| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| - | - | - |
Castlebay delivered a 9% return in Q2 2026, outperforming the UK market by 5%, as capital began returning to quality stocks. The fund maintains a concentrated portfolio of high-quality businesses with a 37% return on equity versus 15% for the market, 24% operating margins, and 91% cash conversion. Despite the rally, the fund still offers a compelling 5.5% free cash flow yield and 3.6% dividend yield, with the valuation dislocation between 12% annualized earnings growth and share price returns beginning to reconcile. The manager introduced a new analytical framework based on Michael Mauboussin's cash flow lifecycle stages, focusing on Stage 3 compounders that the market underprices due to unexciting headline growth rates. A new 2% position was initiated in Spirax Group, a global leader in steam and thermal energy management with a razor-and-blade business model producing strong recurring revenues. The company's Watson-Marlow division provides exposure to structural growth in biopharmaceutical manufacturing. The manager believes a style shift toward quality in the UK has only just begun, suggesting further upside as valuations normalize.
Castlebay invests in high-quality UK businesses trading at attractive valuations, targeting companies with premium returns on equity (37% vs market 15%), strong cash conversion (91%), and sustainable competitive advantages that generate free cash flow yields significantly above the market (5.5% vs 4.2%).
The manager expresses optimism that an inflection point may have been passed, with capital returning to quality in the UK market. The valuation dislocation between earnings growth and share price returns is beginning to reconcile, and there remains significant room for further re-rating given the fund's attractive free cash flow yield of 5.5% and consistent earnings growth profile.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jul 9 2026 | 2026 Q2 | AJB.L, EW, JOBY, ONT.L, QS, SPX.L | Cash Conversion, Free Cashflow, Industrial Machinery, Quality, Return On Equity, United Kingdom, value | SPX.L | Castlebay returned 9% in Q2 2026, outperforming the UK market by 5% as capital rotated back to quality. The fund targets high-quality compounders with 37% ROE and 5.5% free cash flow yields trading at attractive valuations. A new position in Spirax Group exemplifies the strategy: a cash-generative industrial business with a structural growth engine in biopharma that the market undervalues. The UK quality re-rating has only just begun. |
| Apr 13 2026 | 2026 Q1 | AVON.L, CPG.L, CRNW, EW, ITRK.L, NVO, RELX.L | Competitive Advantage, Compounding, Process Power, Quality, United Kingdom, value |
CPG.L AVON.L ITRK.L EW |
Castlebay's UK equity fund trades at historically attractive valuations with 6% free cash flow yield, 4% dividend yield, and 12% earnings growth. Quality businesses have been de-rated despite continued earnings growth, creating compelling opportunities. The fund focuses on companies with Process Power competitive advantages while maintaining conviction despite geopolitical uncertainty. |
| Jan 9 2026 | 2025 Q4 | ADM.L, AJB.L, AZO, BATS.L, CPG.L, DGE.L, GRG.L, NXT.L | brands, Cornered Resource, Quality, regulation, United Kingdom, value | - | Castlebay's UK fund underperformed in 2025 despite superior quality metrics, with companies generating 35% ROE versus market's 14% while trading at attractive 5.5% free cashflow yield. Recent portfolio repositioning included new positions in Greggs and AJ Bell. Management believes current valuations create compelling opportunity for performance reversal in 2026. |
| Jun 30 2022 | 2022 Q2 | AVON.L, RIO, TSLA, UL | long-term, Quality, rates, United Kingdom, value | - | Market confusion over rising rates has wrongly punished quality companies as 'bond proxies' while favoring cyclical stocks. Castlebay's portfolio trades at 4.7% free cashflow yield with 44% ROE versus market's 18%, creating compelling long-term opportunity. Fund remains fully invested in quality businesses trading at top-end valuations despite fundamental strength. |
| Mar 31 2022 | 2022 Q1 | CMPGY, SHEL | Compounding, Quality, Resilience, ROE, uncertainty, value |
SHEL CMPGY |
Quality-focused fund emphasizes resilient businesses with strong returns on equity over forecasting. Q1 2022 saw temporary underperformance as Ukraine conflict drove capital from quality companies to commodities like Shell, which rose 30% despite poor fundamentals. Manager views this divergence as unsustainable and maintains full investment in quality companies for long-term compounding. |
| Sep 30 2021 | 2021 Q3 | AVON.L, CRW.L, KNEBV, UL | Acquisitions, Barriers, defense, innovation, Quality | AVON.L | Castlebay targets exceptional quality companies with sustainable competitive advantages in an era of accelerating technological disruption. The fund's quality metrics significantly outperform the market across profitability and leverage measures. Avon Protection exemplifies the approach through its strategic transformation to a focused defense contractor with strong competitive moats and sole-source contract wins. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q2 |
QualityThe fund maintains a concentrated focus on quality businesses with premium returns on equity (37% vs market 15%), high operating margins (24%), and strong cash conversion (91%). The fund's quality-value framework targets companies with positive ROIC-WACC spreads and high free cash flow conversion, currently offering a 5.5% free cash flow yield despite a 9% quarterly rally. |
Return on Equity Cash conversion Operating margin ROIC |
ValueThe fund emphasizes attractive valuations with a 5.5% free cash flow yield and 3.6% dividend yield, noting that even after a 9% rally, the valuation remains compelling. The manager highlights a persistent dislocation between annualized earnings growth and share price returns that is beginning to reconcile as capital returns to quality in the UK market. |
Free cashflow yield Dividend yield Valuation Mispricing | |
United KingdomThe fund is positioned in UK equities and has outperformed the UK market by 5% during the quarter. The manager notes that capital appears to have been attracted back to quality in the UK, suggesting a style shift that looks as if it has only just begun, representing a potential inflection point. |
UK market Style shift Outperformance | |
Industrial MachineryThe fund initiated a 2% position in Spirax Group, a global leader in steam, fluid and thermal energy management serving industrial customers. The company operates through Steam Thermal Solutions, Electric Thermal Solutions, and Watson-Marlow divisions, offering mission-critical infrastructure with a razor-and-blade commercial model producing strong ROIC and recurring revenue streams. |
Steam Thermal energy Pumps Industrial equipment | |
BiotechnologyThe fund has exposure to biopharmaceutical manufacturing through Spirax Group's Watson-Marlow division, which supplies precision pumps and single-use fluid-path technology. This segment provides structural growth as biologic drug production continues to shift away from older stainless-steel systems, representing a genuine Stage 2 growth engine within the portfolio. |
Biopharmaceutical Single-use technology Drug manufacturing | |
| 2026 Q1 |
QualityThe fund focuses on quality compounding businesses with strong competitive moats. These businesses have continued to grow earnings while being de-rated by the market, creating attractive valuations with 6% free cash flow yield, 4% dividend yield, and 12% annualized earnings growth. |
Quality Compounding Moats Earnings Growth Valuation |
Process PowerThe final installment of the Seven Powers series focuses on Process Power - competitive advantages from embedded organizational processes that cannot be replicated. Examples include Compass Group's operational excellence, Craneware's integrated workflows, and Intertek's accumulated regulatory expertise. |
Process Power Competitive Advantage Operational Excellence Organizational Knowledge | |
| 2025 Q4 |
QualityThe fund focuses on high-quality companies with superior returns on equity (35% vs market 14%), higher operating margins (24% vs 16%), and better cash conversion. These quality metrics support the fund's investment philosophy of owning businesses rather than trading share prices. |
Return on Equity Operating Margins Cash Conversion Business Quality |
ValueThe fund trades at an attractive 5.5% free cashflow yield versus 4.6% for the market, despite superior quality metrics. The manager views current valuations as compelling given the operational performance and expects share prices to eventually reflect economic value generated. |
Free Cashflow Yield Valuation Economic Value | |
TobaccoBAT represents a cornered resource through the intersection of brands, regulation and distribution. Regulatory barriers and licensing regimes make it extraordinarily difficult for new entrants, while incumbents retain pricing power within defined boundaries, supporting cash generation beyond tobacco volume peak. |
BAT Regulatory Barriers Brand Equity Pricing Power | |
| 2022 Q2 |
QualityManager emphasizes quality businesses with persistently strong returns on equity and invested capital that are being wrongly sold off as 'bond proxies'. The fund's companies deliver 44% return on equity versus 18% for the market, with superior operating margins and lower debt levels. |
Return on Equity Operating Margins Cash Conversion Free Cashflow |
ValueCurrent market confusion has created compelling opportunities as quality companies are being offered at attractive valuations. The fund's free cashflow yield of 4.7% sits at the top end of the historical range, providing good nominal and relative yield even with rising gilt yields. |
Free Cashflow Yield Valuation Relative Yield Opportunity | |
RatesRising interest rates have caused market rotation away from quality companies wrongly perceived as 'bond proxies' into lower quality cyclical stocks. The manager views this as temporary market confusion that creates opportunity for long-term investors. |
Interest Rates Bond Proxies Market Rotation Gilt Yields | |
| 2022 Q1 |
QualityManager emphasizes investing in quality companies with resilient business models that can navigate uncertainty. The fund focuses on businesses with strong returns on equity, low debt levels, and proven ability to compound value over time through retained earnings reinvestment. |
Quality Resilience ROE Compounding Value |
OilShell PLC rose 30% in Q1 due to Ukraine conflict and commodity price impacts, but manager views this as unsustainable given Shell's low 5% return on equity and 3% retained return on equity. Capital has been misallocated from quality companies to lower quality energy businesses. |
Oil Shell Commodities Ukraine Energy | |
InflationThe letter acknowledges inflation rates at 30-year highs in many countries as a manifestation of price instability that companies must navigate. This uncertainty reinforces the importance of investing in resilient business models. |
Inflation Uncertainty Prices | |
| 2021 Q3 |
QualityThe fund focuses on quality companies with high returns on equity (42% vs market 19%), strong operating margins (21% vs market 7%), and lower leverage. These quality characteristics provide protection and enable long-term compounding returns. |
Quality Returns Margins Leverage Durability |
DefenseDetailed analysis of Avon Protection's transformation from dairy business to focused defense contractor. The company has made strategic acquisitions and secured sole-source contracts, positioning it as a leader in military and first responder protection equipment. |
Defense Military Protection Contracts Acquisitions |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Jul 9, 2026 | Fund Letters | Castlebay Investments | SPX.L | Spirax Group | Specialty Industrial Machinery | Industrial Machinery | Bull | London Stock Exchange | Biopharmaceutical Equipment, cash generation, Equity, high-ROIC, industrial machinery, Mission-critical Infrastructure, Quality, razor-and-blade model, recurring revenue, single-use technology, Stage 3 Compounder, Steam Systems, Thermal Energy Management, Value | Login |
| Apr 13, 2026 | Fund Letters | Castlebay Investments | ITRK.L | Intertek | Specialty Business Services | Research & Consulting Services | Bull | New York Stock Exchange | Compliance, global reach, Process Power, Quality Assurance, Regulatory Accreditation, Research & Consulting, scientific expertise, Testing & Certification | Login |
| Apr 13, 2026 | Fund Letters | Castlebay Investments | EW | Edwards Lifesciences | Medical Devices | Health Care Equipment | Bear | New York Stock Exchange | capital allocation, Clinical Moat, Healthcare Equipment, Heart Valves, medical technology, Single Product Concentration, TAVR, Valuation risk | Login |
| Apr 13, 2026 | Fund Letters | Castlebay Investments | CPG.L | Compass Group | Restaurants | Restaurants | Bull | New York Stock Exchange | Contract Retention, defensive, Foodservice, Institutional Catering, Moat, operational excellence, Process Power, switching costs | Login |
| Apr 13, 2026 | Fund Letters | Castlebay Investments | - | Craneware | Other | Health Care Technology | Bull | NASDAQ | healthcare software, Hospital Systems, Process Power, recurring revenue, Revenue Cycle Management, SaaS, switching costs, Workflow Integration | Login |
| Apr 13, 2026 | Fund Letters | Castlebay Investments | AVON.L | Avon Technologies | Aerospace & Defense | Aerospace & Defense | Bull | New York Stock Exchange | Aerospace & Defense, capital efficiency, CBRN Protection, Defense, Materials Science, Process Power, Respiratory Protection, Technology Lead | Login |
| Mar 31, 2022 | Fund Letters | Castlebay Investments | SHEL | Shell PLC | Oil & Gas Integrated | Integrated Oil & Gas | Bear | New York Stock Exchange | Bear Case, commodity, Integrated Oil, Low ROE, Oil & Gas, overvalued, Quality Investing, Ukraine conflict | Login |
| Mar 31, 2022 | Fund Letters | Castlebay Investments | CMPGY | Compass Group PLC | Restaurants | Restaurants | Bull | New York Stock Exchange | asset turnover, Contract Foodservice, COVID Recovery, Cyclical Recovery, margin compression, Quality Business, Temporary Headwinds | Login |
| Sep 30, 2021 | Fund Letters | Castlebay Investments | AVON.L | Avon Protection plc | Aerospace & Defense | Aerospace & Defense | Bull | New York Stock Exchange | acquisition, Body Armor, Defense Contractor, Equity, First Responders, Helmets, high barriers to entry, law enforcement, Military Equipment, Respiratory Protection, Sole-source contracts, turnaround, US Department of Defense | Login |
| TICKER | COMMENTARY |
|---|---|
| SPX.L | Spirax Group is, almost literally, a descendant of the Boulton & Watt story: a global leader in steam, fluid and thermal energy management, serving industrial customers for whom these systems are mission-critical infrastructure. The group operates three linked divisions — Steam Thermal Solutions and Electric Thermal Solutions, which sell and service the industrial steam and electric heating systems that keep factories, hospitals and food plants running; and Watson-Marlow, which supplies precision pumps and single-use fluid-path technology into biopharmaceutical manufacturing. We purchased an initial 2% fund position in Spirax for reasons that map directly onto the questions we ask of every candidate: does it earn a return on capital that clears its cost of capital by a wide and defensible margin; do its revenues have a genuine multi-year runway rather than a single cycle of demand; and are we being offered the stock at an attractive valuation entry point? On the first of these points, Spirax's direct-sales, 'razor-and-blade' commercial model — proprietary equipment followed by decades of recurring consumables, spares and service revenue — produces a ROIC that sits comfortably clear of its cost of capital. The recurring nature of its service also helps in sustaining that spread through the cycle rather than requiring it to be re-earned on every piece of new equipment sold. Secondly, the group's revenue runway is unusually well diversified, with Steam Thermal Solutions and Electric Thermal Solutions offering a long growth profile with a highly durable tail of mission-critical replacement and service revenue. Watson-Marlow's business gives exposure to single-use fluid-path technology in biopharmaceutical manufacturing, giving the group a genuine structural growth trajectory on top, as biologic drug production continues to shift away from older stainless-steel systems. On the third, valuation point, we believe the rising earnings growth profile is attractive. Taken together, we see a mature, cash-generative core trading at a valuation that does not yet fully credit the structural growth engine sitting inside it. Put in the lifecycle language introduced earlier in this letter, Steam Thermal Solutions and Electric Thermal Solutions are unambiguously Stage 3, while Watson-Marlow still exhibits genuine Stage 2 characteristics. The market, in our judgement, persists in valuing the group primarily through the lens of its more cyclical industrial activity. If Edwards LifeSciences, the sale of which we reported in our last letter, was a Stage 3 business priced as Stage 2, Spirax is close to the mirror image—a Stage 2 growth engine housed inside a Stage 3 valuation. |
| AJB.L | Strong results from some of our holdings, like AJ Bell, mean that the free cashflow yield for the fund remains above 5.5% and the dividend yield of 3.6%; with the earnings growth profile remaining the same. |
| ONT.L | Oxford Nanopore Technologies, the Oxford-founded DNA sequencing business, grew revenue to approximately £223–224 million in 2025, up around 22% on a reported basis, yet it still reported a loss of £145 million for the year, with cash and liquid investments falling to £303 million from £404 million. It continues to invest toward a reaffirmed target of adjusted EBITDA (Earnings before interest, depreciation and amortisation) breakeven in FY27 and cash flow breakeven in FY28. |
| QS | QuantumScape, developing solid-state batteries for electric vehicles, generated customer revenue of only around $20 million in 2025 against operating cash used of $186 million in the first nine months alone, funded by a $1 billion cash balance bolstered by a further $264 million raised through an equity offering. |
| JOBY | Joby Aviation, the electric air-taxi developer, reported fourth-quarter revenue of $31 million and used $539 million of cash during 2025, subsequently raising a further $1.2 billion via equity and convertible debt, with its core air-taxi revenue still awaiting FAA type certification rather than flowing from commercial service. |
| EW | If Edwards LifeSciences, the sale of which we reported in our last letter, was a Stage 3 business priced as Stage 2, Spirax is close to the mirror image—a Stage 2 growth engine housed inside a Stage 3 valuation. |
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