Dear Partners,

The Fund has been positive since inception (3/1/2017) of this year, however, was down slightly in Q4. The long positions contributed positively for the quarter and the fund’s performance was partially limited by a negative contribution from the short book and a mixed combination from the options portfolio.

I have attached Nightview Capital’s 2018 Investor Outlook which highlights our investment themes going into next year, the 2020s, and beyond. Within our five core research verticals—Retail, Energy, Cloud, Transportation, and Television—we continue to see disruptive trends that we believe will provide profitable opportunities for many years to come.

Our goal remains to return multiples on the Fund’s capital—tax efficiently—over a long time-horizon. While other managers attempt to squeeze returns out of companies through financial engineering or temporary performance increases, we remain focused on the long term by investing in great businesses.

During the back half of the year, our short positions contributed negatively to the performance of the fund. As a result, we have implemented tighter risk control metrics on our positions going forward.

The S&P 500 finished up 19.5% on the year, and was up every month (including reinvested dividends) of the calendar year in 2017. In the last 90 years, 2017 marks the first time when there was not a single monthly loss. We want to ensure that we do not continue to fight an exuberant bull market head on, and we have stopped out of several short positions for both performance and precautionary measures. However, we still maintain our long-term theses and conviction on these positions, and may adjust our positions as market conditions change.

The options portfolio—similar to the equity portfolio—was split performance-wise with the calls contributing positively, and the puts (while providing a portfolio hedge) contributing negatively. The Fund will continue to periodically use small percentages of capital to purchase calls when prices are particularly attractive.

A central tenet of The Fund is to be compensated well when our investment theses play out to completion. With the puts, the idea is to acquire attractive hedges that have the potential to complement returns, while also attentpting to maintaining a permanent protection base in the event of a market downturn. The puts will not always make money, however, we want to ensure that we maintain a constant level of portfolio protection as well as an opportunity to profit on the culmination of our investment themes.

On the short side, incumbent companies destined for failure can certainly benefit from one-time boosts (i.e. the tax code), but their ultimate fate—unless they are willing to innovate and adapt — will most likely be the same. If a revenue stream can be completely upended in a short period of time, traditional valuation metrics, which work well in stable markets, have a high probability of leading to inaccurate valuations. We believe this provides us, as long-term investors, with an opportunity to prosper.

On the long side, the companies we own continue to grow at impressive rates and we believe they will almost certainly be bigger in a year’s time. In this era of disruption, in our view it is paramount to own best-in-class businesses. The internet has democratized many industries and removed regionalities leading to market share increasingly concentrated by a small amount of companies with dominant “value propositions.”

The impressive growth of many companies has had dramatic effects on entire industries. Netflix, for instance, once a mail order service for DVDs, has emerged into a behemoth that recently forced the hand of Disney to make a radical move in acquiring Fox.

During 2018, Netflix plans to spend $8 billion dollars creating original content and building out its library, further strengthening the company’s ecosystem. (Disney, on the other hand, plans to spend that amount on buybacks). We see streaming continuing to dominate and accelerate in adoption going forward—and we believe many traditional media companies are out position.

The problem for incumbents, especially in media and entertainment, is that they are still addicted to old revenue models and hitting quarterly Wall Street estimates. In a stable period without disruptive forces, these are fine goals. But in an industry undergoing disruption, one must be forward-thinking. That is the advantage of companies we look to invest in: They are willing to make the correct business decisions and ignore the short- term mania of Wall St. In these rapidly changing fields, being even a half step behind will make it difficult to succeed.

  • “Rather than continue their aggressive share repurchase of $6-$8 billion per year, why not stop buying back stock and meaningfully ramp investment in content to launch over- the-top, direct-to-consumer services?… If Iger was truly a great CEO, we believe he would stop worrying about what investors think and make the tough decision to invest in content and launch a robust direct-to-consumer offering that includes new content and all of the existing legacy content from their broadcast/cable networks no matter how much pain that causes in the short term.”
    – Bob Greenfield BTIG

Amazon had another banner year with revenues growing roughly 40% in their AWS cloud business. This revenue comes from a large base of customers, and Amazon continues to cement their status as the dominant leader in the cloud space. Andy Jassy’s keynote at the re:Invent conference in November is a great watch, and highlights another fantastic year by this business.

This growth contributed massively to Amazon’s gross profit, and as I stated in the Q3 letter:

  • “As investors, we’re happy that Amazon deploys its cash into AWS and other ventures—as long as those ventures are growing in value more than cash would grow. And although we have made multiples on our money, Amazon, by my valuation, is actually cheaper than it was five years ago.”

We believe Andy Jassy has built itself a strong moat for AWS, as well. After all, once corporate customers choose a respective cloud, they are highly disincentived to move providers for many years to come. To have a business like AWS growing—and from such a large base with steady revenue—is a tremendous opportunity. It is part of what makes Amazon difficult to value, too. To find a fair valuation, one must understand both the retail and cloud computing components of Amazon’s business.

On top of the core retail and cloud businesses, Alexa continues to look very promising, and could contribute meaningfully to Amazon’s business going forward. We finished the year right around where we believed the stock price should be, and we see further upside going into the next couple of years.

As detailed in the 2018 Investor Outlook, we also remain highly bullish on EV cars and energy disruption. We recognize that there has been plenty of headline noise and media speculation about Tesla’s slow Model 3 production start, however, developing and building an EV is a completely different process from building a vehicle that uses an Internal Combustion Engine (ICE). We plan to hold for the long-term and are happy to see them focus on imporving production processes and fixing issues rather than attempting to pump out cars just to hit short-term targets.

Building EVs requires a total overhaul of design and manufacturing processes from current production facilities’ capabilities. All companies that wish to compete in this space—of which we expect to see a growing number—will essentially have to build from the ground up. Not only are most of these firms behind on their EV manufacturing capabilities, they lack control of their battery production, too. In that light, we believe the significance of Tesla’s Gigafactories will be felt for years to come.

Additionally, the new Tesla Semi truck—which has already received reservations from companies like Walmart and PepsiCo—factors into our valuation of the company. The trucking industry is a massive market perfectly suited for autonomous driving. It is also an industry that is primed for disruption, and rapid adoption to a new and safer technology that relies on electric, automated transportation systems.

Beyond these core portfolio companies, our team is always looking for new ideas, as well as analyzing current valuation levels versus calculated intrinsic values. These are exciting times, and while still nascent, the possibility of ‘blockchain technology’ looms on the horizon. We still believe technological disruption will continue to create a massive redistribution of wealth—and we want to ensure we are positioned correctly and profitably on the right side of history.

Your partnership is greatly appreciated and we look forward to a happy and healthy New Year!

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