Voyager Q2 2025 Commentary - Research-Led, Opportunity-Focused

Q2 saw a +17.54% bounce-back in Voyager Fund and it now sits at +11.62% on the year. This is well ahead of small- and mid-cap benchmarks and most of our peers. More important than relative performance is the ability to find businesses from our bottom-up research process that present good long-term absolute growth prospects in free cash flow and earnings selling at attractive valuations. We focus on free cash flow potential because we cannot control market gyrations and overreactions to macro events like the tariff war.

In these comments we will illustrate some examples of how market sell-offs like those resulting from the tariff event and war in the Middle East, can present tremendous investment opportunities to build positions in great growth companies at reasonable valuations. At times of high volatility we are often asked how we stomach the volatility and manage money during these difficult stretches. Below you will see examples of where we invested according to Warren Buffet’s sage advice “Be fearful when others are greedy and greedy when others are fearful.”

Ever since Wealhouse was founded in July of 2008, macro events like the global financial crisis, the Greek sovereign debt crisis of 2011, Covid in 2020 or this recent tariff war have caused major drawdowns in the equity markets. However, in response to those events we leverage our discipline, process and relationships to meet as many CEOs and CFOs as possible. We research what is actually happening to their businesses from a bottom-up perspective. There are some businesses that can survive and thrive during these macro disruptions and others who suffer. Our job of course is to invest in those who will have improving fundamentals moving forward and avoid those who will see their cash flows negatively impacted.             

Times like April and March are not times to hide under our desks when fears around uncertainty escalate.  It always amazes me when we talk to our sell-side relationships at times like we saw this past spring where we hear competitors are cutting their research budgets dedicated to travel to meet companies firsthand. The Volatility Index pictured below is commonly perceived to be a measurement of fear. Two years ago, we were prescient when we decided to add Vishal Hingorani to our team after he expertly traded volatility at TD, one of the world’s largest banks for the past 20 years. We strongly believed then that the world would become much more volatile due to massive amounts of government debt, large government deficits, post-Covid cost pressures as a result of sticky inflation, geopolitical tensions between the U.S. and China, war risks, etc.  And as you can see in the chart below, our call on volatility has been accurate since Vishal joined the Wealhouse team. We are always happy to discuss the skills Vishal has taught us to take advantage of these episodes of volatility spikes. 

VIX Index

SAMPLE OF SCOTT’S 2025 IN-PERSON RESEARCH MEETINGS

SAMPLE OF DEVON’S 2025 IN-PERSON RESEARCH MEETINGS

As we wrote in April at the height of the tariff fears, we have anchored our portfolio to companies that have clean balance sheets, and businesses selling at attractive prices with good management teams and business plans showing true competitive advantages. My mentor always taught me to question whether the decline in a company’s stock price was a two-quarter problem or a set of issues that would take longer to resolve and/or be a structural decline. I learned that investors tend to overreact to two-quarter problems. Based on our discussions with companies we determined that for certain businesses, tariff fear was going to be a two-quarter problem and the U.S. would eventually look to negotiate since tariffs were not the main driver of the Republican win last fall and mid-term elections will be here before we know in 2026.

We do not perceive ourselves to be thematic investors but there are certain powerful secular themes that we feel are shaping the world of the future. It is our job to invest in those leading companies that are almost guaranteed to be winners in the medium- and long-term because of these secular tail winds. Sell-offs like those experienced in April are actually a gift to those willing to look beyond a two-quarter problem. Arguably, the most powerful theme to impact the global economy for the rest of this decade, and in the decades to come, is the impact of Artificial Intelligence (AI). When I started Wealhouse in 2008, I told all our analysts that, no matter their specialty, they should also be tech analysts. Today I tell everyone that they should ultimately be AI analysts and as you can see below more and more companies across all industries are adopting AI.

9.2% OF FIRMS ACROSS ALL INDUSTRIES HAVE ADOPTED AI, UP FROM 7.4% LAST QUARTER

After the release of China-based Deepseek’s AI model in January this year, our team member, Devon Morrison, did a podcast to help explain some of Wealhouse’s high-level thoughts on AI. I highly recommend listening to hear some of his views on how to benefit from AI. For compliance reasons, Devon was not allowed to discuss examples of companies that we believe are beneficiaries versus the obvious winners of trillion-dollar market cap hyper-scalers like Alphabet, Amazon, Meta, Microsoft, and chip suppliers like Nvidia, Broadcom, AMD and Marvell. In the paragraphs below I will highlight some of the winners that we own that will benefit from major growth AI related cap ex by the Hyperscalers.

MAGNIFICENT 7 CAPEX AND R&D SPENDING, Y/Y

Two years ago, when Devon joined Wealhouse after graduating with a science degree, we asked him to research the winners and losers from across the AI food-chain. Having worked summer jobs in software where he coded in Python he was able to attack this project with very differentiated skills well suited for AI research. Devon duly identified companies for us to study for investment purposes from obvious sectors such as semiconductors and software. Not so obvious a couple years ago, however, was a company named Vertiv, that made cooling equipment for data centres, since AI chips generate a lot of heat. As well, a basic cable and copper wire company from Texas, called Encore Wire, allowed for electricity transmission in the data centres running all the AI models. Devon also ascertained in his framework that a rare-earth company from Nevada, named MP Materials, and another from Australia called Lynas would benefit from the physical world’s need to power all the devices that come about from AI advancements—such as humanoid robots and other automation companies, like Google’s Waymo with its autonomous car fleet and Tesla’s robo-taxis.

Wealhouse benefitted this quarter from an up-and-coming chip supplier listed in the UK, called Alphawave. It received a takeover offer from a mega-cap semiconductor company called Qualcomm. Last year, Devon and I travelled to their UK offices to meet members of their management team. Alphawave’s portfolio of products allow semiconductor chips to transmit data faster and with less power. Speed and power are two of the biggest physics problems to solve for the future of AI, as connectivity solutions progress to five nanometer chips and beyond. Devon, with his focus in physics, was able to benchmark that this underwater IPO from 2021 was in a good place to compete with larger competitors like Broadcom and Marvel to help the hyper-scalers solve for future AI chip needs around power consumption and data speed needs.  

Several people have asked me why we hired someone who studied physics to join our investment research team, since most analysts and money managers have business degrees. The reality is that more and more CEOs leading companies like Alphawave have science backgrounds. For example, Tony Pialis from Alphawave has a Bachelor of Science and Master of Engineering in Electrical Engineering from the University of Toronto. If we did not have Devon at that UK analyst day, it is very unlikely that we would have come away being able to buy that stock. As a Warren Buffet disciple, I have always tried to stay within my ‘circle of competence.’  When it comes to the physics of AI, Devon is definitely smarter than we are and those of our competitive peers on Bay Street, Wall Street and, in Alphawave’s case, Fleet Street!

ALPHAWAVE (AWE LN)

It may sound counterintuitive, but all the tariff strife was actually really exciting for us. When the market experiences sell-offs like those we saw this past March and April, I get to dust off research files from companies I have met during past research trips over three decades that sell-off to price points which represent great value. Over my career I have compiled a lengthy approved list of well-managed companies with great business plans from around the world. As I regularly tell my teammates, there can be times when great businesses do not always make great investments because their valuations are stretched and offer insufficient margins of safety for macro sell-offs. One such company we got to buy recently is called Fielmann, which I first met on a tour of German small- and mid-cap companies back in 2003. Fielmann designs and manufactures specialty glasses, contact lenses and hearing aids. Regardless of what happens with tariffs, more and more people need eyeglasses and hearing aids as they age. My wife feels I need to consider investing in some hearing aids.

As I continue to travel across many different parts of Germany, Switzerland and Spain I always notice their well-located retail stores busy with customers. We like that the Fielmann founding family still owns over 70% of the business and has levered its number one position in Germany to make strategic acquisitions across different countries in order to further expand and leverage its proprietary manufacturing network. When we speak to their local customers, we consistently hear that they provide fast exams and better prices than their competitors. Fielmann is an example of a business in an industry benefitting immensely from the aging Baby Boom and Gen X demographics. Fielmann is also a company that was trading cheaper than the market, growing faster with higher levels of free cash flow and profitability, lower debt metrics and higher insider ownership. We still believe it can double or triple in size as it expands around the world.

FIELMANN (FIE GY)

As the rhetoric and threat of the highest tariffs the global economy has ever seen grew, we aggressively pivoted our capital allocation in Voyager to companies that would be minimally impacted. Again, I highlight an idea from Devon who, while working for Wealhouse as a summer student in 2017, suggested a video game company called Square Enix from Tokyo. At the time it had well known video game titles such as Final Fantasy, Dragon Quest and Kingdom Hearts. Since that time the stock has been a 3-bagger and constant core holding in Voyager. As we have seen its market cap increase from $3 billion Canadian to over $11 billion, thanks in part to rumours that it has become a takeover target by larger game developers we have recently begun to take profits before its upcoming stock split this fall. We still like Square Enix as a core holding, since insiders own over 20% of the stock, and it has compounded its dividend growth at 19% over the last 5 years. It has over 20% of its market cap in cash to support future game development to help grow its business.  

SQUARE ENIX (9684 JT)

When we gave this investment strategy the name Voyager, we liked the definition of Voyager as, “a person who makes a long journey involving travel by sea or in space.”  Alphawave, Fielmann, and Square Enix are three examples of companies that are just not available as investments here in Canada, and that were bought after due-diligence trips overseas. There are also opportunities for investment on our home soil, even though Canada is one of those nations most impacted by the threat of tariffs since it is Canada’s biggest export destination as you can see below.

MEXICO AND CANADA IMPACTED THE MOST

OH CANADA: AMOUNT OF DEBT AND DEBT-TO-GDP

Back in 2008, when we hired Justin Anis, he travelled with me to Montreal to meet companies that were selling off during the market meltdown of that year, after Lehman Brothers went bankrupt. Talk about an exciting time for Justin to start his investment career. I am convinced that starting his career during such a tumultuous time in the market is why Lions Bay is so good at protecting capital during difficult times.

One of the companies that Justin and I met on that trip was called 5N Plus, which went public in 2007. This past spring I arranged an update meeting with their CEO and CFO in Toronto, as Voyager had invested in their largest customer, called First Solar. We invested in First Solar, as clean energy stocks got walloped after Trump became President and he aggressively spoke about unwinding incentives put in place under Biden’ s administration to encourage investment in clean energy technologies.

We were pleasantly surprised to hear how much of 5N Plus’ business had pivoted to supplying key materials for the “space” industry. A match made in heaven for our Voyager fund when you consider one of the most famous space missions to explore the solar system was launched by NASA back when I was a kid in the 1970’s! It just so happens in 2021, the management of 5N Plus brilliantly purchased a German company called Azur Space, which was a leading provider of specialty semiconductors and materials for the space industry. This was before Russia’s invasion of Ukraine and the subsequent announcements from NATO countries like Germany that they were massively increasing their defence budget spending. Thus, the March/April sell-off in the stock presented a tremendous opportunity to buy a company with key manufacturing hubs in the U.S., Canada, Germany and China. We see no scenario where end-market demand for both solar and space products will decline in a world combating global warming and needing to protect and grow space assets for strategic defence reasons. Again, we are not thematic investors but the secular growth trends behind this company are very powerful and will allow them to double and triple the size of the business organically from here and experience accretion beyond expectations for their Azure Space purchase.

5N PLUS (VNP CN)

Another business that suffered a sell-off because of back and forth war of words between China and the U.S. was IMAX which has been a core holding for Voyager since the Hollywood strikes and post COVID doubts if moviegoers would ever return to theatres versus just watching all their entertainment at home from streaming services like Netflix, Amazon Prime or Disney Plus. As we like to say “you make the most money when you prove the most people wrong.” IMAX which is truly a one-of-a-kind royalty business model that can trace it roots back to Canada when it was founded the same year as the last time the Maple Leafs won the Stanley Cup in 1967. Since then, IMAX has cemented itself as the go to theatre technology to watch blockbuster and been affiliated with so many academy award winning Hollywood directors.  

We like that IMAX has steadily grown back free cash flow levels to pre-covid levels and believe investors are underestimating strong growth to come for them in overseas markets like India, China and Japan where local content movies are blossoming. Picking up on the name Voyager it is not lost on me that IMAX has flown on 17 space missions. For instance, the Kennedy space centre in Florida has two IMAX theatres that show footage of past space missions. I have to admit that I am not as big of a movie fan like other members of the Wealhouse team but I liked very much when Devon and I toured their head office in Mississauga, Ontario and I realized Wall Street was not giving them value for the massive amount of land they own near a major highway! IMAX is a powerful royalty business model with a strong management and optionality on future movie creativity.

IMAX (IMAX US)

While in Montreal in May, I got to do one of my favourite things, which is to visit a well-managed and well-capitalized company that saw its IPO go underwater.  Groupe Dynamite (GRGD) came public late in 2024 at $21 a share, and to illustrate how volatile the equity market can be, it traded down to $10.35 on April 8 and rallied all the way back to close at $26.25 on June 30. Obviously, apparel stocks that import most of their goods from Asia suffered as a result of high-level tariff threats. We heard CEOs of major American retailers like Walmart pushed back on 145% tariffs on China, and we assumed that the White House numbers would be curtailed.   

For those of you who follow me on LinkedIn, you would have seen a “selfie” I posted after completing a tour of GRGD’s Montreal distribution centre. Despite my daughter’s criticism about the quality of that selfie, she and her friends were able to share with me what they did and did not like about the Garage franchise, which specifically targets young female customers. They were quite knowledgeable about the upward trend in Garage’s prices, which are somewhat below higher-end brands like Abercrombie, Aritzia, Hollister, Uniqlo and Zara. This confirmed to me that GRGD had pricing power that would help off-set the tariff risk.

Investing in well-managed consumer brands like GRGD soon after their IPO has proven very profitable in the medium- to longer-term. To-date, I have similarly invested, over the course of my career, in Lululemon, Shoppers Drug Mart and Aritzia.  We believe GRGD’s two primary brands prominent in shopping malls–Garage and Dynamite—have the ability to double and triple their store count into the next decade.  We believe that investors are underestimating their ability to improve key operating metrics like return on capital employed as they continue to relocate stores from lower tier malls to higher tier ones. We also like that Groupe Dynamite will soon launch a UK expansion which we believe will lead to significant international growth opportunities. Our average share price on the stock is in the mid-teens and we are happy that they have already initiated a buyback, since the company was trading at a double-digit FCF yield. We also like that they have significant insider ownership and that every employee is allotted shares as part of their long-term incentive scheme. We like to be nimble in Voyager, and so like to invest in nimble small-cap companies like GRGD who can adjust their supply chains to tariff threats.

GROUPE DYNAMITE (GRGD CN)

One stock that has not outperformed for us this year is Calgary-based energy infrastructure company, Topaz Energy. It has a unique twist to its business model, which we do not feel is fully appreciated, in that it also collects royalties from top notch western Canadian oil and natural gas producers. Earlier this year I was a guest on BNN and spoke to the fact that for 10 years, Ottawa did so much to stymie the growth of Western Canada with regulatory and policy hindrances while allocating our hard-earned tax dollars to projects that did not have viable unit economics even with government subsidies like EV battery plants. We are hopeful, based on our discussions in recent months with many oil and gas companies from North America and around the world, that our new energy minister, Mr. Hodgson, will facilitate and aid Western Canada to attract capital and help generate future tax revenue to deal with our federal fiscal deficits. We hope he will also convince legacy ministers who don’t understand unit economics to properly recognize that well-managed companies like Topaz have best-of-breed environmental practices.

Now that I have finished my political rant, I will remind our readers that Topaz has a very strong capital structure, which is supported by industry-leading free cash flow generation. Even though it is a relatively young public company after its spin-off from low-cost natural gas producer Tourmaline, it has already accomplished a significant amount of growth while in the public markets. Topaz has been able to negotiate and acquire very attractive assets while there was so much industry uncertainty towards the fossil fuel industry. Their energy infrastructure assets are trading at a significant discount-to-replacement cost, and the undeveloped land bank gives them a long runway of royalty growth without significant future capital requirements. We anticipate steady growth in dividends from an asset base that already generates a dividend yield north of 5%.

TOPAZ ENERGY (TPZ CN)

In consideration of investing capital in the small- and mid-size businesses that Voyager holds, many would point out that U.S. large caps have outperformed other market cap sizes and geographies for well over a decade. Our response to that would be to say that Voyager has compounded at 11.9% despite the asset class and overseas markets underperforming, and also despite going through major market events like Covid. Imagine how it might perform if investors move more capital away from the largest companies and the largest stock market? I have pondered this possibility with each inflection point in my career, some of which have lasted longer than expected, as you can see in the U.S. dollar chart below. As the U.S. Fed gets increasing pressure to cut interest rates for the first time since last fall, at a time when many other global central banks have been cutting rates over the last year, we would expect that global investors will have more reason to diversify further away from U.S. dollar assets. One reason why I believe the Fed will cut rates is because we are not hearing about labour wage pressures from our research. For example, as we prepared for a recent meeting with Shopify we were impressed to hear that despite their solid 20% top line growth in the business their founder Tobi Lutke has a disciplined process around verifying that before hiring any new employees “cannot get what they want done using AI.” It is important to note that despite their growth Shopify’s total headcount fell from 8300 to 8100 employees for their most recent year end.
_{Source: Shopify CEO: Prove AI can’t do jobs before asking for more headcount}              

WE ARE EXITING A PERIOD OF U.S. EXCEPTIONALISM DOLLAR-WISE

FOREIGN INVESTORS OWN ONE-THIRD OF U.S. EQUITY MARKET

FOREIGN-OWNED U.S. DEBT, ADJUSTED FOR INFLATION, DECEMBER 2000 – MARCH 2025

THE GOOD NEWS IS GLOBAL CENTRAL BANKS ARE CUTTING INTEREST RATES – BAD NEWS IS WHY?

Recently, I read a book written by Dr. Alex Karp, the founder of software company Palantir. Palantir is becoming well known for helping western world corporations and governments convert their legacy data repositories into AI-capable, real-time decision-making tools. I highly recommend reading this book, called, The Technological Republic: Hard Power, Soft Belief and the Future of the West, in which he writes: “Some have predicted that language models with as many synapses as exist in the human brain—some 100 trillion connections—will be constructed within the decade.”

This statement sums up why we at Wealhouse took advantage of the market sell-off in April to buy more of our favourite companies involved in helping create, store and manage proprietary data for enterprises and governments. One leading AI data company that came to visit us recently is called Zeta–a leader in helping companies to acquire, grow and retain data. We were intrigued, when listening to their most recent conference call in April, by how the Founder and CEO responded in the following exchange:

ZETA EARNINGS CALL TRANSCRIPT

We have been pleasantly surprised with how much M&A activity there has been in the public markets, with larger companies wanting to buy smaller ones. This points to the valuation discrepancies between large and small companies and why we believe that the outperformance of large caps might be inflecting. In our portfolios this year we have seen Unite student housing in the UK, which has a 4 billion Sterling market cap, announce intentions to bid for our holding in Empiric student housing, also of the UK. As well, we benefitted from mega-cap health care company, Eli Lilly, making a takeover bid for a smaller genetic drug discovery holding we had in Verve Therapeutics. In my mind, if there is this much M&A activity being pursued when there is so much uncertainty around tariffs, war in the middle east, and a U.S. central bank holding on its interest rate policy, then we may be in store for a lot more M&A if rates are cut and tensions settle in the middle east and around tariffs.

One potentially negative consequence of tariffs is that in future, certain investors will look to allocate away from the U.S. While travelling in the UK during the month of May, I was surprised to meet many investors from different countries in Europe who were aggressively stating that they were looking to diversify investments away from the U.S., and in certain cases outright boycott allocating capital to U.S. General Partners. For the first time in many years, we are seeing consistent outperformance by our non-U.S. holdings versus U.S. companies. Only time will tell if this trend will continue. Meanwhile, we will stay diversified in best-of-breed companies from around the world.

17 years ago, Wealhouse was founded with the mindset of having a balanced tool box in order to determine which assets would win and which ones would lose in a world with more and more debt. Hence, during times when the bond and equity markets sell off, Amplus and Lions Bay long/short equity and credit strategies can outperform. When the world is a happier place and rallies occur, Voyager tends to capture more upside. No one truly knows if and when the large amount of government debt will cause unintended consequences but I should point out a major first happened during my career in April’s sell-off. It was the first time in my career that I saw the U.S. dollar go down the same day that both the U.S. bond market and U.S. equity market sell-off. Typically, there were diversification benefits to being invested across those three assets. This event foreshadows, in my opinion, why diversifying our partners’ and my family’s assets across all three of our strategies that have shown diversification benefits during times of strife.

The Voyager strategy was launched in 2018 because we increasingly noticed that awesome small-cap businesses were being underfollowed as more and more money was being managed by fewer and fewer firms. Restrictions precluded them from being nimble enough to invest down in the small- and mid-cap space. We are proud that our research process continues to be validated as we have now seen 22 companies from our Voyager portfolio receive takeover offers since inception.

The inefficiencies of these smaller companies are simply growing as more and more money is allocated to passive investment strategies. The thesis for Voyager is as strong as ever, since there is way more debt in place today and the recent acquisition in Canada of Burgundy Asset Management by Bank of Montreal further reinforces the idea that more and more money is run by fewer and fewer firms.  This is evidenced by the fact that BMO is the third largest owner of itself! And as you can see from the companies that Devon and I are getting to meet, our access to insights from global business franchises has never been better. Thanks to all our investors for your trust and support and I hope you have a great summer. Rest assured that the Wealhouse team are ready to capture opportunities from the next volatility catalysts.

U.S.: AMOUNT OF DEBT AND DEBT-TO-GDP

JAPAN: AMOUNT OF DEBT AND DEBT-TO-GDP

EU: AMOUNT OF DEBT AND DEBT-TO-GDP

MARKET STRUCTURE CHANGES HELPING US

Disclaimer

This Commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Wealhouse has no duty or obligation to update the information contained herein. This Commentary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Wealhouse believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.