| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 12% | - | - |
Castlebay's UK equity fund presents what the manager considers one of the most compelling investment opportunities in thirty years. The fund trades at historically attractive valuations with three key metrics: 6% free cash flow yield, 4% dividend yield, and 12% annualized earnings growth - a combination not seen outside the Global Financial Crisis. The de-rating of quality businesses stems from interest rate impacts and momentum rotation toward alternatives like UK banks, defense, and energy companies. However, the underlying businesses continue growing earnings while trading at lower multiples. The letter concludes the Seven Powers series by examining Process Power through holdings like Compass Group, Craneware, Avon Technologies, and Intertek - companies with embedded organizational advantages that competitors cannot replicate. The fund sold Edwards Lifesciences due to valuation concerns at 30x earnings and business concentration risk. Despite geopolitical uncertainty including trade order fracturing and Middle East tensions, the manager maintains conviction in quality compounders with sustainable competitive advantages now trading at compelling valuations.
Quality compounding businesses with strong competitive moats are trading at historically attractive valuations, offering 6% free cash flow yield, 4% dividend yield, and 12% annualized earnings growth - a combination not seen outside the Global Financial Crisis.
The manager believes the current environment represents one of the most compelling investment opportunities in thirty years of investing, with the fund trading at record low valuations while maintaining strong fundamentals.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| 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. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 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 |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| 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 |
| TICKER | COMMENTARY |
|---|---|
| CPG.L | Compass Group is, in our view, the clearest manifestation of Process Power within the fund. Its industry-leading client contract retention rate of over 96% annually is not primarily a function of its scale, its brand, or its contractual exclusivity — though all three contribute. It is a function of operational excellence so consistently delivered, across thousands of institutional environments from hospitals to schools to corporate campuses, that the switching cost for the client has become effectively prohibitive. The processes by which Compass manages procurement, staffing, nutrition compliance and allergen management in a large hospital kitchen cannot be lifted from the organisation. They are embedded in the people and the systems over years of iteration. A competitor can win a tender on price. It cannot, in practice, replicate what Compass does when the contract begins. |
| CRNW | Craneware represents Process Power in its purest software form. Its revenue cycle management platform is not merely installed in US hospital finance departments — it is woven into the daily workflows of the billing teams that depend on it. The implementation process takes months; the institutional knowledge embedded in how each hospital uses the system is years in the making. The switching cost is not the cost of a new software licence. It is the cost of retraining an entire finance function, reintegrating with clinical systems and rebuilding the institutional memory of every billing edge case the team has ever resolved. That is a profound moat and explains the large difference between their high gross profit margins and their operating margins. Their team work with nearly one in two US hospitals integrating the systems to save the hospitals money. Interests are aligned. When the hospital wins by using its resources more efficiently, Craneware also wins through being an agent, a facilitator of this value creation. |
| AVON.L | Avon Technologies represents a particularly instructive variation on Process Power — one that illuminates how the advantage can be actively deepened rather than merely inherited. The ten-year technology lead in some of its respiratory protection products, that competitors themselves have acknowledged, is the product of decades of iterative design. It's a combination of materials science expertise and accumulated knowledge of how protection systems perform under the most demanding real-world conditions. A competitor can study the finished product. However, it cannot reverse-engineer the organisational knowledge — the failure modes tested and resolved, the material combinations evaluated and discarded and the human insight embedded in every design generation that produced it. The product is, in effect, the visible tip of a process iceberg. We anticipate seeing this manifested in a rising inventory turnover rate, which should in term drive a rising return on capital profile. The market believes Avon Technologies to be a margin story, when in effect it is a capital efficiency one. |
| ITRK.L | Intertek's testing and certification business derives its Process Power from accumulated regulatory accreditation and the depth of expertise that sits behind it. A testing laboratory is not merely a room with equipment. It is an organisation that has earned, through years of demonstrated competence, the right to issue certificates that regulators and customers in over 100 countries accept as definitive. The accreditations — to ISO standards, to national regulatory bodies, to sector-specific schemes — take years to obtain and must be continuously maintained. The knowledge required to perform the testing at the frontier of new materials, new electronics and new chemical compounds is not documented anywhere a competitor could simply read. It lives in Intertek's scientific staff and their accumulated experience. This is Process Power in physical form. |
| NVO | Novo Nordisk has both Cornered Resource (GLP-1 IP and manufacturing scale) and Process Power (peptide manufacturing expertise that took decades to develop). |
| RELX.L | RELX has Scale Economies, Switching Costs, and Network Economies simultaneously. |
| EW | Edwards Lifesciences is a genuinely high-quality business. Its clinical moat in transcatheter heart valves is real and its procedure data is unrivalled. Its management has demonstrated sustained execution over a long cycle. So, we do not dispute the quality of the franchise. However, the question of how we allocate capital within our fund, asks a different question: at what price does quality become a risk in itself? At a current multiple of approximately 30x trailing earnings — double the average rating of the broader Castlebay portfolio — we believe the market is pricing Edwards for near-perfection; and at precisely the moment the business has voluntarily concentrated its earnings stream into a single product category. That comes after it sold its Critical Care division in late 2024, meaning that its Transcatheter Aortic Valve Replacement (TAVR) business now accounts for over three quarters of revenues. Therefore, a combination of the valuation, the evolution of the business structure allied to the growing opportunities in the UK equity market, all contributed towards the decision to sell our position in the second week of March. |
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