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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.

Auxier Report: Spring 2016

Mar 31, 2016

Download Auxier Report: Spring 2016 PDF

 

Spring 2016 Market Commentary

After an 11% decline in the first six weeks of 2016, the benchmark Standard & Poor’s 500-stock index recovered to gain 1% for the first quarter. Stocks rebounded in the face of a sharp cutback in energy capital spending, slowing world growth and wildly volatile currency swings that weighed on export volumes. These setbacks largely offset the positive material savings from declining prices in natural gas, heating oil, diesel and gasoline. Regions with heavy in-migration like the Pacific Northwest are showing very strong economic growth, while those tied to coal and oil are suffering. Historically, sharp drops in energy inputs have led to strong growth (1986 and 1998) as our economy is 85% service oriented. Indeed, my recent visits with executives in construction trades—both housing and commercial—suggest there are serious ongoing shortages in welding, plumbing, electrical framing—you name it, especially in the West.

The quality businesses we favor have typically enjoyed price/earnings multiple expansion in times of sharp commodity and energy crashes. Conversely, when energy prices tripled during the 1970s, price-to-earnings ratios compressed to a rock-bottom 10 times earnings or less. Today, the US is being hampered by higher domestic debt (over 300% of GDP) as US nonfinancial debt rose 3.5 times faster than GDP last year. Therefore, we have continued to seek out and hold businesses that have consistently strong demand, nominal mandatory capital spending and ample cash flow to fuel expansion.  Earnings and revenue growth have been challenging as many industries are faced with supply gluts.  An example: too many physical retail stores as online commerce grows. We try to closely monitor the long term supply/demand relationship in each industry before investing. We want enduring franchises with moral leadership that will survive the harshest economic challenges. Growth in free cash flow—not stated dividends—is a critical metric that allows for the financial flexibility necessary to flourish during challenging environments. If a company’s cash flow is higher ten years out, that company’s share value should track.

Albert Einstein once said the most powerful force in the universe is compound interest.  I am amazed at the “return free risk” people take. When the focus is on compounding, quantifying and reducing risk becomes the priority. If market indexes are too highly valued and don’t offer adequate compensation for the risk, we will have less exposure via holdings of either cash or market agnostic positions. Our mission is to compound returns and to avoid areas of euphoria and mindless imitation (the institutional imperative) that can lead to permanent capital loss. Money managers’ obsession with beating overpriced indexes will invariably lead to disappointment as the cash flows of the businesses will determine the ultimate compounded rate of return.  Industry leaders SunEdison (solar panels) and Peabody Energy (coal) are two recent ego-crushing bankruptcies that resulted from managements overpaying and over borrowing while aggressively participating in commodity bubbles that burst. Consider that only one in five firms in America make it over 15 years. For the record, we’ve been in business for twice that (32 years), surviving a series of crashes, panics and recessions. Each has given me a healthy respect for markets and the irrational behavior that can take place. And the importance of a relentless research effort seeking facts, fundamentals and truth.

We try hard to identify potential problems that can interrupt the compounding process—for instance, technology innovation that can render companies’ products obsolete. At present microscopic interest rate levels, the margin of safety for most fixed income is not attractive. Reason: the purchasing power of currency-based investments is virtually guaranteed to go down over time. At the recent Berkshire Hathaway shareholder’s meeting, Warren Buffett shared how he would rather sit on $20 to $60 billion of investable funds than risk buying overpriced fixed income securities that he views as “dangerous” over the long term (due to the loss of purchasing power). Such distortions in capital allocation result whenever pricing is dictated by a government entity (the Federal Reserve) and not a competitive market mechanism. Banks around the world have suffered with low rates as net interest margins continue to compress and regulations restrict profitability. Also suffering are insurers, money funds, pensions and all savers, especially retirees. Artificially low rates are making it very difficult for younger households to get ahead financially by inflating college, auto and home prices. This may be a contributing factor to the rise in popularity of socialism among the younger generation as they are being “priced out.” It is estimated that negative interest rates globally are costing savers $24 billion a year in lost interest.

Recently I had the opportunity to speak in Omaha at the Value Investor Conference hosted by Robert P. Miles, the author of The Warren Buffett CEO in conjunction with the University of Nebraska Omaha. This event is dedicated to mastering the principles of proper capital allocation. It reaffirmed some of the timeless investment tenets that have the potential to help investors survive and thrive over the long term:

  • Too much borrowed money can take you out of the game. Focus on a strong balance sheet.
  • Overpaying and over borrowing can torpedo any company, public or private.
  • Management without high ethics can’t endure in a world of internet transparency.
  • Be rational and disciplined when allocating capital.
  • Negative macroeconomic forecasts often distract us from research and investing in superior businesses with exceptional management.
  • Stick with the “specific” and “knowable” facts.
  • Companies that execute for their customers have been more likely to achieve outstanding returns.
  • Be a business analyst, not a market analyst.
  • Swear by the importance of the “rule of law,” especially when investing internationally.
  • Be relentless in pursuing facts, fundamentals and truth.
  • Identify ahead of time what you want to own and wait for the market to come to your price.
  • Compounding knowledge is critical to managing risk.
  • Tom Murphy, former CEO of Cap Cities, who Warren Buffett considers the best operating manager in history, shares his views on retirement: The best time of your life is when you are in the game and winning. The second best is when you are in the game and losing. The worst is when you are out of the game.
  • When interest rates are artificially low, don’t stretch for yield.
  • Warren Buffett on efficient markets: “I’d be a bum on the street with a tin cup if the markets were always efficient.”

 

Spring 2016 Performance Update

March 31, 2016

ANNUALIZED
Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
6.92% 6.14%  7.30%  6.41%  -1.34%
S&P 500 Index 4.29%  7.01%  11.58%  11.82%  1.78%
 CUMULATIVE     
 Inception * Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
 206.44% 81.54% 42.25% 20.49% -1.34%
S&P 500 Index 101.79%  96.87%  72.95%  39.82% 1.78%
* 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 Investor Class returned 0.57% in first quarter. The stocks in the Fund returned 1.45% and cash/workouts comprised roughly 14% of the portfolio. The S&P 500 Index rose 1%. It’s worth noting that over the life of the Fund we have never been fully invested in equities. Yet the equity component of the portfolio has returned over 330% since inception. That’s roughly triple the corresponding 102% gain in the fully invested S&P 500. Investing through numerous crashes and recessions, we have a healthy respect for markets and are mindful of our clients’ pain threshold. It

Top Equity Holdings 3/31/2016 % Assets
Pepsico 3.7
Philip Morris International 3.2
Bank of New York Mellon 3.2
Unitedhealth Group 3.1
Kroger 3.1
Molson Coors Brewing 3.1
Medtronic 2.8
Johnson & Johnson 2.6
Microsoft 2.5
MasterCard 2.3

is difficult to stay in the game if the downside volatility is extreme. We will not participate fully when the majority of stocks are overpriced, euphoria is rampant and we see numerous land mines that can interrupt the compounding process. On December 29, 1989, Japan was firing on all cylinders and the NIKKEI Index hit 38,957.  By March 10, 2009 it closed at 7,054, down over 81%. The “buy, hold and forget approach” did not work so well the past 27 years in Japan. This past quarter the NYSE Arca Biotechnology Index corrected 22.37%. This is creating opportunities in high quality industry leaders like Biogen. Bargains abound in bank stocks with the KBW Bank Index declining 11.59%. We have found the best way to reduce risk is through cumulative knowledge of markets, industries, companies and management. Current favorites are companies along the food chain. Residing on an operating farm, we see some powerful trends in pricing. Consumers are willing to pay more for better, healthier ingredients in both food and beverage products. Global protein demand remains strong with nuts, meats, eggs and portable products like beef jerky leading the way. According to Hershey’s, their KRAVE jerky is growing faster than chocolate. In fact, meat snacks are growing over 20% annually. We see nutrition and healthcare becoming more closely intertwined. Consumers are demanding better sourcing transparency. Cancer cures are coming from enhancing the immune system and many autoimmune disorders are being traced to mineral deficiencies. Organic food is projected to grow at a compounded rate of 16% through 2020.

In closing, the Fund is positioned predominantly in quality businesses that have enjoyed high returns on invested capital with growing high free cash flow yields. That advantage becomes more important as debt levels around the world escalate. We continue to focus aggressively on the fundamentals with a steadfast attention to 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. Nikkei is short for The Nikkei 225, a price-weighted equity index, which consists of 225 stocks in the 1st section of the Tokyo Stock Exchange. The NYSE Arca Biotechnology Index is an equal dollar weighted index designed to measure the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services. KBW Bank Index is an economic index consisting of the stocks of 24 banking companies. This index serves as a benchmark of the banking sector.  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: Year End 2015

Dec 31, 2015

Download Auxier Report: Year End 2015 PDF

Year End 2015 Market Commentary

 

Slowing global growth, crashing commodities, depreciating currencies and correcting stocks highlighted the investing climate for 2015. The market continued to purge the excesses of a historic boom in commodities, particularly energy. When commodity prices were far above the cost of production, massive capital spending was unleashed and extraordinary “supply shocks” resulted. Now we see the aftermath of the “easy money lending” that helped inflate bubble prices as capital allocation becomes undisciplined. In 2015, major stock market indices masked the correction and recessions in transportation, industrial manufacturing materials and energy. As an investor, it is so critical to study the supply and demand for industries and companies, as “supply gluts” fueled by excessive borrowed money can be devastating. The stock of Glencore, a global mining giant, has declined over 75% from its peak in 2012 thanks to the firm’s penchant for overpaying and overborrowing. Agriculture is also suffering from the combined challenges of low crop prices, driven by productivity gains, and currency price declines of competing emerging markets. If you produce soybeans, the current selling price is under the cost of production. Worse, the currency of top producer Brazil has declined by 40% versus the dollar, making it very difficult to compete. This is not good if you make a living selling $500,000 grain combines. Currency changes competitively impact many US companies. Indeed, those in Standard & Poor’s 500 stock index currently derive 46% of their revenues abroad.

With exponential increases in data, the ability to overproduce goods is leading to problems of “abundance.” Small teams armed with technology are transforming entire industries. US oil production from shale fields increased from 5.5 million barrels per day in 2009 to 9.9 million in 2014. Energy price declines normally are good for consumption based economies like the US. In fact, recessions in the 1970s were a direct result of parabolic increases in energy prices. However, the ferocity of energy price declines (down some 70% over 18 months) has put a damper on US GDP. Witness a 73% drop in forecasted fourth quarter earnings for energy firms in domestic shale drilling and corresponding cutbacks in capital spending (over $315 billion). Still, lower fuel prices led to record car travel—two trillion miles traveled this past year. With the advent of driverless car technology, the number is projected to climb to three trillion over the next twenty years. People are eating out more than at home for the first time in history. Spending is strong for air travel, cruises and “experiences” in general. Consumption expenditures are running the highest since 2006. Food, beverage, healthcare and other necessity items are showing solid demand. Lower energy prices give room for an energy tax to fund the infrastructure needs in the US. With the growth of online retailer deliveries, a major investment in infrastructure is needed, which would be a boost to the domestic economy. The US continues to be a destination for global money seeking strong “rule of law” protections. China had record outflows, over $800 billion this past year, and much of it landed in America.

Stomaching Market Volatility

It is normal in a free functioning market to fluctuate. Volatility is not risk. The long term loss of purchasing power equates to risk. The dollar’s purchasing power has declined 98% since 1914. That is risk. Navigating through all kinds of markets the past 30 years or so has led me to believe that one’s stomach is the organ most crucial to realizing high compounded returns—maybe more than high IQ. On average US markets have endured 50 corrections of greater than 10% in 100 years. There are 25% drops on average every 42 months. Price swings average 50% annually among shares listed on the New York Stock Exchange. While company ownership beats most investment classes over long periods, the volatility often takes people out of the game, especially in extreme bear markets. I remember like yesterday the 33% drop in 1987—in a strong economy. That post-crash period was a tremendous time to invest, yet the volatility was off the charts. As outstanding investor Shelby Cullom Davis said, “you make most of your money in a bear market, you just don’t realize it at the time.” The best advice a client gave to a referral, which made his family substantial sums over the past thirty years, was to “never look at the market.” Great investors typically keep the emotions and ego out of decisions. They instead keep searching for facts and truth while zeroing in on “knowable” fundamentals. Holding tenaciously onto great businesses and assets pays off over the long term and crushes other investment schemes. The market is there to serve, not guide, and you need to know what you own when it goes down. (And it always goes down!) As opposed to predicting markets, we shop for businesses and managements that can survive and thrive in downturns. Companies with poor balance sheets in commoditized markets currently face stiff headwinds. It is important to remember that stocks represent an ownership interest in a real business and are not a lottery ticket. If the business is focused on their customers and improving execution, returns will follow.

Recall that low oil prices led Russia to default in 1998. We see the market discounting a similar event with Nigeria, Venezuela or Russia if prices stay low. High risk, CCC-rated junk bond yields have doubled from 10% to 20%. Whenever an asset price has a precipitous decline there are all kinds of repercussions. Sovereign wealth funds tied to oil have been heavy sellers of index funds to shore up their capital base. Currency devaluations continue to pressure earnings with close to half of S&P 500’s revenues impacted. And bankers are being hurt by central bank policies promoting negative real interest rates (when a bond’s tiny coupon can’t keep up with inflation). We have been warning for some time of the extreme bubble valuations in publicly traded biotech stocks and private Silicon Valley startups dubbed Unicorns. Both now show signs of cracking. Venture firms I have met with say the valuations in those companies are higher than in 1999.

Year End 2015 Auxier Focus Fund Performance Update

December 31, 2015

ANNUALIZED
Inception * 15 Year Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
6.99% 7.22% 6.32%  8.54%  9.49%  -1.23%
S&P 500 Index 4.27% 5.00%  7.31%  12.57%  15.13%  1.38%
Morningstar Large Value
Category Average
5.38% 5.59% 9.75% 11.63% -4.05%
 CUMULATIVE     
 Inception * 15 Year Ten Year Five Year Three Year One Year
Auxier Focus Fund
Investor Class Shares
 2.04.7% 184.47% 84.55% 50.67% 31.26% -1.23%
S&P 500 Index 99.10% 107.99%  102.42%  80.75%  52.59% 1.38%
* 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 Adviser’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

In fourth quarter 2015, Auxier Focus Fund’s investor class gained 5.60%. The stocks in the portfolio grew 6.83%, slightly trailing the corresponding 7.04% return of the S&P 500 index. For the full year the Fund declined 1.23%, compared with a 1.38% gain for S&P 500 index. The averages masked a far more difficult environment. Median stocks in the Russell 3000 Index finished down 20.90% from their 52-week high. Only 30% of the stocks on the NYSE ended the year in an uptrend. The Fund ended the year with 12% held in cash and “work-outs” (market agnostic positions), 74% in US stocks and 14% in foreign stocks. Negative currency translations were a drag on our foreign holdings, which offset better domestic performers. We started the year with less than 4% exposure to energy. And we ended with slightly less as our refiners outperformed the major integrated oils.

Instead of trying to predict or “play” the markets, we focus on gaining cumulative knowledge in industries and superior businesses with strong managements. We believe the economy is entering a negative credit cycle. That’s when higher risk corporate debt spreads widen in the face of increasing defaults. So we feel it is more important than ever to scrutinize the balance sheet of each business.

Top Equity Holdings 12/31/2015 % Assets
Pepsico 3.6
Bank of New York Mellon 3.5
Kroger 3.4
Microsoft 3.0
Molson Coors Brewing 2.9
Medtronic 2.9
Philip Morris 2.8
Unitedhealth Group 2.8
Johnson & Johnson 2.4
MasterCard 2.3

Companies that sell large ticket items like cranes or require high mandatory capital spending are riskier given the growth in debt levels worldwide. We favor managements that have honed their competitive advantages to better serve customers. These businesses should have the ability to deliver output that will retain purchasing power while requiring a minimum of new investment. Most of the stocks we seek and own have high returns on capital and high free cash flow yields with low mandatory capital spending requirements. Declining energy and commodity inputs provide a tailwind to many of the strong quality franchises we own. Gas savings have been going into increased travel, dining out and “experiences.” Services comprise over 85% of the US economy, and fundamentals in housing (encouraging household formations), hospitality, leisure and healthcare are holding up. While consumer sentiment on main street is looking up, the mood on Wall Street is dour, with recent sentiment the most negative since 2009. The recession in manufacturing and transportation is starting to present opportunities to buy outstanding management teams at bargain prices. We constantly seek a “catalyst” to provide gains in flat and declining markets that often take the form of split-ups or consolidations. Since the early 1980s, we have approached the markets in a systematic, rational, low risk manner. We tend to do better in difficult markets. Our competitive advantages are cumulative knowledge of individual businesses, passion for research, and emphasis on price versus value. Since we started the Fund in 1999, an investment of $10,000 in the Dow Jones industrials has grown to $23,075 and to $20,037 invested in the S&P 500. Each lagged behind a corresponding hypothetical $10,000 stake in the Auxier Focus Fund Investor Shares, which has grown to $30,474. And that’s despite the Fund’s average equity exposure of less than 85%. Within ten years of the Fund’s inception, the market suffered two declines in excess of 40%. In the US, only one in five companies survive 15 years.

During times of extreme volatility, I have found it helpful to study investors who have survived and thrived during market and economic turmoil. J. Paul Getty excelled in the oil industry, particularly during the difficult 1930s. These are some of his thoughts:

  • “The big profits go to the intelligent, careful and patient investor, not to the restless overeager speculator. The seasoned investor buys stocks when they are low, holds them for the long pull rise, and takes in between dips and slumps in stride.”
  • “Separate fact from opinion and dig deep for facts and challenge expert opinion. A man’s opinions are less valuable than the information he gathers.”
  • “Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It is the very essence of successful investing.”

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. The Russell 3000 Index is a market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market. 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