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Annual Letter

Dear investors,

Since our inception in May 2022, the Fund return was -3.97%. Since inception of the Fund, the S&P500 has returned -7.06%. Year-to-date, the S&P500 has experienced a net loss of 19.44%, its largest calendar-year decline since 2008.

I present to you the comparison with the S&P500 index since it is the index most widely used as a long-term benchmark for portfolio managers (as around 90% of fund managers do not outperform the index during a 10-year period). Although I present the comparison with the S&P500 index, I urge investors to judge my performance over a period of five years or longer. Any short-term performance is rather the noise of the market than any clear indication of strategy or correct allocation of capital. If my short-term performance was positive, then that would consequently not be a reason for celebration as you cannot judge a long-term strategy based on short-term performance.

Obviously during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any given time, a fair proportion of our portfolio may be in the sterile stage. Furthermore, a lower annual return may therefore mean that we had the opportunity to buy more of our holdings for cheaper prices. This policy, while requiring patience, should maximize long term profits.

The Strategy

My strategy is based upon a concentrated value investing approach. I like to perform deep fundamental research to find and buy a stake in companies that I find value in. I like to hold 12 to 15 stocks diversified among various industries to diversify against any black swan events. This strategy offers my portfolio enough downside protection while also leaving enough room for my best ideas to play out. I protect the portfolio from serious losses by performing deep fundamental research and by using a margin of safety, not by avoiding or minimizing volatility. I see stocks as parts of businesses and analyze and value them according to that principle. This includes both buying low and buying the companies with a high discount to their intrinsic value. When you minimize losses and allocate capital when the odds are in your favor, you don’t lose and when you win, you win big. That is the backbone of a concentrated value approach.

I do not hold restrictions on portfolio management and can allocate a larger part of my portfolio to one or several stocks. I furthermore do not yield any restrictions to potential investments. Such restrictions harm the ability to invest freely and to fully deploy my strategy and can even diminish performance. This includes market caps, industries, ESG restrictions, portfolio sizes, number of stocks and country of origin. I hold 12-15 stocks because I like it that way, it leaves enough room for opportunities while making sure you deeply understand both your investments and your entire portfolio. I allocate capital based upon a risk/reward scenario whereas all positions (and sizes) are constructed according to that principle. If the numbers are simply too good, I may allocate more capital to that opportunity, certainly if the risk is contained or minimized towards the downside.


Basic mathematical principles tell us that to maximize our upside returns, firstly we need to minimize the downside as lost dollars are harder to replace (i.e. a 33% drop needs a 50% gain to breakeven). I do not hedge the portfolio with various instruments as hedging is surrendering towards the idea that you are unsure about your portfolio and individual positions. I hold securities and maintain a decent cash position to allocate capital to various opportunities presented by the market without the need to sell off other positions. Trying to avoid losses is done by deeply fundamental research and buying stocks cheaply and not by hedging your uncertain positions by buying various financial instruments. One could argue that buying dollar bills for 50 cents and therefore stocks that are cheaply priced towards their intrinsic value is all the hedging an equity portfolio requires.

I do not think that volatility is related to risk or risk of losses and the portfolio is therefore not constructed to minimize volatility. Each investor should understand that a concentrated value approach yields an above average high level of volatility and should not confuse volatility with risk (as is common in modern day finance). Again, risk is minimized not through building statistical models regarding volatility but rather through respectful and deep business evaluation and research. Traditional risk management considers beta, also known as market risk, as a measure of volatility or systematic risk of an individual stock in comparison to the entire market. According to that idea, risk management would therefore be appropriate to diversify in a lot of stocks to smooth out volatility and still be rewarded with an appropriate return. If you include enough stocks to eventually resemble the index volatility, then your returns will eventually resemble the index that you are so desperately trying to beat and doom yourself to mediocre performance. Deep business evaluation and research is ought to be useless as the efficient market assigns the correct values to all businesses. The entire finance industry operates mainly to the same models and therefore increases the volatility and opportunities presented by the market, so volatility can also be a tool to buy a good stock for a high discount relative to its intrinsic value.

Warren Buffet: “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.” (2011)

The Portfolio

I try to stay away from the most popular stock in the most popular industry. I do not assign any indicative value towards securities other than the value I find in them by performing deep fundamental research. I do not allocate capital towards businesses simply because they are popular, well-known, would make the portfolio look great on paper or are fun to talk about on your nephew’s birthday party. Peter Lynch prefers to avoid the hottest stock in the hottest industry; stocks that are heralded as the next big something; longshot companies at the cusp of solving the latest national problem; and stocks with the most exciting name. He also dislikes whisper stocks that attract imaginative, complicated, and emotionally appealing stories. Stocks that receive significant positive attention have greater risk of being over-bought and over-priced. High growth businesses in popular industries with low barrier to entry attracts a lot of competition and imitation. I tend to agree with him.

To the contrary, my strategy may well be exactly the opposite: I try to find beaten down unpopular undervalued stocks in disfavored industries. For these stocks the downward risk most of the times already happened, there is high emotion involved and some stories are not fully understood. These turnaround stories also have the highest potential for increases in returns. I focus on companies based upon EV/EBITDA ratio since I believe that to be a better measure of profitability and the value assigned to a company. I furthermore focus on free cash flow as that provides businesses opportunities to deploy their capital and achieve shareholder returns. I like companies that are buying back shares and have management that is shareholder friendly oriented. I furthermore like ”rare bird” stocks that offer special stories and opportunities such as spinoffs, asset plays, arbitrage opportunities and turnarounds because of the asymmetric risk/reward ratio involved. Some companies are so cheaply priced that there seems almost no further downside risk to that specific scenario. I furthermore like companies with recent catalysts that would make it hard to analyze and value the company correctly such as mergers, scandals or trouble, therefore creating opportunities for the observant investor. I calculate and adjust the financial statements to recent situations to derive at my fair value of the company which most of the time is not in line with the price attached to the company by the market.

I hold my positions for the long term if the fundamentals of the stock stay the same or improve. I sell when my profit target (value) is reached. Although my potential profit could be higher when I hold on just a little longer, in the entire history of humanity, no one has ever gone broke taking profits. If the company does change fundamentally or they don’t show good prospects, I close the position and look for new opportunities. Investing requires both ‘’science and art’’ from the individual investor to form his qualified opinion and specific investment actions. The more qualitative ‘art’ of investing is hard to explicitly state on paper and although I love to elaborate further about the portfolio selection criteria, I think those are best explained below by the current holdings in our portfolio.


2023 Outlook

The past year saw a moderate decline in stock prices and the market decline has created greater opportunities among undervalued situations with positive long-term outlook for potential returns. I specifically use the word ‘moderate’ since casual reading of recent media outlets would suggest that the decline is much greater. One could argue to be ‘greedy when others are fearful’ as we saw a lot of fear in the market in the past year. This does not, however, suggest that the market is unable to decline more and create both further investment losses and bargain situations in the stock market. As I do not attempt to forecast stock prices in the short or medium term, I have no idea whether broad market indexes will rise, fall or go sideways for the upcoming year, period or decade. Although past performance is no guarantee for future results, it is a rather useful indicator because the one constant in financial markets is human nature and human nature can be highly emotional, volatile and irrational. If you would compare the 2022 bear market with historical bear markets this would suggest more pain ahead but then again the economic situation and outlook may well be different from those economic situations in the past that accompanied historic market drawdowns.

I do think that the short-term outlook is rather negative across financial markets and that such negative outlooks in the past have been good moments for opportunities in the markets. I furthermore think that our portfolio is well suited for potential long-term returns and potential short-term volatility.  We hold a decent cash allocation in the portfolio to buy a) any of the undervalued opportunities Mr. Market presents to us or b) to increase our positions in our current holdings.

I do not pretend to be able to predict market movements in the short-term and would feel that any energy used in this endeavor would take energy away from my main tasks. I rather spend my energy looking at the investment opportunities not the condition of the general market itself. That will be our 2023 strategy. Please consider that our concentrated equity portfolio is one of high volatility and act accordingly. I personally have invested a large part of my net worth in the Fund and I hold no other equity securities. My entire professional focus is in this Eurykleia Fund and I therefore believe our goals and returns to be aligned.


Our Current Portfolio

Our portfolio currently consists of 12 marketable securities that are discussed in more detail individually below. I believe all holdings to be undervalued and for that reason have included them in the portfolio. Traditional risk management would suggest that our portfolio contains a high level of risk since it is not diversified into many stocks. In fact, traditional risk management is right in the fact that this portfolio has a high level of market volatility but is wrong in assuming that volatility is in any way related to risk. I do not include company A because I also hold company B and consequently pretend that that addition to the portfolio would in any way decrease the portfolio risk of serious investment losses. To the contrary, adding various random businesses without the deep fundamental research required upfront just for the sake of ‘diversification’ would only worsen the portfolio outlook and increase the risk of serious losses.

The portfolio is structured and prepared for a wide variety of potential economic situations in the upcoming year. All of our holdings are cash flow generating businesses that generate a high stream of free cash flow and do not depend upon the interest rates dictated by central banks for their growth and survival. We hold 15% of our portfolio in cash to take advantage of opportunities provided to us by the market.


We have allocated 25% of our capital to Brookfield Corporation and Brookfield Asset Management since there is value to be found in both businesses due to their recent spinoff of the asset manager. We hold 16% of our portfolio in two oil and gas producers (Ovintiv and Diamondback Energy) as the low allocation of capital in the industry and the shareholder friendly attitude of management provides opportunities for the coming period. We have furthermore some exposures to retail businesses that may be impacted by a dooming recession but a) these businesses together make up only 15% of the portfolio and b) these businesses are priced so cheaply that they are priced for a suggested bankruptcy instead of a potential recession.

Brookfield Corporation (14.86%)

Brookfield is a Canadian alternative asset manager that currently has over $750 billion assets under management across real estate, infrastructure, renewable power and transition, private equity, and credit. Brookfield furthermore holds equity investments in both their own investment funds and subsidiary businesses of $35 billion as well as a sizeable amount of $125 billion cash that can be deployed in their funds and the markets. They have grown their funds from operations annually by 15%. The recent downturn in the market means that they both must adjust the fair value of their investments to market prices and have more cheaper opportunities to deploy their vast amount of capital. More recently, they have distributed 25% of their asset management businesses towards shareholders in a recent spinoff. The Corporation, post spinoff, will own circa $150 billion of private and listed investments, including a 75% interest in the newly listed Manager.

Brookfield is known for building high growing businesses from scratch and eventually deploying them on the equity markets. They have done so successfully with their asset manager. Currently they are already building their next high profitable and strongly growing business: Brookfield Insurance Solutions which contributed with increased earnings to the distributable earnings that have grown by 39%. By holding our shares in the corporation, we own a claim on the profits received from all businesses owned by the corporation and we participate in the growth of all underlying businesses as well (such as the insurance solutions).


Brookfield Asset Management (10.72%)

Brookfield Asset Management has recently spinoff from Brookfield Corporation and is therefore a rather new company.  The manager earnings are based on the fees they receive on their invested capital as well as their portion fees of the investment profits (carried interest). The manager has grown their fee bearing capital from $141 billion in 2018 towards $407 billion in 2022 and AUM has grown by 19% YoY, or $66 billion. Their fee-related earnings have therefore also grown from $823 million in 2018 towards $2 billion in 2022 and have grown 21% YoY, or $352 million. 83% of their fee-bearing capital is long-dated or perpetual. Currently the manager is expected to pay a quarterly (annual) dividend of $0.32 ($1.28) which amounts to a dividend yield of 4.5%. Management furthermore expects their earnings to double in 2027 and to pay 90% of their earnings as a dividend. This means that in 5 years’ time at the current market price the dividend yield would be 9% as well as their earnings to double. Furthermore, the asset manager is able to buy investments at cheap prices and can demand bargain deals for private equity deals. Please notice that the corporation holds 75% of the shares of the manager and therefore receives a $1.37 billion dividend in 2022 alone, or 2.66% of their market cap of $51 billion (the corporation). We own the asset manager because we want to profit from our stake in a highly growing business that has successfully shown in the past that they are able to even outperform their own estimations.


Ovintiv (9.40%)

Ovintiv Inc. is a Canadian energy company that is engaged in the exploration, development, and production of oil and natural gas. The company is focused on unconventional oil and natural gas resources, including shale, tight oil, and tight gas. Ovintiv is one of the largest oil and natural gas producers in Canada and is also active in the Permian Basin in the United States. The company certainly looks undervalued with an EV/EBITDA ratio of 3.19, a free cash flow yield of 14.5% and return on equity of 71.25%. The company has focused on paying down debt and returning capital to shareholders. They have decreased their net debt from $4.6 billion to $3.6 billion in 2022 and have the approval to buyback 25 million shares (or 10% of their shares outstanding). Investors might stay away from oil companies because of the fear of a recession and the accompanying drop in oil prices, but even when oil prices drop to crude at $65, the company guides to free cash flow generation of $11B over the next 5 years. In other words, there’s a good shot the company will return nearly its entire market cap to shareholders over the next 5 years.

Qurate Retail Group (8.08%)

Qurate Retail Group is a multinational company that owns and operates several retail brands, including QVC, HSN, Zulily, and Ballard Designs. The company is known for its focus on home shopping and e-commerce and Qurate Retail Group’s brands offer a wide range of products, including apparel, home goods, beauty products, and electronics. YTD the stock dropped 78.89% towards a market cap of $652 million with a 10-year average of $1 billion free cash flow. Several negative issues such as a fire in a distribution facility, decreasing revenue, a high annual loss and recession fears have pushed the expectation of future profitability towards new low levels. The company, however, is paying down debt at an increasing rate and could buyback their debt on a discount due to rising interest rates. Furthermore, if the company can even come close to their average of $1 billion free cash flow, they can buyback their stock and retire nearly their entire market cap in one year. Since the stock has decreased significantly, it now offers a high margin of safety and a high upside opportunity. The company is currently valued at bankruptcy levels. If the company is able to only use a $100 million of free cash flow to buy back their own stock, they can retire 15% of their outstanding shares. Qurate Retail could be one of those rare turnaround opportunities that provide limited further downside risk and substantial potential upside returns.

Geo Group (7.09%)

The GEO Group, Inc. is an American multinational corporation that provides government-outsourced services, primarily in the field of corrections, detention, and mental health treatment. The company was founded in 1984 and is headquartered in Boca Raton, Florida. The GEO Group operates detention centers, prisons, and mental health facilities in the United States, Australia, South Africa, and the United Kingdom. The company contracts with various government agencies, including the Federal Bureau of Prisons, U.S. Immigration and Customs Enforcement (ICE), and state and local governments. Due to the government contracts that have a retention rate of 91%, the revenues and cash flows are highly constant and predictable. The company is furthermore paying of their debt and has a highly growing electronic monitoring business unit that has grown by 74% in the past year. The Geo Group is a real estate owner that records all their PPE at ‘at cost basis’ and therefore highly understates their balance sheet assets which consists for 50% of buildings. The company is growing their revenue and margins and has access to 82.000 correction beds across 102 facilities; The beds are currently valued as if the facilities are idle but the beds have an occupation rate of 85%. The Geo Group seems the perfect value play for the coming year since there is little downside risk of serious losses and there are several positive catalysts coming together.

Diamondback Energy (6.62%)

Diamondback Energy, Inc. is a publicly traded American oil and natural gas exploration and production company. It is headquartered in Midland, Texas and is focused on the acquisition, development, and exploration of unconventional oil and natural gas resources in the Permian Basin of West Texas and New Mexico. The company was founded in 2007 and went public in 2012. Diamondback Energy is one of the largest independent oil and natural gas producers in the Permian Basin and is known for its focus on using advanced technology and data analytics to optimize its operations. With a dividend yield of 6.56%, an EV/EBITDA ratio of 4.19 and a free cash flow yield of 13% the company seems highly undervalued. The general investment thesis surrounding oil companies is comparable to that of Ovintiv but Diamondback Energy carries less debt than Ovintiv, adds geographic diversification of revenues and is focused on improving free cash flows by performing strategic acquisitions. The acquisitions can be highly rewardable due to the low values of the industry assets and businesses. As long as oil prices remain elevated, so also the share price of Diamondback Energy.


Activision Blizzard (5.86%)

Microsoft has offered to buy Activision Blizzard for $95 per share in a transaction that is expected to complete in June 2023. With the current share price of $76 this amounts to a potential 25% return in 6 months. Although we believe that the deal will go through there is always uncertainty with arbitrage opportunities and we therefore have allocated only 5% of our portfolio towards this arbitrage play. We furthermore believe the downside risk to be minimal which contributes to the investment thesis.

Warner Bros. Discovery (5.11%)

Warner Bros. is down from a share price of $31 towards a current share price of $9.40, or a 70% decrease in price YTD. The company is struggling with the recent merger between Warner Bros. and Discovery and incurs high merger costs as well as depreciation and amortization that have been a downward pressure on its profitability. Investors are worried about the seemingly high amount of $47 billion debt. The company, however, has shown strong cash flows and is able to pay off their debt on a discount due to recent rising interest rates. For example, in the past two quarters the company paid off $6 billion of their debt with their cash flows. The CEO has great experience in the media industry and with turning around a media company. Although there are several problems within Warner Bros. Discovery, we believe the pessimism to be overstated and we expect a turnaround when the company can control their merger costs and regain profitability.


F&G Annuities & Life (4.79%)

F&G is a nationwide market leader for insurance solutions to retail annuity and life customers and institutional clients. The company has recently spinoff from parent company Fidelity National Financial and currently has a market cap of $380 million and a 4% dividend yield. They have grown their assets under management by 21% YoY towards $42 billion (which were $28.6 billion in 2020). The U.S. retirement and middle markets are growing, and F&G is well-positioned for continued growth in their retail and institutional channels. F&G has diverse product lines and have grown revenue with significant above industry growth numbers (sales grown 15% YoY). Recently, F&G reached an inflection point where they expect to start distributing a portion of their adjusted net earnings to shareholders over time, subject to F&G board of directors’ approval. YTD Q3 their net income was $581 million and their adjusted net earnings were $207 million. For the past 9 quarters, they managed to earn $100 million adjusted net earnings. Given the fact that F&G has grown by double digits in the past years and recently diversified into new revenue streams and has a market cap of only $380 million we highly think that the stock is undervalued.

Stellantis NV (4.23%)

Stellantis is the parent company of various auto brands such as Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Fiat Professional, Jeep, Lancia and Maserati. As the stock is not listed in the USA, the company only reports semiannually. The stock has dropped 35% from their high in 2022 due to recession fears and the broader market decline. Although the recession fear may be correct, it seems that Stellantis is punished before it has even committed a crime. With $50 billion in cash holdings and a market cap of $45 billion, the stock holds more cash per share than the current market price. The company has furthermore fully accelerated their EV strategy and has a broad diversified group of global customers. In the short term their earnings may of course deteriorate due to a recession but with an EV/EBITDA of 0.97 and cash flow yield of 48% it looks like the company is currently priced for a potential bankruptcy instead of a recession.

Hewlett Packard (3.66%)

Hewlett Packard (HP) is a technology company that offers a range of products and services, including personal computers, printers, software, and hardware. The company was founded in 1939 and has become a global leader in the technology industry. In recent years, the company has faced challenges as the technology industry has evolved and has undergone several major restructuring efforts to adapt to changing market conditions. HP has a strong free cash flow yield of 14% and has returned significant capital to shareholders. The company has returned $4 billion towards shareholders by share buybacks in 2022 and have thereby elevating earnings per share by 33% since 2018. The company furthermore carries a 3.88% dividend yield and has a highly shareholder friendly management that can run the business. HP has furthermore invested into more diverse revenue streams such as their recent acquisition of Poly. Approximately 75% of office workers are investing to improve their home setups. Traditional office spaces are also being reconfigured to support hybrid work and collaboration, with a focus on meeting room solutions. Currently, there are more than 90 million rooms, of which less than 10% have video capability. As a result, the office meeting room solutions segment is expected to triple by 2024 and HP is certain to profit from this transition.

Paramount Global (2.41%)

Paramount Global shares have dropped by 45.76% YTD. The company’s depressed value is due to a highly negative light on the global media outlook and DTC (direct to consumer) businesses. At a PE ratio of 3.85 and a dividend yield of 5.72%, we have time to wait out the storm surrounding media companies. The company is now priced to cheap to ignore any longer. Their streaming service Paramount+,  global revenue grew 95% YoY and they have added 4.6 million subscribers in the past quarter alone. They will launch Paramount+ in France, Germany, Austria and Switzerland in Q4 adding further to their subscriber amount and Paramount+ growing revenue. Total DTC revenue grew 38% YoY. In their theatrical unit: Top Gun: Maverick became the #1 best-selling digital sell-through title in the U.S. in its first week of release. The company continued to execute their differentiated strategy with strong IP assets (some of the studio’s most famous iconic films include Titanic, Forrest Gump, The Godfather, Indiana Jones, and Mission: Impossible) which they can all use for generating additional revenue. The company furthermore continues to pay down debt aggressively. In businesses, it can take some time before the growth strategy eventually shows up in the company’s financials, reaching consumers and building various new revenue streams but this brings opportunities towards early observant investors.

I have kept the discussion of our current portfolio to a bare minimum in the section above. I wanted to give the reader an insight into my work and provide enough material for further research. If any of you would like to receive more information or additional discussion on one of the portfolio holdings, please feel free to contact me. If you have any further questions, please feel free to reach out. I would welcome hearing from you.

Thank you for your time and trust.


Martijn Steeghs

Eurykleia Capital Management


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Eurykleia Investments is not a registered investment, legal or tax advisor or a broker/dealer. All investment/ financial opinions expressed by Eurykleia Investments are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that the all information is accurate and up to date, occassionally unintended error and misprints may occur.