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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Immersion delivered 22.3% in Q2 by largely holding their concentrated small cap portfolio of coiled springs. Small caps trade at dot-com bubble-level discounts to large caps despite strong fundamentals."
Immersion Investment Partners delivered 22.3% net performance in Q2 2023 versus 5.2% for the Russell 2000, with broad-based contributions from half their positions. The managers largely sat on their hands, adding to existing names and introducing only two small new holdings while exiting one position. They view their companies as high-quality and wildly mispriced coiled springs. Small caps are at their largest relative discount to large caps since the dot-com bubble, creating significant opportunity. The fund holds nineteen businesses ranging from $40 million to $11 billion market cap with a median of $600 million. Key new holding MPAA represents a reversion-to-the-mean play in auto aftermarket with significant earnings inflection potential. They reduced Basic-Fit by 50% due to European investor apathy and communication issues, while completely exiting IDT due to litigation risk and deteriorating fundamentals. The managers remain focused on patient capital deployment in undervalued small caps while being opportunistic with special situations when market dislocations create attractive short-term opportunities.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
The fund holds a concentrated portfolio of 19 positions with top five representing 57% of NAV. The managers provide detailed thesis summaries for individual holdings like MPAA with specific price targets and earnings estimates. They demonstrate conviction through position sizing and willingness to hold through volatility, though some hedging language around timing caps the score below 0.80.
Growth Outlook
The manager is constructive on small cap opportunities, noting they are at historically wide discounts and comparing the setup to post-dot-com bubble period which produced some of the best returns in small cap history. However, they acknowledge market inefficiencies can persist and timing is unpredictable.
Risk Appetite
The fund is fully invested with 19 positions but has been reducing concentration risk by trimming top-heavy weightings from historic 65-80% in top five holdings to 57%. They substantially reduced or exited positions like Basic-Fit and IDT, showing selective risk management rather than aggressive deployment.
Capital Deployment
The managers state they have done very little to the portfolio in the first six months, aside from adding to existing names and introducing two small sub-5% holdings while exiting one position. This represents modest rotation and selective additions rather than meaningful net deployment.
Forward Guidance
The managers plan to largely maintain current positioning, stating they will continue to beat investors over the head with anecdotes about cheapness until the universe becomes fairly valued. They are selectively opportunistic with special situations but not aggressively deploying new capital.
Language Signal
Language is more bullish than bearish with terms like coiled springs, wildly mispriced, high-quality, and significant opportunity set. However, this is balanced by acknowledgment of risks, market inefficiencies, and the need for patience.
Perceived Risk
The managers acknowledge several risks including that cheap can get cheaper, market inefficiencies can persist, and specific company risks like MPAA's debt position and customer concentration. However, risks are discussed as manageable rather than systemic threats.
Opportunity Density
The managers explicitly state the opportunity set remains quite large in their sub-$5 billion market cap universe, with small caps at historically wide discounts. They describe finding undiscovered gems and having a broad set of coiled springs, indicating abundant opportunities.
Time Horizon
The managers emphasize they don't judge themselves on ninety-day numbers and suggest a three-to-five year evaluation period is more indicative of skill. They discuss exercising patience and letting companies reach fair value over time, though they also engage in shorter-term special situations when opportunities arise.
