October 10, 2024
Dear Fellow Shareholders,
We begin this letter with an important update about the future of the Intrepid Small Cap Fund (“the Fund”). On or about November 22, 2024, the Fund will merge with and into the Intrepid Capital Fund. The Intrepid Capital Fund employs a balanced strategy with approximately 60% of its holdings in equity and 40% in fixed income. The equity focus for both funds is on small cap companies, however, the Intrepid Capital Fund also invests in midcap and a handful of large cap businesses. The security selection process and portfolio management approach for both Funds follows the same guiding principles.
The merger is being undertaken for two primary reasons. First, we have observed a more attractive opportunity set in the corporate bond markets today than in the stock market. We believe there are ample opportunities to earn equity-like returns while remaining senior in the capital structure and avoiding some of the whipsawing price swings of the stock market. Layering bonds into the portfolio will, in our view, allow investors to earn these returns, but with potentially less volatility. Second, the Advisor has restructured its business in response to thisperceived shift in opportunity set. We believe that the consolidation of the two Funds will allow the reoriented structure the best opportunity to deliver attractive results to clients.
The merger will be a nontaxable transaction, and we are not expecting either Fund to have a capital gain distribution following its 9/30/24 fiscal year end. Please do not hesitate to reach out with any questions related to the upcoming transaction.
Risk assets rallied during calendar Q3 as investors anticipated the Fed finally kicking off a rate cut cycle. The benefit of interest rate declines tends to be more pronounced for small caps which have a significant amount of floating rate debt, and are seen as more economically sensitive.
For the quarter ended September 30, 2024, the Intrepid Small Cap Fund returned 3.37% compared to 8.48% for its benchmark Morningstar Small Cap Index. As we have written in prior commentaries, we have observed a lower correlation between the performance of many of the Fund’s holdings and the performance of the broader market, resulting in a higher tracking error. Unfortunately, this was the case for several of the Fund’s holdings during Q3, resulting in the underperformance versus the benchmark.
Looking forward, we are optimistic about the combination of the two Funds. Importantly, we want to stress that the merger should in no way be interpreted as a lack of confidence in the small cap value asset class. Moreover, it reflects our growing conviction in our ability to earn these equity-like returns with less volatility.
Thank you for your investment.
Matt Parker, CFA, CPA
Intrepid Endurance Fund Co-Portfolio Manager
Joe Van Cavage, CFA
Intrepid Endurance Fund Co-Portfolio Manager