Alluvial Fund achieved a 4.9% increase in the second quarter of 2026, culminating in an 8.0% year-to-date return. This performance unfolded against a backdrop of significant activity in small-cap and micro-cap markets, where AI and semiconductor-related enterprises experienced substantial growth. Despite this market fervor, the fund maintained its characteristic focus on value, contrasting with the broader market's momentum-driven enthusiasm. The fund manager views this conservative stance not as a drawback but as a deliberate feature, acknowledging that such a strategy may temporarily underperform when speculative trends dominate investor sentiment.
Key adjustments within the portfolio included navigating challenges and opportunities presented by specific holdings. Zegona Communications, a major contributor to the fund's 2025 returns, experienced a recent downturn despite strong operational performance and debt refinancing efforts. The fund attributed this to profit-taking, a transition in its shareholder base, and market overreactions to competitive threats from new entrants like Digi. Similarly, McDermott International, an energy EPC company, undertook a significant $500 million rights offering to bolster its balance sheet and enhance its long-term financial stability. This move, reminiscent of the Garrett Motion rights offering in 2021, aims to de-risk the company and unlock substantial future value, with Alluvial Fund fully participating to capitalize on the attractive post-offering prospects.
The fund's diverse holdings reflect a commitment to long-term value. Garrett Motion continues to expand its reach beyond the automotive sector, targeting data centers and utilities for its turbocharger technology. McBride Plc., a British manufacturer, showed resilience despite temporary margin compression from rising petrochemical costs, further strengthening its position with a strategic acquisition. GreenDot Corp. is progressing towards the sale of its technology assets and merger of banking operations, promising future upside from share buybacks. Talen Energy, acquired during its bankruptcy, has demonstrated excellent management, actively returning capital and reinvesting in modern generation capacity, positioning itself to benefit from increasing electricity demand. New acquisition Vistance Networks is undergoing a significant transformation, selling off its main businesses, indicating a likely future sale of the company. Gulf Marine Services is weathering geopolitical instability, with its shares stabilizing as panic selling subsides, and has secured new long-term contracts. EACO Corp. continues its impressive operational performance, with strong revenue and operating income growth, yet remains undervalued in the market. Finally, Digital Network SA, a Polish operator of digital billboards, has achieved remarkable growth and capital allocation through strategic acquisitions. Each of these companies underscores the fund's approach of seeking out overlooked opportunities with strong fundamentals and capable leadership, maintaining a multi-year holding period to maximize compounding benefits while remaining flexible to divest if the investment thesis changes or valuation becomes unfavorable.
The investment landscape constantly shifts, with market preferences oscillating between "quality" and "momentum." Currently, investor focus is heavily tilted towards rapid gains from trendy sectors. However, history teaches that such fixations are often transient. Adopting a long-term perspective, and investing in fundamentally sound companies with strong management and robust outlooks, regardless of their current popularity, consistently proves to be a more prudent strategy for sustained growth. By diligently identifying and supporting these undervalued opportunities, the fund aims to deliver consistent value to its partners, fostering enduring prosperity.
