Bristlemoon Global Fund Lost 25.5% in Q1, Worst Drawdown Since Inception

The Bristlemoon Global Fund lost 25.5% in the March quarter, its worst drawdown since inception. The fund manager said the decline was not driven by deteriorating earnings in its holdings. It came from a sharp repricing of what investors would pay for those earnings.

The fund's largest holdings suffered severe multiple compression. Fair Isaac Corporation (FICO) fell almost 37% in the quarter. Its forward earnings multiple collapsed from above 50x at the start of the year to 25x at the end of March. The manager said FICO's P/E is now more than one standard deviation below its 10-year average. Historically, when the multiple reaches these depressed levels, the stock has staged a sharp rebound back through the long-term average when the narrative improves. There is 50% upside alone in FICO returning to its average multiple, the letter said.

The multiple compression came as investors grew less certain about FICO's future growth prospects. Credit bureaus have cut the price of VantageScore, FICO's main competitor. There has been talk of the GSEs testing a VantageScore securitisation pool. The FHFA might pressure the GSEs to release VantageScore LLPA grids that are unfavourable for FICO. The manager argued that FICO's moat remains intact. The FICO Score is deeply entrenched in the US mortgage ecosystem, integrated into systems, workflows and regulatory requirements across loan origination and the secondary market securitisation value chain. Switching to VantageScore would require buy-in from lenders, GSEs, MBS investors, insurers, regulators and other intermediaries, many of whom do not directly benefit from using VantageScore.

Progress in operationalising VantageScore for the conforming loan market has been glacial, the letter said. It is currently not possible to sell a VantageScore-scored mortgage to the GSEs. The gating factor to VantageScore adoption has always been the securitisation market. MBS investors may resist VantageScore acceptance due to its limited history that fails to capture past credit cycles, a lack of demonstrated predictive superiority versus FICO 10T, and the GSEs having previously endorsed FICO over VantageScore.

The manager believes that additional uncertainty around VantageScore would translate to a discount on VantageScore-backed paper. That would flow through to higher borrowing costs for VantageScore-scored loans. For every 1 basis point of risk premium from using VantageScore instead of the FICO Score, the borrower would pay an additional $926 over the life of a typical mortgage, the letter calculated.

In a scenario with a modest recovery in mortgage origination volumes, the manager expects FICO can grow earnings at north of 40% per annum over the next two years. If that unfolds, the manager expects FICO to be worth more than $2,400 per share, or 2.2x where the stock trades today. FICO currently carries an Alpha Score of 26 out of 100, labelled Weak, reflecting the market's pessimism.

Hemnet Group was the largest detractor from the fund's returns since inception. The stock fell roughly 75% from its February 2025 peak. The manager acknowledged paying too high a price for Hemnet, leaving no margin of safety when the Swedish housing market turned and competition from Booli intensified. The manager said the mistake was not in purchasing Hemnet based on the long-term earnings power. It was in anchoring too heavily to that long-term view while not being nimble enough with adjusting position size as investor confidence deteriorated.

Green shoots are emerging. Hemnet is rolling out a Sell First Pay Later payment option where property sellers can list at no upfront cost and only pay if the property sells. In the first week of February in Stockholm, where the model was introduced, listings were down 5% year-over-year compared to a 22% decline for Hemnet as a whole. Hemnet's share of listings in Stockholm jumped from 78% on a trailing basis to 95% in that first week. Listing volumes in the first week of April surged 67% week-over-week. The manager projects a more than 40% IRR from the fund's Hemnet investment over the next three years.

AppLovin (APP), the fund's largest position, fell almost 41% in the quarter despite rising earnings expectations. The manager attributed the decline to misplaced AI-disruption fears. APP declined 30% in January alone, including a 17% single-day selloff after Google announced Project Genie, a generative-AI tool for creating 3D playable worlds. The manager called that move irrational. AI reducing barriers to game content creation would likely produce an explosion of new mobile games, benefiting AppLovin's ad business.

AppLovin also faced a short seller attack in January that the manager said was based on a mistaken identity. The short seller later retracted substantially the entirety of its report after realising the error, the letter said.

The manager was able to add to the AppLovin position at sub-$400, a level it called compelling value. At those levels, the business trades at 25x forward GAAP EPS, despite sellside expectations for earnings to more than double from 2025 to 2027.

Following the outbreak of the Iran War and the closure of the Strait of Hormuz in early March, the fund flexed down its net exposure from roughly 94% to less than 60%. The manager shorted companies it believed were negatively exposed to fallout from the conflict and where that potential deterioration was not reflected in the share price. The fund has since increased net exposure, trimming and exiting many of the shorts put on in March.

The letter introduced a refined position sizing framework that separates each investment into a compounding position (typically 2-5% of the fund) and a conviction position (larger, requiring confidence in near-term earnings acceleration). The manager said the fund's worst drawdowns occurred when it deviated from this framework, oversizing positions where it liked the long-term earnings potential but the stock sold off due to interim narrative shifts.

Bristlemoon Capital is the trustee of the fund. Bristlemoon Research is the investment manager.