dramatic cuts in rates. Central banks typically have a dual mandate that focuses on keeping inflation and employment at healthy levels. Jobs are key since consumer spending is typically around two thirds of what drives an economy. As you can see in the illustrations below, Canada has seen the highest levels of job losses as rates increased, and this has led to recession-like consumer spending. Since wages are a big driver of inflation in an economy, we expect that Canada’s inflation rate will be lower than many other jurisdictions. You can see this in the chart we cite from the Financial Times below. Sadly, Canada is just not creating enough jobs out of the public sector.   

CANADA HAS SEEN ONE OF THE LARGEST INCREASES IN THE UNEMPLOYMENT RATE ACROSS THE G10

Household Spending Per Capita At Recession Levels

CANADA IS MOST AGGRESSIVE AT CUTTING RATES BECAUSE INFLATION HAS FALLEN THE MOST

I continue to advocate for Wealhouse investors to stay balanced across our funds. Although returns in Voyager were in the healthy mid-teens, there was much volatility beneath the surface and the year ended with a lot of volatility to the downside. This suggests to me that we have reached a point at which global government debt load and geopolitical tensions are becoming very risky. For example, investors will notice that Voyager Fund had a 4.73% drawdown during December, while most major small- and mid-cap indices were down 6-8.5% during the month. By way of explanation, there was a less-than-enthusiastic narrative coming from the U.S. Fed Chief Powell during his press conference in December, and this sent the market into a tailspin. Powell talked out of both sides of his mouth throughout his remarks, and led investors to assume that further cuts may not happen. As an example: 

“Attentive to risks on both sides.” 

“Risks to achieving goals roughly in balance.” 

“We can be more cautious going forward, can be more cautious in reducing rates.” 

“Reducing policy restraint too slowly could unduly weaken economy, employment.” 

“Policymaker projections for policy rate are higher for next year, consistent with higher inflation.” 

“Extent and timing language shows we are at or near point of slowing rate cuts.” 

“Slower pace of rate cuts reflects expectation of higher inflation.” 

“Risks and uncertainty around inflation we see as higher.” 

“We are significantly closer to neutral, still restrictive.” 

“As long as the labor market, economy is solid, can be cautious as we consider further cuts.” 

“We think the economy in a real good place and policy too.” 

“What’s driving the slower rate-cut path is stronger economic growth and lower unemployment.” 

“Also driving the slower rate-cutting path is higher inflation this year and next year.” 

“Also closer to neutral rate, another reason to be cautious.” 

“Committee is discussing ways in which tariffs can drive inflation, we’ve done a good bit of work on that.” 

“Premature to make any conclusion on impact of tariffs, don’t know what countries, what size, how long.” 

“We also have to think about the labor market, mindful it is gradually cooling.” 

“We expect significant policy changes, we need to see what they are and the effects to get a clearer picture.” 

“We will be looking for further progress on inflation to make those cuts.” 

The above waffling by the most important central banker in the world resulted in something that has never happened before in my career: the 10-year bond yield rose, and the bond market sold off after the U.S. Fed cut rates. 

This situation also validated why we started Amplus as a long/short credit fund, in the spring of 2020. I have long joked that I started Wealhouse in 2008 because there was too much debt in the world, and I wanted to have the tools to navigate an environment in which markets had an adverse reaction to rising government debt levels. The last five years have been the worst stretch for bond market returns in my career, and we are proud that our long/short credit fund has compounded at low-double digits. Congratulations to my teammates Andrew and Mike, who navigate those choppy waters every day for investors. 

I would also like to congratulate my colleague Justin who received a 5-year award for best Sharpe Ratio amongst Canadian-based long/short equity funds. I feel that it is prudent to remind investors that during positive years like 2023 and 2024, Voyager generated better returns because it takes more risk. During years like 2022, however, Voyager dramatically underperformed Lions Bay because Lions Bay takes a more cautiously optimistic investment approach with tools that protect capital in down markets. Please trust me when I say that it is very hard to predict how different asset classes will react in a world we cannot foresee. For example, we have never seen an investment world that has had to navigate its way through: 

• So much debt on government balance sheets 

• Quantitative tightening after a decade of quantitative easing 

• Forthcoming disruption risk from technological advancements in artificial intelligence, i.e., agentification of tasks, humanoid robots, autonomous vehicles 

• Geopolitical tensions in Europe, Asia, Americas and the Middle East 

• So many violent and intense weather events 

This is why I continue to advocate for being balanced across all three of our strategies. Simply put, it is incredibly hard to predict the impact on capital markets from any of the above macro variables. I am not inherently pessimistic but I am realistic. Hence, we focus on bottom-up analysis and diversification across different liquid asset classes, industries, currencies and geographies in order to grow and protect capital. Voyager Fund is about finding one idea at a time that is cheaper than the market, growing faster than the market and better capitalized than the market, in order to weather the kind of unforeseeable macro risks that are mentioned above.  

Despite the uncertainty, however, we are still finding areas in which to be bullish, regardless of how the macro environment works out. One advantage of higher interest rates is that it raises the cost of capital to bring on new supply, especially in capital intensive industries. An example of an industry that has experienced limited access to capital is the energy sector, for many reasons other than just higher interest rates over the last decade: 

• Increased government regulatory headwinds for fossil fuels, i.e., carbon taxes 

• Pushback from shareholders to increase return-on-invested capital as opposed to supply growth for growth’s sake 

• Government subsidies for competitive renewable Industries even though they were higher cost providers 

• ESG fears by institutional investors to invest in fossil fuel businesses, i.e., the Greta Thunberg effect for decarbonisation 

Fast forward to today and the oil and gas industry is now earning well above its higher cost of capital, limiting growth by the drill bit, serving as back-up to unreliable renewable energy projects from solar and wind that are intermittent sources of energy, seeing exponential growth from AI-driven data centre demand growth and seeing a voter base pushing back against cost-of-living pressures from higher cost renewables and carbon taxes.  

We are very bullish on natural gas that is a far less dirty fuel source than thermal coal–which is still used in large amounts in overseas markets by the world’s largest population bases in China and India. Despite China becoming the largest consumer of electric vehicles, the electricity grid that charges those vehicles is largely powered by thermal coal. I have many not-so-fond memories of company tours in China where my nostrils were feeling the downside of heavy pollution from coal and diesel fuel usage. 

CHINA’S THE WORLDS LARGEST GREENHOUSE GAS POLLUTER

This past fall, we had a meeting with the head of Shell’s global Liquefied Natural Gas (LNG) franchise, which is the primary marketer of gas in the world. They confirmed to us that their partially owned project off the coast of British Columbia will be ready to go by the summer of 2025. Phase One of the project will allow them to export 14 million tonnes of LNG to more lucrative international markets from oversupplied Western Canadian natural gas basins.  

We are thus very bullish on western Canadian gas producers who will see increased demand for their product as more and more LNG export capacity comes online off our west coast in 2025 and beyond. One company that we are very bullish on is Arc Resources, which has contracts in place to export its gas with Shell. We also like this well-managed company because of its very strong capital structure, which has a high-single digit free cash flow yield, and long-run growth potential on the back of its many years of low-cost reserves.  It is interesting to note in the slide below that they have supply access to many different North American and International end-markets, and through LNG facilities near the Gulf of Mexico, too. As the Canadian dollar trades off due to our internal political strife and economic weakness, ARC benefits from its exposure to U.S. dollar revenues. We also illustrate in the slide below that ARC has been buying back their shares, since they feel that they are undervalued.  

Sample Voyager Investment: Arc Resources​

Alberta Natural Gas Gas Spot Price​

CAPACITY FACTOR BY FUEL TYPE

AI DATA CENTRE GROWTH WILL REQUIRE MORE NATURAL GAS THAN MOST ANTICIPATE

It is a big part of our job at Wealhouse to conduct bottom-up research so that we can identify companies with exposure to geographies and industries with improving fundamentals. Typically, Voyager Fund is balanced between companies that we believe have fundamentals set to exit a slowdown and/or have the potential to continue to surprise investors to the upside for the long-term. One of the ways that we make money is by looking for reasons to buy quality businesses that are temporarily out of favour, in order to get ahead of other investors. One of my favourite Warren Buffet lessons is to be fearful when others are greedy and greedy when others are fearful. Energy was one of the weakest-performing industries in 2024 and yet we believe it is set to outperform in the years ahead, as evidenced by our natural gas thesis. We are diversified across many different industry groups and geographies and will do our best to allocate companies that meet the criteria of our checklists. We are confident that the sample of research meetings as listed below will lead to more profitable investment opportunities in the years ahead. Thank you again for the trust you place in us to wisely invest your capital. We at Wealhouse wish you all the best for 2025. 

SAMPLE OF SCOTT’S IN-PERSON CORPORATE RESEARCH MEETINGS IN 2024

SAMPLE OF DEVON’S IN-PERSON CORPORATE RESEARCH MEETINGS IN 2024