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Auxier Report: Summer 2017

Jun 30, 2017

Download Auxier Report Summer 2017

 

Summer 2017 Market Commentary 

Improving corporate earnings and revenue growth together with an upswing in global fundamentals provided a solid backdrop for companies in the Fund, especially those with exposure to international markets. With political gridlock and a weaker US dollar, the more defensive multinational component of the Fund has been showing solid progress. The growing global debt overhang combined with accelerating technological disruption makes it more important to scrutinize the strength of each business franchise, balance sheet, cash flow and managerial capital allocation more closely. Businesses today that are utilizing advanced data analytics, mobile communications together with a customer centric passion are gaining premium valuations. While the capitalization weighted indexes appear fully valued, we are finding selective opportunities where exceptional management is brought in to build value in mismanaged enterprises. AIG, for example, just added top-flight CEO Brian Duperreault in May. As Marsh & McLennan shareholders in 2008, we benefitted tremendously as Brian helped turn around that ailing franchise. Prior to that he excelled at ACE insurance.

Individual security selection and the understanding of the value drivers and managerial leadership becomes more important in expensive markets. The risk abounds when markets are overweight in “high expectation” stocks that can torpedo portfolio returns when they crash. Especially as global central bankers may be at an inflection point in reducing massive monetary stimulus that has encouraged speculation. We want to be positioned in businesses that can weather any kind of storm.

The Double Play 

To compensate for the risk in stock ownership we are continually seeking the double or triple play return. We seek out of favor businesses selling at low valuations (ideally 10-13 times earnings) that have the potential to execute and grow earnings while enjoying a price-to-earnings (P/E) multiple expansion. Markets always cycle, fads come and go, but eventually long-term returns are tied to the fundamentals of underlying sales, earnings and cash flow growth. This past year with the negative press and uncertainty surrounding companies in the healthcare industry, we were able to pick up good buys of powerful global franchises with innovative products, strong balance sheets, and high free cash flow yields with able management teams. Many industry-leading medical device companies like Zimmer traded down to 11 times forward earnings, a steep 35% discount to their normal valuation.

Supply/Demand for US Public Companies

The Private Equity Industry has been raising record amounts of capital and is thought to have buying power of nearly $1 trillion. The supply of publicly traded companies in America has dropped by over 50% since 1997 to under 3,800. Many of the Fund companies have financial characteristics that are appealing to private equity buyers—low tech, high free cash. Today, prices being paid can be categorized as frothy as the funding for leveraged buyouts is far too easy. Covenant-lite loans have little protection for the l

Top Equity Holdings on 6/30/2017 %  Assets
Bank of New York Mellon Corp 4.0
 Philip Morris International  3.9
 PepsiCo Inc.  3.7
 UnitedHealth Group Inc.  3.6
 Medtronic PLC  3.4
 Johnson & Johnson  3.1
 Microsoft Corp.  2.6
 Merck & Co. Inc. New  2.6
 MasterCard Inc.  2.6
 Zimmer Biomet Holdings  2.5

ender and are a relaxation of loan restrictions. Former Fed chief Alan Greenspan recently commented that he sees a “bubble in bond prices.”

Portfolio Highlights

Auxier Focus Fund’s Investor Class returned 3.59% in second quarter vs. 3.09% for the S&P 500 Index. The stocks in the Fund returned 4.03%. Domestic stocks comprised 81% and foreign 14%, with cash at 5%.  Since inception at the top of the market in 1999, the equity exposure has averaged 78%. A hypothetical $10,000 investment in the Fund, since inception, has grown to $35,794 compared to $24,379 for the fully invested S&P 500

 

 

Spring 2017 Performance Update

ANNUALIZED
Inception * 15 Year 10 Year 5 Year 3 Year 1 Year
Auxier Focus Fund
Investor Class Shares
7.35% 7.77% 5.97% 9.68% 6.12% 14.55%
S&P 500 Index 5.08% 8.34% 7.18% 14.63% 9.61% 17.90%
CUMULATIVE
Inception * 15 Year 10 Year 5 Year 3 Year 1 Year
Auxier Focus Fund
Investor Class Shares
257.94% 207.35% 78.65% 58.71% 19.50% 14.55%
S&P 500 Index 143.74% 232.76% 100.08% 97.92% 31.70% 17.90%

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.10%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 0.98%, which is in effect until October 31, 2017. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase. For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.

Contributors to the quarter:

UnitedHealth Group (UNH)

UnitedHealth has continued to execute since our original purchase of $46. The stock today is over $185. The company, through the heavy use of data analytics, has dominated a relatively dull industry. United’s market capitalization has continued to grow double digits every year for the last decade. The dividend was recently increased 20% to $0.75.

Medtronic (MDT)

Deeply oversold in 2016 political uncertainties, the world’s largest standalone medical technology company rebounded sharply for the quarter. A leader in biomedical devices, they sold their medical supplies business for $6.1 billion and will pay down debt and repurchase shares.

Bank of New York (BK)

Bank of New York recently added an exceptional CEO in Charles Scharf who helped lead Visa in technology and international expansion. The company is benefitting from the relaxation in capital requirements and higher short-term interest rates. They are returning $4 billion to shareholders while raising the dividend 26% to $0.24.

Corning (GLW)

Corning is an innovative company that now is a leader in Gorilla Glass 5 which has applications in mobile devices and automobiles.

Mastercard (MA)

Mastercard delivered net revenue gains of 12% as the labor markets continued to improve domestically and global retail spending improved as well. Mastercard is investing $170 million towards their E-wallet service Masterpass and partnering with PayPal Holdings to boost their mobile payment initiatives. Mastercard has delivered exceptional returns since our purchase at $22.14, compared to the current market of $128.

America Movil (AMX)

Controlled by the Slim family of Mexico, America Movil has been “hopelessly out of favor” as they are the number one telecom player in Latin America and have suffered with currencies and increased competition. However, they are good operators and showed an 18.5% increase in revenue for the quarter. They are adding 4.5G which is expected to be 7.5 times faster than 4G. The Slim family has several generations of cumulative business experience in many of the markets they serve.

Unilever (UN)

Unilever under the leadership of Paul Polman has accelerated shareholder enhancing initiatives while improving operational execution. The threat of a takeover by Kraft Heinz provided a strong catalyst for action.

Oracle (ORCL)

Oracle has found success in the continued development of the Oracle Cloud and Gen2 infrastructure which claims to be both faster and lower cost than Amazon Web Services (AWS). They expect cloud revenues to overtake license revenues in the next fiscal year.

Johnson & Johnson (JNJ)

AAA rated Johnson & Johnson is the world’s largest medical conglomerate. Johnson & Johnson just completed the acquisition of Actelion which gives them a sixth therapeutic area to address potential patients with pulmonary arterial hypertension. Johnson & Johnson expects the acquisition of Actelion to add $1.3 billion in sales for 2017.

Detractors to the quarter:

Kroger (KR)

Kroger is the leading grocer in the US. The price of groceries has declined for 18 consecutive months which represents one of the longest declines in over 50 years. Egg prices are down over 60% in the past three years. Eating at home is a tremendous bargain compared to eating out. New competitors like Amazon/Whole Foods and foreign entrants Aldi and Lidl have added to the negative sentiment. Kroger has competed very well with Walmart for several years now. Kroger is a fierce competitor and after visiting several stores in three states we are convinced they offer compelling food value and strong execution. At 11 times depressed earnings it looks too cheap.

Molson Coors (TAP)

Molson is a beer brand that has endured over 150 years. They recently made a good buy on Miller which greatly enhances their distribution in the US. Despite being a leading player in craft beer, there is a plethora of brewers which has led to a correction in TAP’s share price. Free cash flow is over $1 billion.

Discovery (DISCA)

John Malone is the largest shareholder and is on record with the intention of consolidating the media “content” space. This can act as a positive catalyst for Discovery which is a leader in European sports programing in addition to the US. We have been happy shareholders of John Malone for years. The stock trades for 11 times forward earnings.

Compound Interest

Compounding at high returns over long periods continues to be our focus. To help improve the odds of successful compounding, we constantly seek to manage and mitigate risk through dedicated research and a cumulative knowledge of investment cycles. Costco’s former CEO Jim Sinegal used to say, “retail is detail.” When preserving and growing one’s life savings, we believe strongly in daily details and ledgers to drive long term results. Technological disruption is coming at a furious pace. There is a chorus of financial experts who claim investors don’t have to study, learn and think. It has been my experience, having operated in the market trenches for over 33 years, that a key to surviving in today’s investment landscape is having the humility to prepare through a consistent research effort while questioning conventional wisdom and maintaining flexibility to adapt to ever-changing facts and fundamentals.

 

We appreciate your trust.

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived. Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter. These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

Auxier Report: Spring 2017

Mar 31, 2017

Download Auxier Report Spring 2017

Spring 2017 Market Commentary

 

The excitement surrounding the Trump agenda died down as political gridlock dramatically slowed proposed policy changes. The priorities of job creation and economic growth with pro-business policies favoring deregulation helps to incentivize small business growth and the overall economy, but it cannot happen overnight. New proposed changes in the tax code including a lower tax on “pass-through” entities will provide tremendous incentives to start up a business. I remember investing in 1986 after oil prices dropped over 60%, then tax rates were slashed under the Tax Reform Act of 1986 which was the largest simplification of the US tax code in history. The country added over two million businesses during the decade. The economy surged, earnings and sales improved overall and longer-term interest jumped over 2.75% in less than 18 months. Our quality, cash-rich franchises enjoyed strong performance with double play returns—earnings acceleration and price earnings expansion. Although the booming share prices suffered a setback—specifically, the severe crash in the fall of 1987—the underlying economy remained solid. Thoughtful deregulation also tends to be a positive to new business formation as heavy regulation negatively impacts small businesses disproportionately. In 1996, deregulation of the telecom industry unleashed many new companies which helped to drive the economy and entrepreneurial spirit. Going forward, the price of free markets tends to be greater volatility—both up and down. As Peter Lynch would say, the key organ to successful investing is the stomach, which is needed to endure painful downturns.

The Great Equity Shrink

So far, publicly traded stock supply has continued to decline through a combination of corporate stock buybacks fueled by cheap debt, leveraged buyouts and mergers. The potential for repatriation of $2.5-3 trillion in foreign cash could lead to further buybacks. Goldman Sachs estimates that if the repatriation goes through, buybacks in the S&P 500 could increase by 30% or $150 billion up from the projected $780 billion this year. However, a robust initial public offering (IPO) market could change that positive supply/demand dynamic. Back in 1999 we saw a flood of over 400 new IPOs at extremely overpriced levels which ultimately contributed to an 80% decline in the NASDAQ.

There is good news for energy independence in the US. The energy sector from oil, natural gas, wind and solar continues developing at a vigorous pace leading to ample supplies. With improved data analytics, companies are becoming more efficient and lowering breakeven points. In the Permian Basin, one of the largest producing regions in the world, companies like Pioneer Natural Resources and EOG are profitable under $40 a barrel, so production continues to put pressure on prices. Refinery capacity out of Asia has been growing as well, which opens up the potential for a gas tax to help fund road repair with the surge in online deliveries. Commodities generally will revert back to the cost of production. Low energy prices are good for service-based economies, and the US enjoys a material global cost advantage in natural gas. Historically, parabolic upward moves in energy have compressed price-to-earnings ratios for stocks while crashing energy has led to multiple expansion.

A long period of low rates (currently $10 trillion in negative bond yields globally) has led to record corporate bond issuance, not only in the developed countries but also in emerging markets. Brazil has invested heavily in grain capacity and is looking to develop an additional 150 million acres over the next twenty years. Easy money and aggressive borrowing in China has led to an oversupply in steel and charges of “dumping” in many export markets. This could fuel the flames of protectionism. The Great Depression of the 1930s was partly the result of the improved technology of the time creating surpluses in crop production which then led to the Smoot-Hawley Tariff Act—protectionist legislation that was designed to save farmers who were swimming in excess supply (Hawley grew up 30 minutes from our office).

Restructuring in Retail

In the US, owing to a combination of cheap financing and advances in mobile and online technology, we are over-stored and the industry is now undergoing a massive distribution restructuring. We are seeing over 3,000 store closures so far in 2017 and 50 retail bankruptcies projected for the full year, more than double the last recession. This is the result of an expansion in per capita retail space to 23.5 square feet per person, or 6-8 times greater than in Europe or Asia. In 2016 shoppers in the US enjoyed a 1.3% decline in the price for staples like eggs and meat. Federal data shows this to be the steepest drop since 1959. Contrast that with socialist Venezuela where shoppers are only able to buy food one day a week and a carton of eggs now goes for $150. Inflation is projected to run over 1200% in 2017.

One area that continues to enjoy good pricing and employment opportunity is skilled labor, especially in construction-related fields. According to Adecco, 62% of firms said they were struggling to hire skilled workers in trades. In San Francisco, a starting journeyman electrician makes $128,000 per year working a 40-hour work week.

As wage pressures increase, this can be a problem with businesses that have high mandatory capital spending. When inflation picks up, cost overruns can severely impact free cash flow for the capital-intensive business. In the 1980s, utility shareholders were crushed as huge nuclear power plant construction led to cost overruns because of high inflation in the late 1970s.

Home prices rose 5.7% for the year ending in February, which supports a bright spot in retail spending. Home improvement, maintenance and renovation spending have been strong. However, the average down payment in today’s market is a mere 7%. The problems can add up in carrying the house after purchase, especially if the work has to be hired, or if the furnace goes out. If you are looking for an investment that drowns in cash, don’t look at a house at current prices.

Today, millennials demographically outnumber baby boomers. However, debt levels are very high by historical standards, over 250% of GDP. Excessive debt robs future supply. The problem: people buy based on payment levels, rather than on the price of the asset. Student loan debt is $1.3 trillion, auto debt over $1.2 trillion, and credit card debt over $1 trillion. Generally, the public does not understand how excessive debt—especially when applied to a depreciating asset—can take you out of the game in an economic downturn. We see high debt levels as a significant impediment to strong growth.

Be Careful Extrapolating Returns in Technology-related Businesses

Back in the 1990s it was difficult to find an investment that was performing as well as Intel, which was in our backyard. At the height of euphoria it peaked at a market capitalization in excess of $500 billion in 2000. This blue chip then corrected to $91 billion—down over 80% by October 4, 2002. (Source: The High-Tech Strategist). After 17 years, the stock is still down by half. The world’s largest tech companies at the time lost $6.5 trillion or over 81% from the high in 1999-2000 through October 2002. Interestingly, today technology comprises approximately 23% of the Standard and Poor’s 500 index. The tech telecom boom lasted 114 months, similar to the housing boom. That is why a diligent daily research effort is so important in mitigating risk; you can better assess how late the cycle has run and take measures to protect against devastating losses.

Spring 2017 Performance Update

ANNUALIZED
Inception * 15 Year 10 Year 5 Year 3 Year 1 Year
Auxier Focus Fund
Investor Class Shares
7.24% 7.09% 6.29% 8.70% 6.24% 12.76%
S&P 500 Index 4.97% 7.09% 7.51% 13.30% 10.37% 17.17%
 CUMULATIVE     
 Inception * 15 Year 10 Year 5 Year 3 Year 1 Year
Auxier Focus Fund
Investor Class Shares
 224.54% 179.21% 84.00% 51.74% 19.92% 12.76%
S&P 500 Index 136.44% 179.54% 106.27% 86.71% 34.45% 17.17%

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.10%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 0.98%, which is in effect until October 31, 2017. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase. For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.

Portfolio Highlights

Top Equity Holdings 3/31/2017 % Assets
Bank of New York Mellon Corp 3.9
Philip Morris International 3.8
Pepsico Inc. 3.7
UnitedHealth Group Inc. 3.3
Medtronic plc 3.1
Johnson & Johnson 3.0
Microsoft Corp. 3.0
Merck & Co. Inc. New 2.6
Kroger Co. 2.5
Mastercard Inc. 2.4

Auxier Focus Fund’s Investor Class returned 5.90% in first quarter, while the S&P 500 Index rose 6.07%. The stocks in the Fund returned 6.5% with a mix of 80% US, 12% foreign, and the balance in cash or “work outs.” Since inception at the all-time market peak in 1999, a hypothetical $10,000 investment in the Fund has grown to $34,526 vs. $23,723 for the S&P 500 and $28,276 for the Dow Jones Industrial Average. Although much higher today, the average equity exposure in the Fund over the entire period has been 76.4%. Foreign domiciled companies in the Fund have been a drag but are finally seeing an improvement in fundamentals and price performance. A number of high quality biotech businesses with breakthrough technologies have corrected to price levels which provide attractive high free cash flow yields.

Contributors to the quarter:

Unilever

Unilever is a major player in consumer goods, especially in emerging markets with leading brands like Lipton Tea, Dove, skin products company Dollar Shave Club, and Best Foods. Kraft Heinz made an offer to buy the company for $143 billion. Although it was rejected, it motivated the company to aggressively restructure, benefiting shareholders.

Medtronic plc

Medtronic is a leader in implantable biomedical devices. Back in 2001 the stock traded at 37.5 times earnings and this past quarter traded down to 13 times earnings with a fortress balance sheet and a 7% free cash flow yield. They continue to be a leader in medical technology as their world’s smallest pacemaker, Micra, accelerates US sales driving pacemaker market growth. They generate over $5 billion in free cash flow annually.

Zimmer Biomet Holdings

Zimmer Biomet has a leading musculoskeletal portfolio and is the global market share leader in knees and hips. Zimmer is also predicting $2B in annual free cash flow by 2020. At year end the stock traded down to a steep discount to the market, an attractive 12 times earnings. The demographics favor hips and knees as the peak year is age 68—about the average age for baby boomers. According to the Pew Research Center, roughly 10,000 Americans turn 65 every day. Pain is a good motivator for action.

PepsiCo, Inc.

PepsiCo was the single largest contributor to US retail food and beverage growth in 2016 for the third straight year. They also announced their 45th consecutive annualized dividend increase in 2017 and are driving 3.7% organic revenue growth through healthier products.

Philip Morris International

Philip Morris is working on transforming from a cigarette company to focusing on meeting the growing demand of reduced risk, smoke-free tobacco products. They estimate that about 1.4 million adults quit smoking cigarettes in 2016 and switched to their IQOS product that heats tobacco rather than burns it, and annual production capacity will grow from 7 billion units to more than 32 billion units in 2017.

Corning Inc.

Corning is engaged in the manufacturing of specialty glass. They expect their gas particulate filters to become a significant business in China following the finalization of emission-related regulations in December 2016. Corning recently made a deal to provide Gorilla Glass for moderately priced smartphones that are within the reach of many of India’s customers—the second largest smartphone market in the world.

Oracle Corp.

Oracle’s cloud revenue growth continues to expand reaching $1.2B in the most recent quarter, a growth of 62% year over year.  Oracle is selling more enterprise SaaS than any cloud services provider in the world, and claims their new Gen2 IaaS is both faster and lower cost than Amazon web services.

Merck & Co.

Merck’s recent lung and skin cancer drug, Keytruda, continues to gain new approvals for more treatments as over 300 clinical studies are underway for 30 different tumor types.

Anthem, Inc.

Anthem is a leading managed care operator which operates under the Blue Cross/Blue Shield brand.  Fourth quarter net income was up 103% year over year as medical enrollment increased 3.4%. They are expecting their operating cash flow to be greater than $3.5B in 2017.

Cerner Corp.

Cerner is a leading healthcare information technology company which provides critical software to help automate hospitals and other healthcare providers. The stock traded down to a multiyear low valuation at year end providing for an attractive entry point to this high-quality enterprise.

Visa

Visa dominates the global market for electronic payments handling over half of all credit card transactions globally. The trend toward digital payments and away from cash is strong and fundamentals for global commerce and spending have been improving. Their network processes over $8 trillion in transactions annually.

Detractors to the quarter:

Kroger Co.

Falling food prices and a grocery price war continue to impact results as Kroger pushes through the third deflationary cycle in the past 30 years. However, lower prices are making Kroger much more competitive with restaurants.

Chevron /ConocoPhillips/BP

Despite OPEC production cuts, major US shale activity and efficiency are leading to lower breakeven price levels. This has put renewed pressure on oil equities. We would expect to see increased consolidation in energy given the lower long term outlook for energy prices as a whole.

Bank of New York Mellon Corp.

Banks in general declined off euphoric post-election highs although Bank of New York still sells at a significant discount to the market and will benefit greatly if interest rates normalize.

After a difficult global earnings and revenue environment for over six quarters, we are seeing a pickup in sales and earnings for our core positions as many economies have seemed to stabilize. Domestically, the ISM services index still shows good improvement over 55%. We work hard at monitoring fundamentals to be able to catch the turn. While we are concerned with making good buys, it is also important to monitor highly valued “high expectation” stocks that can suffer painful drops when results fall short. We are looking for high integrity, dynamic management teams that can build value in any environment. We have learned over the years that having the cumulative knowledge of specific businesses, cash flows and balance sheets is far more important than being a market operator. When focusing on the power of compounding, it is critical to quantify and constantly assess risk through an in-depth knowledge of facts and valuation with a focus on the growth in underlying per share intrinsic value. At the core of mitigating risk is understanding the asset and the fundamentals. The problem with the proliferation of exchange traded funds is that nobody truly understands what they own as individual businesses. Most are following momentum. The real value added comes when markets drop and you really need to know the individual fundamentals at the height of panic. Many of the top Fund positions we have owned for 20-30 years. We want to be prepared daily and know ahead of time what we want to own. Then when the market drops we are ready to act. I love to study great coaches and in particular legendary UCLA basketball coach John Wooden who had preached that “the will to win is not nearly as important as the will to prepare to win.” We see the will to grind out daily research as integral to prepare for difficult times and improve the odds of protecting our clients’ life savings.

We appreciate your trust.

 

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones Industrial Average consists of 30 stocks that are considered to be major factors in their industries and that are widely held by individuals and institutional investors. The ISM services index was created by the Institute for Supply Management Non-Manufacturing, using information collected from surveys from over 400 non-manufacturing companies. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

Auxier Report: Winter 2016

Dec 31, 2016

Download Auxier Report Winter 2016

Year-End 2016 Market Commentary

 

Donald Trump’s November 8 election confounded most experts in Washington, D.C. and on Wall Street. Our stock and bond markets reacted decisively to Trump’s proposed pro-growth agenda focused on stimulating the economy and domestic jobs. High on his policy wish list are tax cuts, rollbacks in onerous regulations, renegotiation of trade deals and a large increase in infrastructure spending promoting construction jobs. Infrastructure investment has dropped to under 14% of GDP vs. 48% in China. To incentivize business spending, Team Trump is talking of a one year expensing option for depreciable property. There is a push to lower taxes on individuals, corporations and capital gains. To pay for tax cuts, a 20% border tax on imports has been discussed as well as reduction in the deductibility of business interest. These policies appear very positive for new business formation, particularly of smaller ones.

The prospect of such aggressive fiscal stimulus may well have ended our 35-year bull market in bonds. Inflation fears are driving up interest rates as we close in on full employment and shortages of skilled workers, especially in construction. Since the election, over $1.8 trillion has been lost in government bonds, as prices of 10-year Treasuries slumped and yields spiked from 1.5% in August to over 2.5% after the election. Bonds face the double whammy of principal loss in a rising rate environment coupled with the loss of purchasing power. Ironically, bonds have been the most popular category of investment, attracting record flows into fixed income funds just as prices have hit historic highs. There is no way for investors to stay ahead of the rising cost of living with such low rates. Yet capital from abroad continues to pour in thanks to America’s reputation for a strong rule of law and private property rights. Over $500 billion has exited China this past year, boosting that country’s purchases of foreign real estate by 50%, with the US the biggest destination. The domestic housing market has been firm with home prices up 5.6% in the 12 months ended November 2016. The strongest markets were Seattle, Washington, up 10.4% and Portland, Oregon, up 10.1%. Partly due to the shortage of skilled labor, new housing construction is running 15% under historic trend. The market in the Northwest is showing signs of froth as we are seeing crazy bidding wars and “flipping” activity.

Year-End 2016 Performance Update

ANNUALIZED
Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
7.00% 5.87%  8.85%  4.32%  7.09%
S&P 500 Index 4.69%  6.95%  14.66%  8.87%  11.96%
 CUMULATIVE     
 Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
 226.30% 76.85% 52.84% 13.53% 7.09%
S&P 500 Index 122.92%  95.72%  98.18%  29.05% 11.96%
* Fund Inception July 9, 1999

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.10%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 0.98%, which is in effect until October 31, 2017. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase.  For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.

Portfolio Highlights

Auxier Focus Fund’s Investor shares returned 2.14% for the fourth quarter vs. 3.82% for the S&P 500 index.

Top Equity Holdings 12/31/2016 % Assets
Bank of New York Mellon Corp 4.0
UnitedHealth Group Inc. 3.9
Pepsico Inc. 3.8
Philip Morris International 3.0
Microsoft Corp. 2.8
Kroger Co. 2.8
Johnson & Johnson 2.7
Medtronic PLC 2.7
Molson Coors Brewing Co. 2.5
Merck & Co. Inc. New 2.5

For the year, Auxier Focus Fund returned 7.09% vs. 11.96% for S&P 500.  The stock portion returned 8%. As of year-end 2016, a hypothetical $10,000 investment in the Fund since inception has grown to $32,634 vs. $22,433 for the S&P 500.  It’s worth noting that the Fund was launched in 1999, the last leg of a long bull market in stocks whose aggregate value totaled over 145% of GDP, a historic peak. Our results were achieved with far less exposure to risks inherent in the market. And 100% of the fund manager’s retirement skin is committed. The Fund has a wide, flexible investment mandate to maintain high compounding returns and protect capital during difficult markets. This past year, the Fund had approximately 78% in domestic stocks, 11% in foreign, with the balance in cash and “workouts” or market agnostic positions with a timetable.  Results were hurt by multinationals and foreign holdings whose profits suffered not so much from poor fundamentals, but from an exceptionally strong dollar. This was especially painful in the UK, where export companies did well but the pound suffered a steep 16% loss against the US dollar. In contrast, banks and other financial intermediaries rallied in response to post-election prospects for Trump’s pro-business agenda. Bank of New York was up over 19% for the quarter, Bank of America gained over 40%, and Central Pacific was up 25%. Reason: anticipation of a steeper yield curve improves net interest margins together with higher returns on cash balances. Health insurers UnitedHealth and Anthem rang up gains near 15%. The devastation from Hurricane Matthew boosted insurance premium pricing, helping Berkshire Hathaway and Travelers.

Grocery store operator Kroger rebounded 16% as grocery prices now offer consumers tremendous bargains compared with other food choices. We have continued to see one of the steepest corrections in food prices since 1960. Chemical names like Celanese, Dow and Dupont were strong in sync with the Trump Bump and lower prices for natural gas feedstocks. The farm economy, however, is suffering one of the worst downturns since the 1980s.  Mounting supply gluts are compounded by the dollar’s appreciation, making US products more expensive on the global market. On the downside, defensive food and beverage stocks slumped, with Molson Coors down 11% and Unilever sliding 10%. Investors switched post-election from stocks that do well in deflationary, low-growth times to those that excel in a reflationary, pro-growth setting based on the assumption that all of Trump’s initiatives will sail through without a challenge. We still see a deeply divided country where gridlock could slow the pace of change.

Uncertainty over the Affordable Care Act’s future, together with President Trump’s warning about high drug prices, led to declines for quality medical services companies like Becton Dickinson, Merck and Johnson & Johnson. Medical devices companies Zimmer and Medtronic were especially weak. Zimmer is the low-cost provider of hip and knee implants whose demand peaks at age 68—about the average age of baby boomers today. The stock dropped to 12 times earnings during the quarter, an enticing 35% discount to the market’s multiple, plus an enormous free cash flow yield. Demographic trends still provide strong demand for healthcare goods and services. Companies that are innovative and provide value through research should prosper. Negative political headlines are leading to attractive long-term values among healthcare stocks, especially in biotech, medicine and neuroscience, as key technologies are information enabled. A good example is Cerner, which is a leader in digitizing medical records. And there’s the prospect of a post-election FDA moving safe compounds much faster to the market in the next few years, spawning even more innovation and the potential for value enhancing spinoffs.

2016 will go down as a year that defied the experts. First was Great Britain voting to leave the European Union. Brexit was an event politicians and pollsters missed badly. This was followed by dour predictions of a deep recession. What actually happened? Britain finished the year with stronger growth than any country in the G-7. Then the so-called experts were stunned by Trump’s victory, with some Wall Street pundits predicting 10% to 20% market declines. It reinforces the lesson I learned when analyzing Enron after it had purchased our local utility Portland General Electric in 1997. We analyzed the books and discovered enormous debts not listed on its balance sheet. About the same time, around February 2001, Fortune magazine had Enron on its cover touting “best practices in the utility industry.” Wall Street had the same optimistic opinion. We checked with eight brokerages, and all had strong buys on the stock. We kept digging and decided the excessive borrowed money threatened Enron’s solvency in a downturn.  We sold the stock several times around $80 and, within the next 18 months, it dropped to zero in bankruptcy. This despite the strong consensus of “experts” on the merits of the company and leadership.  Having the humility to do the homework every day is crucial. Nailing down facts and fundamentals not only helps us avoid losses that interrupt the compounding process, but also stand firm when a solid business is temporarily out of investing fashion.

We have had an earnings recession for the past six quarters. Stock price gains for most companies have far exceeded the growth in underlying business value. Massive share buybacks and historic low interest rates have acted as a buffer. The digital transformation of business is spawning disruption in many industries. Shopping malls are getting crushed by consumers’ switch to buying online, particularly on their cell phones. Advertisers are losing out to Facebook and Google as video use is exploding. Small corporate teams armed with data are making rapid advances against old-line and entrenched franchises. We continue to seek out businesses blessed with ethical management who can survive, thrive and endure through such challenges.  Factoring in Trump’s proposed tax cuts, we can see S&P 500 earnings for 2017 possibly improving by as much as 10%. A repatriation of nearly $2.5 trillion sitting abroad would be a positive for the supply/demand for US stocks. Deregulation has historically been good for small businesses, which have been an important generator of new jobs. Easing regulations in the banking industry could unleash more lending and potentially greater “velocity of money,” fueling higher inflation. The negative of higher inflation is the compression of price earnings multiples.

On a positive note, three billion new minds will join the global economy in the next six years estimates Peter Diamandis, co-founder of Silicon Valley think tank Singularity University. This could lead to a new population of consumers and a further explosion of innovation. Ten years ago, we had 500 million internet-connected devices. Today there are eight billion. By 2020 there will be 50 billion. With the pace of change accelerating exponentially, an active, voracious research effort has never been more important to maintain high compounded returns in today’s markets.

We appreciate your trust.

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund.

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor. 

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

Auxier Report: Fall 2016

Sep 30, 2016

Download Auxier Report: Winter 2016

Fall 2016 Market Commentary

This past quarter I have spent a great deal of time visiting companies (over 55), managements and looking at new disruptive technologies. The goal is to catch the turn up in fundamentals, especially in beaten down sectors of the market. The seemingly exponential growth of data analytics, together with easy money, has contributed to excess capacity and supply “gluts” across a number of industries. Data sharing will only improve as the next generation 5G wireless promises to boost web speeds 10-50 times. I recently attended the largest commercial drone conference in North America. Open source software is fueling the rapid advances in drone technology, transforming agriculture, shipping, logistics, supply chains as well as search and rescue. Soon drones could be delivering groceries to your house. We are on the lookout for well-nurtured businesses with a “heart and soul” and drive that can successfully navigate, innovate and implement new technology often in dull businesses. I met with Sherwin Williams – a very well-managed company in coatings under the leadership of John Morikis. With many painting contractors charging $35 an hour, you aren’t typically going to skimp on low quality paint. While general market levels are high there are opportunities as rolling corrections within industries and stocks take place. We have had a “profits recession” now for over 5 quarters-a very challenging time. It is so critical to constantly assess the estimated long-term profits and cash flow for a business. That is our daily focus—the economics of each business we own. Many well run industrial names like Fastenal, Celanese, and LyondellBasell have been hurt by the strong dollar and cutbacks in capital spending. In the past couple of years an estimated $1 trillion cutback in energy infrastructure alone. The farm economy is suffering from the worst downturn since the 1980s, and many commodities are now selling for less than the cost of production. This is predictable as we had one of the longest booms (118 months) in history peaking in 2011. Fertilizer company Mosaic traded over $160 in 2008 and now trades at $24 with over a 4% yield.  Generally, it is a good time to buy when a commodity is selling under cost of production. In the past 8 months, food prices have seen the steepest drop since the 1960s. Meats and dairy have suffered sharp declines. This has hurt grocers like Kroger, Walmart and Costco. It has led to stiff competition in the restaurant industry as well. We still believe longer term there are tremendous opportunities as businesses marry nutrition with healthcare and the ties of base minerals and immunology become more widely known. Ingredient sourcing is growing in importance for 83 million millennials.

Biotech companies which were bid to extreme price-to-sales ratios two years ago have now corrected by over half in many cases.  World class research organizations like Amgen and Biogen are selling for very low historic valuations. The best health care buys typically have taken place in the face of negative political headlines. Recall for example the   early 1990s when the Clintons took office, proposed legislation led to a great buy in Johnson and Johnson that declined from 58 to 36. More recently, with the rollout of the Affordable Care Act, we were able to buy quality names like UnitedHealth at steep discounts (over 20% free cash flow yields) to intrinsic value. We prefer strong cash flows and negative headlines. In today’s world of blind pools, it is more important than ever to do the homework on individual securities, to seek facts, fundamentals and dissect balance sheets – especially in difficult declining markets. It is better to be a “business analyst” as opposed to a “market analyst.” Investing is the craft of the specific. Having an edge requires dedicated research, cumulative knowledge and knowing where we are in the cycle of supply and demand. This is crucial in bull markets where the highly valued, high expectation stocks tend to dominate the indexes and torpedo returns in sharp downturns. In 2000, passive indexing reached peak popularity and Cisco led the indexes, trading at 170 times earnings with a valuation in excess of $600 billion. Everyone was an expert in technology. By 2002 it had dropped over 80%, sinking the indexes. Today you have similar price extremes in the pre-public “Unicorns” ($1 billion valuations) with aggressive accounting that have been able to sell products at losses because of the plethora of easy money. Veteran venture capitalist Bill Gurley of Benchmark recently warned that there’s too much money in the startup ecosystem. Gurley says “there will be consequences” of excessive risk-taking in tech “with interest rates so low, you just have people looking for yield, and so money sloshes around.” We continue to appreciate and focus on the power of compounding and inherent risks of investing. To quantify the downside, and to make great buys in gloomy markets, you need to really know what you own.

Interest Rate Inflection 

Today’s insanely low interest rates threaten the solvency of financial intermediaries. Witness the collapse of Germany’s giant Deutsche Bank. You can’t grow the economy by destroying the banks. According to The Economist, collective balance sheets of the most active central banks (U.S. Federal Reserve, Bank of Japan, European Central Bank, Swiss National, Bank of England and Bank of China) grew from $3 trillion in 2002 to over $18 trillion recently. Such aggressive action has driven interest rates to the lowest yields in recorded history. This is totally unsustainable. There used to be “bond vigilantes” that would act as an early warning mechanism for credit quality deterioration. That function has been virtually eliminated with central bank intervention removing the market and pricing mechanism. Governments never effectively price risk. Bond volatility traditionally has been on par with stocks, but that volatility has been repressed.  These policies, due in large part to the damage to banks, pensions, and insurers, are under increased criticism and may be about to change. Fiscal spending may start to replace monetary stimulus as both U.S. presidential candidates are pushing hard for massive infrastructure repair. A more normalized interest rate environment would help refocus investors on the fundamentals of price vs. value.

Low Energy

Today’s energy costs remain reasonable thanks to a combination of higher fuel efficiency (cars and buildings, for example) plus technological advances in capturing shale oil, solar, and wind sources of power. According to the Energy Information Administration (EIA), average generation costs for new onshore wind farms fell 30% between 2010 and 2015. Solar panels fell by 66%. U.S. oil and gas drilled but uncompleted wells (DUCs) now total over 5,000. Virtually all are profitable at $50 a barrel oil, with production potential of 250,000 barrels a day, or equal to half of California’s current output. The lowest stock market valuations in the past 50 years have occurred when energy prices went parabolic. The highest valuations followed energy crashes in 1986 and 1998. These price swings are crucial indicators of the health of the U.S. economy dominated by consumption of goods and services.

Monitor Supply and Demand

The pool of U.S. publicly traded stocks has been shrinking through buybacks, mergers and buyouts by private equity funds. In 1996 there were about 7,000 public companies. That number is now close to 4,000 thanks in part to the growth in private equity deals. According to Preqin, there were 24 private equity firms in 1980. Today there are 6,628.  The market for initial public offerings (IPOs) of stock also has been very slow to bring new supply, with less than 20 in 2016 through September. This compares favorably to the bubble top in 1999 when 480 IPOs hit the U.S. market.

Risks to Fixed Income

Risks far outweigh potential rewards in fixed income investments including high-dividend stocks. Wally Weitz of Weitz Investments recently commented that if a 10-year bond rises in yield from 2% to 4%, the decline in principal is 16.4%. If a 30-year bond yield rises from 4% to 6%, the decline in principal is 27.7%. The proliferation of bond exchange-traded funds sets up the market for a potential liquidity crisis, as the number of bond dealers has shrunk in the face of increasing regulatory burdens. Prior to 2008, bond dealers generally held inventory levels of more than 2% of the market. Today it is closer to a tenth of the size. (Economist). Low energy costs historically have provided a big boost to a service economy. In 1986 after energy prices dropped over 60%, interest rates rose from 7% to 10% in less than two years as the economy picked up steam. If politics favor ramped up fiscal spending like in the 1980s, the resulting inflation could be painful for bondholders. They not only get whacked by loss of principal but also loss of purchasing power over time. Like Warren Buffett has stated, $1 in 1965 requires over $7 today in purchasing power. It took an average annual 4.3% return (before taxes!) just to maintain purchasing power risk over that entire period. That is why we strive for the “double play” investments. Straight income can’t come close to maintaining purchasing power over the long term. Thus our favorite investments have historically high returns on equity, low capital needs, and growing free cash flows. Plus we aim to purchase at prices below intrinsic value and wait patiently for expansion of temporarily depressed earnings multiples.

Elections

Regarding elections, our main concern is that the constitutional checks and balances remain strong and incorruptible. High grade ethics in leadership is needed to endure in any field. Gridlock is a favorable outcome. But the good news-internet transparency tends to clean up bad behavior. An example of a government without checks can be seen in Venezuela, which sits on more oil reserves than any other country in the world. It is suffering a GDP decline of 10% this year, starving citizens and stoking runaway 480% inflation heading to 1,600% next year. This resulted largely from autocratic socialistic policies and the collusion of a corrupt executive and judicial branch that went on to control the military.

Importance of Maintaining Price/Value Investment Disciplines

In allocating capital, the sins of over paying and over borrowing can linger for years. Global banks have suffered over $200 billion in fines and lawsuits since 2008. Bigger is not safer as the operators of large institutions often have very little of their own money at risk. Time and time again CEOs combine ego and emotion with borrowed money to overpay and destroy good businesses.

Fall 2016 Performance Update

AUXIER FOCUS FUND

PERFORMANCE UPDATE

September 30, 2016

ANNUALIZED
Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
6.97% 6.45%  10.21%  6.16%  10.72%
S&P 500 Index 4.54%  7.24%  16.37%  11.16%  15.43%
 CUMULATIVE     
 Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
 219.46% 86.41% 62.58% 19.63% 10.72%
S&P 500 Index 114.71%  101.14%  113.44%  37.36% 15.43%
* Fund Inception July 9, 1999

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.10%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 0.98%, which is in effect until October 31, 2017. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase.  For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.

Portfolio Highlights

For the third quarter of 2016, Auxier Focus Fund’s equities gained 3% with the Fund returning 2.23%. The Fund had an average 78% exposure to U.S. stocks, 10% to international companies with 12% in cash and workouts. By comparison, the S&P 500 index rose 3.85%, and the Dow Jones

Top Equity Holdings 9/30/2016 % Assets
PepsiCo 4.0
Bank of New York Mellon 3.4
UnitedHealth Group 3.4
Medtronic 3.3
Philip Morris International 3.2
Molson Coors Brewing 3.1
Johnson & Johnson 2.8
Microsoft 2.6
Merck & Co. 2.6
Zimmer Biomet Holdings 2.5

Industrials gained 2.78%. Lower food prices hurt such Fund holdings as Kroger and McDonalds. Foreign holdings like Carlos Slim’s America Movil have also been hurt by Latin American devaluations, and is the cheapest valuation in years. The perception that easy monetary policy will be displaced by fiscal spending and higher interest rates has given a boost to financial names like Bank of New York and Aflac. Biogen, which is developing treatments for spinal muscular atrophy and leads in the Alzheimer’s battle, recently declined to a compelling buy point and was a major positive contributor for the quarter. We like research-driven healthcare organizations innovating to solve today’s health problems with new solutions. Microsoft continues to lead in cloud, although we are worried about the massive capital investment going into the space. MasterCard continues to excel operationally in the credit card payment space, but competition is building. In media there is currently a glut of content, but AT&T recently announced the takeover of Fund holding Time Warner and we would expect the industry to further consolidate with names like Discovery. We often see markets where the most overpriced issues outperform for long periods. Longer term there tends to be a reversion to the mean. We are starting to see that as many overpriced stocks are correcting. We are seeing better value in some quality industrial names.

For the past 30 years, we have made a study of great investors, business operators and enduring capital allocators. Central to their success was a rational temperament with a determined dedicated quest for knowledge on a daily basis. We have studied both success and failure. We have learned to be wary of “investment products.” Talk is cheap; that is why we spend our day seeking facts and truth. When interest rates are rock bottom, investment products far outnumber the individual securities, and promoters proliferate. We believe in the principal, not the agent mentality. We want to own the same well researched businesses with our clients because we believe it is the best way to compound returns over the long term. In 1987 we witnessed the introduction of “portfolio insurance” designed to protect during a crash—it didn’t, as the market dropped over 30%, forcing sells at the lows. We saw Long Term Capital, with more PhDs on staff than any firm in the world, collapse in 1998. They borrowed over $200 billion on a $2 billion capital base using mathematical formulas. We watched insurance companies issue variable annuities guaranteeing against stock market loss, leading to a drop in Hartford shares from $100 to $2. West Coast Bank tried to automate their lending, only to suffer a $30 million loss and forced sale. Today, exchange traded funds are the hottest craze. In our study of panics over centuries, we see how a semi-informed public will pool up in rising expensive markets only to unwind in down markets. We seek to capture the power of compounding with a constant eye on the downside and quantifying risk through a diligent research effort. There are no shortcuts in risk management.

We appreciate your trust.

 

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website. Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

 The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

 

Auxier Report: Summer 2016

Jun 30, 2016

Download Auxier Report: Summer 2016

Summer 2016 Market Commentary

June’s shocking vote by Great Britain to exit the European Union added to volatility for the second quarter. I remember like yesterday investing in the 1990s when negative headlines out of international markets were relentless. Japan’s stock market crashed off an immense bubble that peaked in 1989. Mexico suffered a severe Peso devaluation in 1994. Russia defaulted after the energy bust in 1998.  East Asia faced a severe financial crisis and meltdown at the same time. Despite such alarming headlines, the superior businesses we owned endured and thrived. And investment flows returned to the US as investors increasingly valued the integrity of our markets and rule of law. These inflows ultimately contributed to bubble valuations in US blue chips in the late 1990s, when we were forced to lighten up. A classic example was Coca Cola, then trading at 50 times earnings.

Today we have similar gloom out of China—the result of an extraordinary borrowing binge. Venezuela is bankrupt and should default. Brazil is in the worst economic downturn in 100 years. And the banking industry in Europe is severely undercapitalized. That is why we have focused not on predicting markets but on valuing individual companies. We strive to own businesses that survive and thrive even when faced with the most extreme macroeconomic challenges. We believe longer term it is more rewarding to be an exceptional business analyst as opposed to a market analyst. One with an eye on knowable fundamentals. To enjoy the fruits of compounding that high return businesses can provide, investors need to stay in the game and not be scared out by negative headlines. Central banks in the US, Japan and Europe continue to add to the distortion in asset values by driving interest rates negative. This is leading to rapid growth in debt accumulation and a “flight to safety” mentality rampant among many investors chasing for yield—often blindly.

At current interest rate levels, there is no chance to maintain purchasing power in the years ahead. Central banks have far too much power to print money and need to be checked. Regarding the misperception that bonds are currently “safe,” author Jim Grant recently dusted off his copy of A History of Interest Rates, first published in 1963 by Sidney Homer and Richard Sylla. Grant figures that over $13 trillion in sovereign bonds globally now yield negative interest. This is a phenomenon that has never taken place in over 3000 years. So corresponding prices are dangerously expensive. Usually rates rise when corporate balance sheets deteriorate in a free market pricing environment. Central banks have interrupted and impeded the market through bond purchases (some estimates as high as 15% of global corporate and sovereign issues). In the past twenty years, we have seen extreme bubble valuations in tech-telecom, housing and commodities. Now the price extreme is in income vehicles perceived to be “safe.” In order to maintain the compounding process, it is critical to identify bubble valuations and systemically sell into them to reduce exposure. Traveling throughout the country I see rents rising (9% annually in Portland and Seattle), home prices trending higher, healthcare premium renewals rising 12-18%, costs of maintenance, repair and property taxes surging, and wage gains as shortages abound among skilled workers. Traffic is jammed, airports are packed. This is not a depression environment that warrants zero interest rates. There is talk of instigating even more aggressive money printing policies (so-called helicopter money) in Japan. It is helpful to revisit such devastating policies during Germany’s Weimar Republic after World War I. Then the bulk of German investors were hiding out in bonds during a recessionary economy. In 1921 the German currency stabilized at 90 marks to the US dollar. By November 1923, the American dollar was worth 4,210,500,000,000 marks. On a recent research trip, I saw a bumper sticker that read, “Sure You Can Trust The Government, Just Ask An Indian.” When it comes to your investments you can trust a little, but you need to constantly verify the facts and fundamentals.

Summer 2016 Performance Update

June 30, 2016

ANNUALIZED
Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
6.94% 6.57%  7.34%  6.39%  1.58%
S&P 500 Index 4.37%  7.42%  12.10%  11.66%  3.99%
 CUMULATIVE     
 Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
 212.47% 88.88% 42.49% 20.41% 1.58%
S&P 500 Index 106.74%  104.65%  77.02%  39.20% 3.99%
* Fund Inception: July 9, 1999

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.27%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 1.14%, which is in effect until October 31, 2016. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase.  For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.

Portfolio Highlights

Auxier Focus Fund’s equities returned 2.62% in second quarter 2016, with 15% in foreign stocks and 11% in cash and short-term cash equivalents. The total portfolio gained 2% for the second quarter and 2.55% year to date. The S&P 500 index returned 2.46% and 3.84% for the same periods, respectively. We continue to seek out bargains among businesses that sport strong balance sheets, historically high returns on invested capital and attractive and growing free cash flow yields. Such impressive companies tend to have the strength to raise dividends over time and survive the harshest economic conditions. When stock prices are too high, we park some of our cash in “market agnostic” short-term investments that we refer to as workouts. We track earnings, cash flow and mandatory capital spending closely for each business. If the earnings and cash flow decline over the next five years, the stock will surely be lower.

Where We’re Finding Value in Volatile Times

We see attractive values in industry leading biotech companies like Biogen. It has a powerful research culture that dominates the field of multiple sclerosis drugs and is a potential leader in Alzheimer’s with the drug Aducanumab. There are 5.4 million Americans suffering from Alzheimer’s.

Top Equity Holdings 6/30/2016 % Assets
PepsiCo 3.9
UnitedHealth Group 3.4
Bank of New York Mellon 3.4
Philip Morris International 3.4
Medtronic 3.3
Kroger 3.0
Molson Coors Brewing 3.0
Johnson & Johnson 2.9
Merck & Co. 2.4
Microsfot 2.4

Biogen recently went on sale for 13 times earnings, a steep discount to its five-year trading range with a free cash flow yield more than triple the prevailing ten-year government bond yield. That valuation also might prove enticing to cash rich competitors as a takeover prospect. Core Fund holdings like Medtronic project generating over $40 billion in free cash the next five years (Omar Ishrak, CEO). S&P Global Market Intelligence expects 2016 healthcare earnings to be up 6.5%—higher than all but one sector. Other top Fund holdings executing in healthcare include UnitedHealth, Johnson & Johnson, Zimmer Biomet, and CVS. Again, many of these holdings have recent free cash flow yields far in excess of the prevailing long bond yields. Merck is leading advances in immunotherapy for cancer cures with the drug Keytruda, where sales have increased from $110 million to over $314 million in the past year. I recently spent time visiting companies involved in medical marijuana. I strongly believe that the anti-inflammatory properties of Cannabinoid (the nondrug part of the plant) will be proved effective in replacing often-addictive painkillers. Twenty-five states in the US have legalized medicinal marijuana. Germany’s Health Minister said the country will legalize in 2017 with health insurers reimbursing as well. Canada, Australia and Italy look as if they may follow within the next couple of years.

Lower energy prices ultimately are good for a US economy that is 70% consumption and 85% service oriented. There now is a glut of refined fuel partly due to the expansion of refinery capacity in Asia. This opens the door for a very palatable 10 cent gas tax that could fund badly needed infrastructure in the US as online shopping (and deliveries) continue to show greatest growth in retail spending. US construction spending on infrastructure (as a percentage of GDP) is running the lowest in over 30 years—and odds favor a big boost after the elections. Every energy crash that I have invested through has led to very strong fundamentals for our economy and higher interest rates. Low fuel prices and mobile technology are contributing to a travel boom as Americans have logged over 3 trillion road miles this past year. Convenience store purchases for foods and beverages continue to be strong. On the negative side, a flood of capital into big grocery chains has created excess capacity and hypercompetitive pricing of goods. Improved data analytics make it easier to overproduce and oversupply. We see numerous businesses afflicted with gluts. These are problems of “abundance.”

Fund holdings Molson Coors and Altria were beneficiaries of the buyout of SABMiller by AB InBev. This is a case where cumulative knowledge in an industry helped enhance returns in a flat market. Molson appreciated over 150% since our purchase four years ago as the industry has consolidated. Altria was a major shareholder of SABMiller, and Molson will be able to buy joint venture assets of Miller at attractive price levels as part of this buyout deal. We see the need for media content consolidation led by Liberty Media founder John Malone. We also see attractive valuations in companies like Discovery Communications (Malone is its largest individual shareholder). Discovery owns its content and trades at a steep discount to private market value. While domestic banks are very cheap, they continue to suffer from headwinds of souring energy loans, low net-interest margins and deteriorating subprime car loans. Look for more trouble for banks directly exposed to the oil patch as well as the farm belt. Insurers suffer with zero interest rates as investment portfolio “float” becomes worth less. I believe autonomous cars ultimately will pose a material risk for auto insurers as accident rates are sure to fall. Technology disruption ranks as one of the biggest risks to investing in today’s markets. The growth of online shopping, mobile communications and data analytics is transforming entire industries. In highly valued stock markets, risk management becomes more critical to minimize the threat of “torpedoes.” These are pricey stocks with very high investor expectations that can suddenly disappoint, crash and torpedo the portfolio. In allocating, we see a strong need to maintain cash and/or market agnostic positions to take advantage of bargain purchases that result when the electronic herd panics. Historically, market indices can be flat for decades. The Dow Jones Industrials rose one measly point between 1964-1981. For my money, I want to trust in a focused daily research effort to identify compelling opportunities. This process combines price discovery and cumulative industry knowledge to quantify and reduce risk while improving odds of success. Investing is the “craft of the specific.” Our returns depend on carefully studied company selection, not the market. Life savings are too important to be left to chance. With regard to holding excess cash in portfolios, in market crashes there tends to be 85% correlation on the downside. So we view the cash in the portfolio as integral to make exceptional buys in times of panic.

We appreciate your trust.

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter. These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

This Internet site is not an offer to sell or a solicitation of an offer to buy shares of the Fund to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Foreside Fund Services, LLC. Distributor (www.foreside.com) | Hosted by clnw.com