The Value of Patience: Zelikovic Investments' Q1 2025 Strategy in a Market of Extremes

In an era defined by short-term speculation and tech-driven market cycles, Zelikovic Investments’ Q1 2025 letter offers a contrarian blueprint. The fund’s 12.24% return in 2024—achieved without exposure to the overhyped “Magnificent Seven” tech giants—underscores a disciplined focus on small-cap equities and international diversification. But behind the numbers lies a deeper argument: value investing’s revival in a world of overvaluation risks.

Performance: Outpacing Indices Through Contrarian Focus

Zelikovic’s Ayalon Global Stocks Fund has delivered a 13.35% Compound Annual Growth Rate (CAGR) since its 2019 inception, outperforming the Russell 2000 and matching the S&P 500’s returns. This success stems from its avoidance of the S&P 500’s largest constituents, including Apple, Microsoft, and Nvidia, which collectively drove 50% of the index’s 2024 gains.

The fund’s focus on smaller, overlooked stocks has paid off. While the Russell 2000 underperformed the S&P 500 for the eighth consecutive year, Zelikovic’s portfolio sidestepped its underperformance by combining small-cap exposure with global diversification. Israel’s Tel Aviv 35 Index, for instance, surged 28.4% in 2024, a stark contrast to the NASDAQ 100’s 26% gain—now reversed in early 2025.

The Magnificent Seven’s Overvaluation Trap

The letter’s most striking critique targets the tech giants that dominate the S&P 500. By late 2024, their forward P/E multiple hit 43.3x, nearly double the S&P 500’s 22x and far exceeding the index’s historical average of 16.4x.

This overvaluation has already backfired. By April 2025, the group had fallen 18%, dragging the S&P 500 down 10%. Zelikovic argues this is no anomaly: high P/E multiples correlate with low future returns. JP Morgan’s analysis shows that starting valuations above 22x could limit the S&P 500 to -2% to +2% annual gains over the next decade—a stark contrast to its 20% annual returns since 2020.

Why Small Caps and International Markets Matter

Zelikovic’s strategy hinges on two pillars: small-cap resilience and global valuation gaps.

1. Small-Cap Value:
   The fund holds ~100 global stocks, emphasizing small/micro-caps with strong return on equity (ROE) and reinvestment potential. Examples include Texas Pacific Land Trust (TPL), a rare “compounder” stock with a 60+ P/E but 20% annual EPS growth. Such holdings avoid the “double whammy” risk of overvalued growth stocks: stagnant earnings + P/E contraction.

2. International Opportunity:
   U.S. equities now represent 70% of global indices but trade at a 35% premium to European and emerging markets. The fund cites Oakmark International’s research, noting that non-U.S. equities have historically outperformed when valuation gaps shrink—a trend already emerging in 2025.

The Math of Future Returns

Zelikovic’s projections are stark. Using a model that factors EPS growth, P/E reversion, and dividends, the fund expects:
- 15.07% annual returns over 10 years, driven by 13.9% EPS growth (vs. the S&P 500’s 8%) and a 3.67% dividend yield.
- The S&P 500, by contrast, faces a 5.1% annual return ceiling due to its 27.99x P/E and reliance on overvalued tech stocks.

Risks and the Ergodicity Principle

No strategy is without risk. Zelikovic acknowledges geopolitical threats—like U.S. tariff plans—but dismisses short-term macro forecasts. Instead, it invokes the ergodicity principle: avoiding bets that could permanently impair long-term returns, even if they offer short-term gains.

The analogy of a skier prioritizing longevity over speed encapsulates this philosophy. “A skier who chases steep slopes risks a crash,” the letter notes. “Investors chasing overvalued assets face similar peril.”

Conclusion: The Case for Patience and Discipline

Zelikovic’s Q1 letter is a masterclass in contrarian investing. With the S&P 500’s P/E still 34% above its historical average, the fund’s focus on small-cap value stocks and international diversification offers a compelling alternative to the tech-dominated status quo.

The data speaks clearly:
- $100,000 invested in Zelikovic’s strategy in 2019 would now exceed $250,000—outperforming the S&P 500 by 22%.
- The Russell 2000’s eight-year underperformance suggests a mean-reversion opportunity, while European indices have already outpaced U.S. markets in 2025.

In a world of extremes—where tech stocks are priced for perfection and small caps are overlooked—Zelikovic’s message is simple: value persists where others look away. The next decade may belong to the patient.