In 2025, Alluvial Fund achieved an extraordinary 41.2% return, marking its most successful year in nine years. This impressive performance was driven by strategic investments in a diverse portfolio of often-overlooked companies across various sectors, including consumer staples, industrials, and telecommunications. The fund's success underscores a commitment to value investing principles, deliberately sidestepping speculative trends like AI-driven stocks. Key contributors to this strong showing included Zegona Communications, which excelled in its management of Vodafone Spain, and Crawford United, an Ohio-based industrial conglomerate acquired by SPX Technologies. The fund also made new, calculated investments in Sylvamo Corp, a paper manufacturer poised for a rebound, and Itafos Inc., a phosphate producer with significant potential, further diversifying its holdings and reinforcing its robust, long-term investment philosophy.
The year's outstanding returns were a testament to the fund's philosophy of identifying and nurturing value in companies operating in what might be considered 'unexciting' industries. While the broader market saw gains concentrated in high-growth technology and AI sectors, Alluvial Fund prospered through its stakes in entities dealing with everyday necessities and foundational industries. This included companies involved in household goods production, food processing, commercial real estate, and crucial raw materials like limestone and cement. This divergence from mainstream investment trends highlights a deliberate strategy to mitigate risks associated with market bubbles, ensuring portfolio resilience against potential economic downturns.
A standout performer for Alluvial Fund was Zegona Communications, which delivered exceptional results by successfully executing its strategic plan for Vodafone Spain. This plan encompassed the sale of valuable fiber networks, significant reductions in operational costs, renewed customer growth, and substantial capital returns to shareholders. Zegona's proactive measures, including a €1.4 billion cash distribution and aggressive share repurchases, dramatically reclassified its market perception from 'speculative' to 'investable.' Despite this re-evaluation, the fund's management believes Zegona remains undervalued compared to its European telecom counterparts, with further upside expected from additional asset divestitures and continued operational improvements.
Another significant event was the acquisition of Crawford United, an Ohio industrial conglomerate, by SPX Technologies for $300 million. This transaction represented a highly profitable exit for Alluvial Fund, yielding a sevenfold return on investment and an annualized gain of approximately 32%. While acknowledging the financial success, there was a tinge of regret that the company's full potential might have been realized under continued independent operation. This sale exemplified the complexities of investing in family-controlled businesses, where the interests of founding families and external shareholders can occasionally diverge, especially during acquisition processes.
Garrett Motion also significantly bolstered the portfolio, with its stock price doubling after the company repurchased 9% of its outstanding shares, initiated a dividend, and committed to returning 75% of its free cash flow to shareholders. The company's long-term prospects improved as market fears about product obsolescence in the face of electric vehicle adoption subsided, and a large share overhang from previous hedge fund ownership dissipated, attracting broader investor interest.
New additions to the portfolio, Sylvamo Corp and Itafos Inc., reflect the fund's continuous search for undervalued opportunities. Sylvamo, a paper manufacturer, was acquired with the expectation of a strong recovery from short-term market headwinds, driven by capacity expansion and industry-wide supply adjustments. Itafos, a phosphate producer, was a rare venture into commodity markets for the fund, justified by its robust financial health, low valuation, and the critical global demand for phosphates, which are essential for crop nutrition and emerging battery technologies.
The strategic shift over the years, from 'truly tiny' companies (under $100 million market cap) to 'merely very small' companies ($100 million to $2 billion market cap), reflects an evolving analytical capability and accumulated experience within Alluvial Capital. This adjustment acknowledges the changing market landscape, where fewer high-quality micro-cap opportunities exist, and emphasizes a preference for slightly larger, yet still often overlooked, businesses that tend to be better managed and more financially stable. This considered approach ensures that the fund continues to find attractive investments that can meaningfully impact its performance, without straying into the highly visible, frequently overvalued segments of the market.