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Auxier Report: Fall 2019

Sep 30, 2019

Fall 2019 Market Commentary

We continue to see corrective price action in many industries   since the market highs of January 2018. The global transportation, materials, agriculture and manufacturing industries are a few discounting a recession. Europe, Japan, China and emerging markets have been weak on trade tensions, political uncertainties of Brexit and historic lows in many commodities (many under cost of production). In the US, a continued expansion in labor markets, resilient consumer spending and a stable service sector are positives for the domestic economy. Homebuilder order growth has accelerated with the recent drop in mortgage rates.  According to Standard and Poor’s, the spread between the most expensive and least expensive stocks is one of the highest in the past 70 years.  Up until recently the most overpriced names have often been outperforming the cheapest.  However, we are starting to see many momentum stocks with exciting stories   come back to earth as investors are shifting focus back to cash flow and away from “revenue growth at any price.”

Don’t Fight the Fed

According to Evercore ISI in the past three months there have been 40 rate cuts by monetary authorities around the world. In addition, the Fed has been expanding their balance sheet to the tune of $60 billion a month. Back in 1995 and 1998 the Fed was able to prolong an extended US economic expansion with a series of rate cuts, even as Japan, the number two economy, was suffering from a major downturn. Instead of instigating much needed restructuring many countries, especially in Europe, are overly reliant on monetary policy and negative interest rates to stimulate their economies.  Globally we are seeing historically low yields (and high prices) with over $13 trillion in negative rates. According to JP Morgan, since 1958 the average yield on US 10-year Treasury notes has been 6.05%. Recently we saw yields drop to 1.45%. As a result, bonds and bond surrogates such as real estate, utilities and consumer staples, have been strong performers so far in 2019. However, on the downside, a 1% increase in rates would lead to a drop of over 20% in 30-year Treasury bond prices. With bonds you have purchasing power risk, as governments love to spend, but also interest rate risk not previously seen in our lifetime. While low rates inflate asset values it hurts the banking industry especially when rates turn negative.  The average European bank trades at less than 50% of its book value. US banks trade at very cheap price-earnings ratios as well. In past recessions high and escalating energy prices have often been a major contributor to downturns. This time we have energy gluts in oil and natural gas and declining prices for many alternatives like wind and solar. Battery storage is making huge advances. This continues to act as a tailwind for US consumer spending and the service sector. Low energy prices have negatively impacted many emerging markets that are dependent on oil.

We aggressively research hundreds of companies over the course of the year to stay on the pulse of industry dynamics, supply and demand, etc. We track credit markets and balance sheets. We want to be ready when there is a turn in fundamentals—up or down.  We are seeking facts. Since our focus is on maintaining the power of compounded returns, we see diligent research as important in mitigating risk.  Since 1989 the Japanese market is down by about half.  To passively have held that in an index would have been a disaster.  Markets can go sideways or down for years. We have found that the careful purchase of outstanding “high return” businesses with a heart and soul, capable management, with “skin in the game” may be a viable formula for success.

Market Purging Speculative Manias

Historically, easy money has led to numerous speculative manias that have ended badly. The Economist magazine had a letter of correspondence in the 1860s citing easy money back then as the cause of manias. “It is equally beyond doubt, that every speculative mania which has run its course of folly and disaster in this country has derived its original impulse from cheap money.” Fast forward to today, we are witnessing a   purging in money losing speculative companies with questionable business models.  Overhyped venture capital backed businesses from Japan, China and Silicon Valley are collapsing. WeWork, funded by Japanese firm Softbank was being touted by major brokerage firms to be worth as much as $92 billion a few months ago. The model of transforming rented office space into smaller units has historically been a failure for the past sixty years. It now has been revalued to less than $7 billion.  Tilray, a leading Canadian marijuana company has recently declined from $300 to $23 as fundamentals have failed to materialize as promised. There is a surplus of food delivery stocks funded with seemingly “free money.” DoorDash, Postmates, Uber Eats and Grubhub to name a few. Grubhub recently suffered a 43% one-day decline.  There is a belief in the venture world that if you are losing money on every transaction that magically increased volume will help. When rates are low the promoters come out in full force. There is an old saying that a fool and his money are invited everywhere.   Private equity is another area of   excess that many institutions see as “low risk”. Yet the model depends on paying inflated prices for businesses then applying extreme leverage which is risky in a period of record leverage loans. We are watching closely for goodwill write-downs like the $15.4 billion suffered by Kraft Heinz this year when they overpaid for Kraft which torpedoed the stock. By some estimates there is still over $2 trillion in buying power in the private equity industry.  Overpaying and overborrowing destroys shareholder value over time. While money is flowing into private markets, we see the inherent volatility and mandated disclosure of public markets as a better bet for long term compounding. Greater transparency underscores the importance of high-grade ethics to endure. Those cutting corners are getting crushed. The proliferation of headline-driven program trading may benefit the serious investor willing to research individual businesses.  Material misappraisals take place with headline-driven momentum trading. We are finally seeing a renewed focus on productive assets with strong underlying cash flows as opposed to money losing story-stocks where revenue growth was prized at any price. Valuation is making a comeback in the investment equation.

Policy and Political Leadership – Ignore it at Your Peril

In August, Argentina suffered the second biggest crash of any stock market since 1950.  The MERVAL Index plummeted 48% in one trading session. This was the result of elections showing the left-wing populist leader Alberto Fernandez pulling ahead in the polls. Extreme socialism is the enemy of free enterprise. Argentina has defaulted on its government debt eight times since 1816 yet was able to sell 100-year bonds two years ago. Venezuela’s radical social populism has crushed their government debt as inflation exceeded 1.37 million percent in 2018 (Source IMF). This is why we prefer to invest in   businesses, not markets.  The financial industry likes to put investor money in scalable models which leads  to opaque structures and often overcrowding.  This can work in up markets but not during long periods of flat to declining markets, which history shows occur over 40% of the time. It can be hard to stay the course in such periods.  There are so many ways to lose money, especially if you don’t know what you own.

Healthcare Stocks Lagging but High-Quality Solid Value

Healthcare stocks in general have suffered price-earnings compression from negative macro headlines like “Medicare for All.” We see opportunity in gloom and   are focusing on innovative companies and managements utilizing rapid advances in data analytics, compounding knowledge and artificial intelligence to increase the odds of cures for many of the most devastating chronic illnesses.  Healthcare is showing some of the best relative earnings for the quarter with strong free cash, yet many companies are trading at steep discounts to the overall market.  According to the American Diabetes Association one person develops diabetes every 21 seconds.  Over 5.8 million Americans suffers from Alzheimer’s.  Biogen has been a leader in diseases of the brain and has a strong position in the fight against Alzheimer’s with their drug aducanumab.  Yet, the stock recently traded at a mere nine times earnings.  Huge strides are being made in oncology as well through the immune system, with Merck’s Keytruda. Gene therapy is making rapid progress in fighting cystic fibrosis.

Streaming Wars too Much Supply

Over the past few years growth in online streaming has been quickly catching up to traditional cable. Globally streaming subscriptions grew 27% to 613.3 million in 2018 according to the Motion Picture Association of America (MPAA). This growth contrasted with traditional cable subscriptions which decreased by 2% to 556 million in 2018. Streaming growth is expected to continue to outpace cable as the rise of smartphones and tablets have increased the desire for more on-demand content. The streaming market has long been dominated by Netflix, but competition will soon intensify as big players like Disney and Apple enter the streaming space. Competition is bringing an increased focus on investing in quality original content. In 2018 Netflix spent $12.04 billion on content creation and licensing and Wall Street analysts expect content spending could increase to $15 billion in 2019. The Financial Times reported that Apple invested $6 billion into their streaming service. Disney only expects to spend just under $1 billion on original content in 2020. A large company like Disney may have an advantage over Netflix and Apple due to their massive library of brands like Star Wars, Marvel, Pixar and Disney’s own animated films. Disney can simply focus their investments on original shows and movies while competitors like Netflix must also pay licensing fees to fill out their catalog of content with movies and shows from other media companies. From an investor’s view we are monitoring the industry closely but are nervous with the massive spending on content over $30 billion for new shows in 2019 alone. Who has time to watch all that?

Third Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned -0.22% in the third quarter vs.  1.70% for the S&P 500 Index and 1.83% for the DJIA. Stocks in the Fund comprised 94.9% and declined -0.01%. The equity breakdown was 80.5% domestic and 14.4% foreign, with 5% short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception in July 1999 to September 30, 2019 is now worth $40,907 vs. $31,304 for the S&P 500. The equities in the Fund have returned over 570% since inception. This was achieved with an average exposure to the market of less than 79% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 9/30/2019.

MasterCard (MA)
MasterCard continued to grow during the quarter driven by the strength of the U.S. economy and as a result management has guided for double-digit revenue growth for 2019. The company’s balance sheet remains solid with manageable debt levels and positive free cash flow generation. The Indian payments market has been growing as the country demonetizes their currency.  MasterCard is intending to invest $1B in India to take advantage of a mobile payments market that has grown at a compound annual growth rate (CAGR) of 121% from 2013-2018 (RBC Capital Markets). MasterCard partnered with technology company R3 to develop a new cross-border payment system which aims to allow institutions to make secure real-time payments to each other. In 2018, 77% of the world’s transactions were completed with cash (McKinsey & Company). This number continues to fall as card payments become more widespread which could present further growth opportunities for MasterCard.

PepsiCo Inc. (PEP)
PepsiCo has been performing well over the last quarter and management has guided for 4% organic revenue growth for 2019. The company’s strong cash flow generation has given management the flexibility to invest in the growth of the business and they expect free cash flow of $5 billion for 2019. Increases in daily snacking habits have more than offset declines in the consumption of carbonated beverages. PepsiCo is making strides to be more environmentally conscious with a new target of reducing first-use plastic by 35% across their beverage portfolio by 2025. Management is working to make their business more sustainable to fit in with the shifting priorities of consumers. PepsiCo plans to continue to create new types of products to bolster their portfolio and keep up with changing market trends.

Raytheon Company (RTN)
Raytheon performed well during the quarter, growing both sales and earnings. The company’s performance is supported by a record backlog of $43 billion. Raytheon’s planned all-stock merger with United Technologies’ aerospace division is expected to close in the first half of 2020. This merger is designed to leverage nearly 100 years of experience to bring the company more in line with its competitors like Boeing and Lockheed Martin. Management is confident that the merged company will be a cash flow generating machine. Raytheon is continually creating new, and innovative products such as a new, smaller and cheaper missile that will replace the 30-year-old missile currently used in the F-35 fighter jet.

Medtronic plc (MDT)
During the quarter Medtronic unveiled its new robot assisted surgery platform that they claim is more flexible and cost-effective than other systems currently on the market. This robot is expected to launch internationally in early 2020 and after two years will be brought to the US. This robot aims to compete with Intuitive Surgical’s current robot that has been operating with little to no competition. Medtronic has been improving their expense structure which has led to operating margin expansion. Along with their surgical robot innovations Medtronic also plans to release the next generation of their MiniMed insulin pump in 2020 which aims to reduce finger sticks by 95%.

Microsoft Corporation (MSFT)
Microsoft’s Azure cloud platform continued to be the biggest growth driver for the company during the quarter. Microsoft is currently in second place in the cloud computing market and is growing more than twice as fast as the market leader Amazon (Gartner). The company’s balance sheet remains extremely solid as they have strong earnings and cash flow generation that will easily cover their debt obligations. Microsoft plans to invest their excess cash into creating new products such as Surface tablets and game consoles as well as improving the functionality of their cloud platform to remain competitive in the space. Management reaffirmed their full year 2020 guidance of double-digit revenue growth and expects their cloud platform to be the main driver.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 9/30/2019.

Discovery, Inc.  (DISCA)
With the amount of content available today, Discovery has made it a priority to focus on more niche programming in order to compete in the current streaming market. At the end of September Discovery announced the launch of the Food Network Kitchen, a direct-to-consumer product with live streaming and new interactive cooking instructions each week. Food Network Kitchen will also offer over 800 on-demand classes, online shopping and home delivery and plans to be available through all Amazon, iOS and Android devices. A limited version of Food Network Kitchen is intended to be available for free at the end of October while the full suite of products will be available for $6.99 a month or $59.99 a year. Discovery had nearly $600 million in free cash flow this past quarter.

Johnson & Johnson (JNJ)
Johnson & Johnson has been struggling for most of the year due to lawsuits related to their role in the opioid crisis and talcum powder products. In August, a judge in Oklahoma ruled that Johnson & Johnson was responsible for paying for one year of Oklahoma’s costs related to opioid addiction. This came out to $572 million, and although it may seem like a lot, it was viewed as a win for them as it came well short of the 20 years of costs, or $17 billion, that Oklahoma was seeking. The talcum powder lawsuits all allege that Johnson & Johnson’s talcum powder causes ovarian cancer and mesothelioma in women using it for personal hygiene.  Johnson & Johnson has maintained that their products do not contain asbestos and that talc is not a known carcinogen. Talc has over 30 years of medical studies showing it is safe for human use. While the negative headlines in the short term are likely to continue to weigh on Johnson & Johnson, their strong pipeline and fundamentals should be enough to carry them through. They currently have over 30 drugs in phase three trials.

Corning Inc. (GLW)
The company that made the glass for Thomas Edison’s first lightbulb has gone through dozens of transformations over its 168-year history and is currently going through another one. As Corning’s revenue from TV manufacturers and wireless carriers shrinks it has been forced to come up with an alternative source of revenue to make up for their declining sales in other sectors. Luckily for Corning their product Gorilla Glass has been making up for their losses in other sectors as it is a key product in smart phones, tablets and smart screens in cars. As the demand for strong, shatterproof glass in phones, tablets and cars continues to grow, Gorilla Glass has Corning well positioned to take advantage. Apple recently announced a $250 million investment in Corning from their Advanced Manufacturing Fund.

Anthem Inc. (ANTM)
The health insurance industry has been down on talks of Medicare-for-All in the Democratic Primary overriding the otherwise positive results from Anthem. Both Sen. Warren and Sen. Sanders have healthcare proposals that would either eliminate or severely cut down the role of private health insurance providers at an estimated cost in excess of $30 trillion. Health insurance stocks have gone down as the odds that one of these senators is elected goes up. Although it is possible, and starting to become more likely, that one of these senators is nominated as the democratic nominee they would still have to win the general election before attempting to get a bill through Congress, which seems unlikely given Majority Leader Mitch McConnell has said multiple times that he would never allow a Medicare-for-All style bill through the Senate. While the threat of these healthcare plans is not nothing, it remains incredibly unlikely that the health insurance industry is going to be legislated out of existence.

UnitedHealth Group (UNH)
UnitedHealth Group is experiencing the same problems as Anthem with the negative sentiment in the industry overriding its positive results. Total revenues were up 8% while net earnings grew 15%.   UnitedHealth is a leader in data analytics and enjoys significant scale and cost advantages due to its powerful network effect. It maintains a solid balance sheet and over $17 billion in cash.

In Closing

Transparency of the internet is underscoring the great importance of ethics in leadership as many companies cutting corners are suffering the consequences. We are still finding opportunities during market weakness to add high quality businesses with strong free cash flows that have fallen out of favor as investors have gravitated to revenue momentum names. There appears to be the start of a reversion to the mean which should favor our disciplined approach to capital allocation. We aim to add value for our investors with our years of cumulative knowledge and hard study of   successful enduring businesses.  Research and rational reasoning are so critical and necessary in reducing risks and in pursuing compounded returns. We adhere to the Ben Franklin adage, “An investment in knowledge pays the best interest.”

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 Utility Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P MERVAL Index, Argentina’s flagship index, seeks to measure the performance of the largest, most liquid stocks trading on the Bolsas y Mercados Argentinos Exchange (BYMA) classified as domestic stocks. The constituents of the index must meet minimum size and liquidity requirements. 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 2019

Jun 30, 2019

Download Auxier Report Summer 2019

Summer 2019 Market Commentary

The US economy, while slowing, is still benefiting from a strong labor market, a stable service sector and robust consumer spending. Conversely big ticket “goods” producers are suffering from tariffs, a strong dollar and turmoil in the international markets.  39% of S&P 500 earnings in 2018 came from foreign countries (S&P Dow Jones Indices). Consumer facing franchises are generally seeing an improvement in sales trends and pricing. These include leaders in fast-food restaurants, coffee, snacks, beverages, skincare and other necessities. These businesses are reworking product offerings and utilizing technology to speed up service while enhancing the customer experience. Low fuel prices are helping to stimulate travel. This is particularly impactful for millennials who tend to value and spend on “experiences.” We continue to see strong fundamentals for businesses involved with the digital transformation of the economy, although prices for many of these businesses are getting prohibitively expensive.

Housing

The decline in the 30-year mortgage rate to 3.75% has stimulated refinancing activity. However high-end housing across the country has been softer partly due to the pull back of Chinese investment along with the limits on tax deductibility of mortgages over $750,000 and property taxes over $10,000, depending on your tax filing status. The dollar volume of homes purchased by foreigners for the 12 months ending in March was down 36%. First time buyers have been struggling to come up with down payments. Student loan debts nearing $1.6 trillion are impeding the growth of the entry level housing market.

New Technology Can Lead to Exuberant Pricing 

New technology disrupters garner excitement and often nosebleed valuations. A good example is the comparison of two transportation companies Uber and UPS. After 112 years UPS recently had their best quarterly performance in the history of the company. It operates in 220 countries and moves 3% of the global GDP of goods and 6%­ of US GDP. With profits exceeding $6.5 billion and a well-compensated workforce, it trades for a lower valuation than ride-sharing Uber which is losing $3 billion a year with a temporary workforce of drivers. FedEx is trading at ten times earnings, 40% lower than their historical valuation, over fears that Amazon will overtake them. We estimate it would cost a startup over $110 billion to get up to speed with FedEx which has been diligent in leadership through state-of-the-art ­logistics technology. In the late 1990s companies with great stories and no cash flow were the rage.  E-toys, Webvan food delivery and Pets.com all enjoyed great momentum and sky-high valuations until reality set in and they crashed and burned. Investing comes down to the cash an investment generates not just a story. We aggressively follow industry cycles and those with the most euphoria that are going parabolic tend to be late cycle. Excitement amid a merger frenzy marked the peak in commodities in 2011 after a 118-month boom. Commodities may have finally reached bottom after a painful eight-year correction. At the peak many commodities reached prices over double their cost of production. In farming it is so tough just to cover the cost of production. Today most of the farm sector is in a deep decline with farm incomes down over 50% from their peak while many commodities are trading for less than the cost of production. The odds favor food shortages in the next few years.

Companies in Secular Decline 

While we always like a bargain price many companies can appear to be statistically cheap but are actually in secular decline. Take Eastman Kodak, once a dominant blue chip.  It totally missed the digital transformation­ in photographs. We now take over two trillion pictures a year.  That is why an investor needs to be a dedicated, investigative researcher to seek out potential technological disruption that can interrupt the compounding of returns.  The power of compounded knowledge is also important to surviving and thriving over the long term.

Healthcare

Numerous health care stocks have lagged the market advance in 2019. Recurring adversarial headlines out of Washington DC have depressed valuations. The negative headlines drown out the exciting innovation that we see taking place that has the potential to cure many chronic diseases.  Abbot is making great strides in diabetes and heart valves. Medtronic is combining data analytics and artificial intelligence. Both Alphabet and Apple are making meaningful advances. Merck’s cancer fighting drug Keytruda is making excellent progress with sales gaining over 50% this past quarter. More competition and improved efficiency via technology is needed to drive costs lower. A total government takeover of healthcare could cost $32 trillion (Committee for a Responsible Federal Budget). Socialism means less competition and higher prices.  Venezuela’s state-run economic model now has inflation exceeding 10 million percent (CNBC). So much for “safe” sovereign debt. Venezuela was the number one ranked economy in Latin America in 2000.

Central Bank Distortion—Negative Interest Rates 

Nearly $13 trillion face amount of bonds from outside the US are priced to yield negative interest rates. If you deposit money in a savings account in a German bank you pay the bank interest. It is a form of competitive currency devaluation that gives an export advantage in the global markets. A risk is a prolonged trade/currency war. It is a man-made (central banks) distortion that leads to the misallocation of investments. It is killing European banks. Germany’s largest bank, Deutsche Bank recently dropped to less than one third of book value. Europe has relied heavily on monetary policy and has failed to make the tough policy decisions needed to restructure in order to unleash the potential of a market-based economy.

Hemp as a New Disrupter

The outlawing of hemp in 1937 (due to its relationship with its sister cannabis plant, marijuana) froze the development of the nation’s ability to understand the crop. However, with the passage of the 2018 Farm Bill, hemp was federally legalized. Through recent research, CBD effects on the body are being explored at greater lengths and scientists are finding beneficial uses across a vast array of medical applications. CBD has entered the market rapidly in accordance with recent deregulation and has created an unprecedented number of opportunities for development and investment. Due to the explosion of the hemp industry in a relatively short period of time, the supply chain has proven to be challenging. These bottlenecks are where investments could prove to be the most advantageous. CBD is positioned to eventually overshadow traditional over-the-counter pain relief (such as acetaminophen or ibuprofen). The health and wellness, beauty products, beverage and pet health industry have all championed this emerging hemp market and have benefited from this major introduction. The industrial side of hemp poses a similar number of disruptions as there is an incredible number of products that could soon be replaced by the hemp crop including certain textiles, plastics, building materials and insulation. Levi’s now makes a hemp shirt.  Oregon State University, in our back yard, has some of the best research in the country allowing us to gather unrivaled data and insights for identifying attractive investments.

Second Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned 1.92% in the second quarter vs. 4.30% for the S&P 500 Index and 3.21% for the DJIA. Stocks in the Fund comprised 95% and gained 2.24%. The equity breakdown was 81% domestic and 14% foreign. Health care stocks hurt performance for the year. A hypothetical $10,000 investment in the Fund since inception in July 1999 to June 30, 2019 is now worth $40,999 vs. $30,782 for the S&P 500. The equities in the fund have returned over 450% since inception. This was achieved with an average exposure to the market of less than 79% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 6/30/2019.  

Visa (V)
Visa Inc. saw strong performance in revenues and earnings for the quarter led by continued growth in payments volume, cross-border volume and processed transactions. During the quarter, the company repurchased 14 million shares of common stock using $2 billion of cash on hand. They have $8.3 billion of authorized funds available for further stock repurchases. Management expects revenue growth for the full-year 2019 to be in the low double-digits. Visa recently partnered with Razer to allow their 60 million users to make payments wherever Visa is accepted. This partnership will increase Visa’s reach in  Southeast Asia, a region which has a large underserved population of over 438 million. Visa also launched their payment system called Visa B2B Connect to offer seamless and secure cross-border payment processing for businesses.

PepsiCo Inc. (PEP)
PepsiCo is showing strong performance in their snacking and international segments. Shares have increased by 20.0% in the past six months, outperforming the S&P’s increase of 17.2%. The company’s growing snack business has largely offset slight dips in the beverage industry. PepsiCo has instituted a cost savings program that could achieve $1 billion in annual savings through 2023. They expect to generate cash flows of about $9B and return $8B to shareholders in the form of dividends and share repurchases. PepsiCo has cemented itself as one of the best dividend stocks on the market with 47 consecutive years of dividend hikes.

Microsoft Corporation (MSFT)
Microsoft’s revenue increased by 14% for the quarter while earnings increased by 19%. Revenue growth was led by increased demand for Microsoft’s Azure cloud offerings. Microsoft plans to increase their investment in cloud-based systems to continue to shrink the gap between them and Amazon in the cloud service segment. Microsoft has almost doubled its market share in the public cloud infrastructure industry over the last few years. They are now #2 in the cloud industry and well ahead of other competitors. Management is very optimistic about the continued growth of the company providing guidance of double-digit revenue and operating income growth over the next year. Microsoft’s debt is dwarfed by its near $1 trillion market cap. This should give the company the flexibility to continue investments in more growth-oriented projects.

Mastercard Inc. (MA)
Mastercard, the largest holding in the fund, continued its strong performance with another quarter of solid growth. Revenues were up 9% and net earnings were up 25% for the quarter. Revenue was boosted by a 12% increase in global gross dollar volume. Mastercard returned over $2 billion to shareholders in the form of share repurchases and dividends during the quarter. Year-to-date, Mastercard stock has increased by 40% versus a 17% increase in the S&P 500. Mastercard’s underlying infrastructure means that they can continue to increase the number of total transactions they can handle with only a minimal increase in expenses. Mastercard seems likely to benefit from the continued growth in the e-commerce industry which is currently growing five-times as fast as face-to-face transactions (eMarketer).

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 6/30/2019.

Bank of New York Mellon Corp. (BK)
After coming over from Visa in July of 2017, CEO Charles Scharf has worked to transform Bank of New York Mellon just as he did with Visa. Under Scharf Visa nearly tripled in price due particularly to his focus on improving their technology infrastructure and diversifying the company through international expansion. At Bank of New York Mellon Scharf has also focused on diversification and technology. While the diversification has hurt margins in the short-term and the investments in technology have lowered current earnings, we believe that the improvements Scharf has made will pay off in the long run. In the short-term Bank of New York Mellon continues to return capital to their shareholders with a recent 11% dividend increase and a nearly $4 billion share repurchase authorization.

Kroger Co. (KR)
In the second year of their Restock Kroger program, Kroger is continuing to invest in their technology and infrastructure to make good on their goal to “deliver anything, anytime, anywhere.” The results from Kroger’s investments can already be seen as their total sales, excluding fuel and the effect of their sale of their convenience store business, were up 2%. They have a long history of success and are trading at a steep discount of around nine times earnings. Kroger used their $1.4 billion in free cash flow in the quarter to invest in their business and reduce their debt.

Philip Morris International (PM)
Philip Morris has been facing extreme currency pressure due to the strength of the US dollar. Despite the foreign exchange headwinds, they continue to dominate the international tobacco market with total market share increasing by a point to 28.4%. Their in-market sales were up 1.7% led by strong growth from their IQOS heated tobacco devices which grew by nearly 35%. IQOS has taken off in Japan and is starting to pick up steam across the rest of the globe with the EU and Russia both seeing double-digit growth. Philip Morris has marketed the IQOS devices as a substitute to traditional cigarettes that releases fewer chemicals since the tobacco is not burned. The rapid growth of IQOS is only projected to increase as local governments push this alternative.

Zimmer Biomet Holdings (ZBH)
Zimmer Biomet has faced some fixable issues with their supply chain hampering current operating results. However, they are a low-cost provider with a strong history in hip and knee replacements. Their rapidly growing S.E.T (surgical, sports medicine, extremities and trauma) and Spine & CMF (craniomaxillofacial) divisions leave them well positioned to take advantage of the growing demand for medical devices. The peak demand for hips and knees is 68 years old—just about the average age of the baby boomer today.  Zimmer Biomet is planning on using their strong free cash flow generation to further reduce their debt in 2019.

Our primary focus is to take advantage of the power of compounding with businesses and management teams that appear likely to successfully navigate through the most challenging environments. We search for solid businesses and managements, priced right, that can pursue compelling returns over long periods. The explosion of data has contributed to the power of networks and platforms. With network effects businesses can leverage their users with the potential to grow returns with greater scale. By utilizing data analytics and artificial intelligence they are better able to identify customer needs. This is especially true in digital advertising, Facebook, Google Search and YouTube are a few examples. As users increase, the value of the experience or product can increase exponentially.

Shortage of Shares 

Supply and demand is still favorable for publicly traded US stocks as buybacks are running close to $950 billion annualized (Standard & Poor’s). Private equity demand has exploded with over 8000 firms armed with over $2 trillion in buying power (Bain & Co.). We favor businesses with high free cash flow yields which private equity buyers seek. Industry mergers are common as well. With investors fear of volatility in public auction markets together with disclosure and regulation we think some of the best odds for success come when dealing with  smaller sums of money in the markets where investors can take advantage of the periodic waves of irrational behavior to score bargains not available in the private 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: Spring 2019

Mar 31, 2019

Download Auxier Report Spring 2019

Spring 2019 Market Commentary 

Favorable economic trends in the US continued in the first quarter. Consumer spending comprises over two thirds of the US economy. Services are also big, contributing over 68% of US GDP and over 83% of private employment (Moody’s). Lower oil prices, declining borrowing costs, regulatory relief and increasing wages have provided a positive backdrop. Credit spreads are still very tight despite the accelerating growth in covenant-lite corporate debt and leveraged loans. The Fed made a material reversal at year-end and lower interest rates have fueled gains for both stocks and bonds. Unprecedented technological innovation is driving impressive productivity gains which has helped to keep inflation in check. If California were a country it would rank in the top five globally by GDP. The recent plethora of initial public offerings coming out of California this year is a huge positive for  that state which is heavily dependent on capital gains for the majority of its tax revenues. Trade uncertainty and Brexit are contributing to weakness in Europe, Japan and China which impacts US companies exposed to those end markets. $10 trillion in negative yielding bonds continues to hamper European banks and lending. Where socialism grows so does inflation and stagnation. Inflation in Venezuela now tops one million percent annually. Bondholders there have been crushed.

Program trading and the growth of exchange traded funds have led to some wild swings in securities as mathematical algorithms tied to momentum strategies accentuate moves–both up and down. Oil declined over 35% in the fourth quarter of 2018 only to rally over 40% in 2019. This highlights the importance of knowing the facts, fundamentals, supply/demand and underlying cash flows of what you own. In 2018 we endured two brutal corrections, one in the spring and one at year-end, marking the first time in 24 years that Treasury bills outperformed stocks. After a similar market decline in 1994 a strong rebound in equities lasted for three years. To enjoy the fruits of compounding it is so important to buy right and then  stick with good businesses over long periods.

Opportunities

Healthcare is an industry that can get hit hard on political headlines like “Medicare-for-All.” The cost of this proposal is estimated at $28-32 trillion over a decade (Urban Institute). Since 1999 we have done well buying  businesses with strong fundamentals where the headlines are gloomy. We see value in healthcare today.  Uncertainty and negative sentiment mask advances in the cures for many diseases through data analytics and medtech. Looking across the investment spectrum we see  excesses in venture funding and private equity.  Private equity firms are forced to pay high control premiums with borrowed money. There is now over $1.8 trillion in buying power in private equity. Bond yields  today after tax and inflation don’t compensate for the loss of purchasing power. The heavy mathematical-based trading in exchange traded funds is creating attractive opportunities as the liquidity buffers have diminished in recent years, leading to shocking drops and temporary misappraisals in many blue chip names. There is a big advantage in dealing with small sums of money that are not subject to a timetable or “liquidity event.” Our universe of investable ideas is large. According to Bernstein, the valuation spread between the most expensive and cheapest stocks is the widest in 70 years. Value tends to outperform when dispersion in valuations across the market is at an extreme.

Euphoria in Technology

Low interest rates have  contributed  to a boom in US venture funding ($137 billion in 2018) and now an avalanche in IPO supply. Just as we saw in 1999-2000, there is a growing enthusiasm surrounding money-losing business models. Many of the delivery models are dependent on freelance workers (gig economy) that tend to dry up in tight labor markets. Costs are sure to rise with unemployment levels at 50-year lows. Over $20 billion dollars a year is being poured into streaming content with more than 500 new programs this year. Who has time to watch all these shows? Some recent IPOs are seeing valuations in excess of 50 times sales, such as the enterprise software company Zoom, a provider of video conferencing. This compares with the average S&P company that trades less than three times sales. WeWork is a shared-office real estate company that is being valued at over $46 billion. Last year they lost $1.9 billion on revenue of $1.8 billion. This is starting to remind me  of March 2000, as envy took hold and retirees were putting 100% of their life savings in tech stocks that were going parabolic. Many internet mutual funds were doubling over short periods only to go out of business within three years. In 2000 the Nasdaq lost 39.29% of its value dropping from 4069.31 to 2470.52. The next year it retreated 21.05%, from 2470.52 to 1950.40. In 2002, the index lost 31.53% falling from 1950.40 to 1335.51. From the March 2000 high of 5048.62 to the October 2002 low of 1139.90 the Nasdaq index lost 76.81% (Dow Jones). So much for the efficient market theory. In 2018 speculators in Bitcoin lost over 75%.

Investing is about buying productive assets that will yield increasing cash flows over time. It is about understanding the qualities of management that can create or destroy value. It is the “craft of the specific.” At this point of the tech cycle over 81% of the new companies coming to market are losing money  (Dow Jones). The idea of putting your hard-earned savings on autopilot without an understanding of odds, fundamentals   and a daily  dedicated research effort has always baffled me.  Look at the S&P passive index craze which peaked in 1999 only to see the worst ten-year period in US stock market history through 2009. The Auxier Focus Fund returned a net 78.43% vs. -9.10 % for the S&P 500 from 12/31/99 to 12/31/09.

Economic Trends

Powerful investment trends include the digitization of the economy. Visa and Mastercard are enjoying the growth in the conversion from cash to plastic. Cerner is digitizing medical offices. Alphabet, Microsoft, Facebook, UnitedHealth and Amazon are examples of industry leaders that enjoy powerful networks and are utilizing artificial intelligence and  data analytics to drive productivity.  The advertising business is being transformed  as digital ads now exceed  50%. Newspapers have been on the wrong side of the digital trend in ads  as 1800 closed between 2004 and 2018 (Dow Jones). Travel fundamentals are very strong, global airfares are dropping and 80% of the world population has yet to travel on a plane. Boeing is suffering today but longer term their problems appear fixable and demand trends solid. People young and old love to travel and continue to value “experiences.” Airbnb, Booking Holdings and Marriott are some examples of companies that should continue to benefit.  The legalization of hemp is a potential disrupter in healthcare, cosmetics, food, plastics and building materials to name a few. In 1619, Jamestown colony law declared that all settlers were required to grow Indian hemp. George Washington and Thomas Jefferson were big hemp farmers. We see a huge market for hemp CBD oil in pain relief and the fight against inflammation. Oregon is a leader in hemp research.    

First Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned 9.16% in the first quarter vs.  13.65% for the S&P 500 Index and 11.81% for the DJIA. Stocks in the Fund comprised 92% and gained 11%. The equity breakdown was 79% domestic and 13% foreign.  A hypothetical $10,000 investment in the Fund since inception in July 1999 to March 31, 2019 is now worth $40,228 vs. $29,512 for the S&P 500. This was achieved with an average exposure to the market of less than 79% over the entire period. After the steep  13.52%   decline in the fourth quarter of  2018, The S&P 500 rebounded dramatically as the Fed  reversed policy pausing interest rate hikes. The fears of a sharp earnings recession have also abated with revenues growing over 5% in the first quarter.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 3/31/2019.

Mastercard Inc. (MA)
While the banks in general have languished, Visa and Mastercard have continued to show strong operating results and enjoy powerful networks in the face of an increasingly competitive payment space. The Fund has now gained over ten times the original investment in  Mastercard and nine-fold in Visa.  This shows the value of tracking fundamentals of individual businesses and  knowing which to hold for the very long term.  Mastercard has the third most blockchain patents of any company yet CEO Ajaypal Banga has remained cautious saying that “the business model is not proven” and that there was still “a lot to improve and change over time.”  However, in a recent conference (Fintech Ideas) Mastercard indicated they are still deeply invested in eventually using blockchain to improve supply chains and deter counterfeit goods.  Mastercard had  a 52% return on investment (ROI) in 2018 with over $5 billion in free cash flow.

Central Pacific Financial Corp (CPF)
Located in Hawaii, Central Pacific has been able to consistently improve key performance indicators including net interest income, net interest margin, return on equity and efficiency ratio. Hawaii saw a banner year with visitor expenditures of $18 billion, up 6.8% over 2017.

Zimmer Biomet Holdings (ZBH)
Zimmer Biomet specializes in knee and hip replacements while also providing a variety of other joint replacements. With the obesity rate in the United States over 30% and the number of Americans over 65 nearing 50 million, the demand for joint replacements will continue to grow. Zimmer Biomet is trading at a discount with a forward price-to-earnings ratio of under 15x. They had over $1.3 billion in free cash flow in 2018.

Microsoft Corp. (MSFT)
Satya Nadella has led Microsoft to another record quarter by focusing on Microsoft’s proprietary digital capabilities. This is most evident in their push in artificial intelligence, which can use Microsoft’s expansive amount of data to “learn” more than other programs could. Their subscriber and cloud-based products have been firing on all cylinders. Azure has been a rocket, growing over 70% in the first quarter alone. Microsoft has over $135 billion in cash and short-term investments and returned $6.1 billion to shareholders through dividends and share repurchases in the first quarter of 2019.

BP p.l.c. (BP)
CEO Bob Dudley’s bet on market stabilization has paid off with oil prices steadily rising since the new year leading to increased margins. BP has also started to reap the rewards of their heavy investments in discovery and technology. Their recent expansion in the Atlantis platform network increased production to 200,000 barrels of oil and 180 million cubic feet of natural gas per day. Meanwhile, their technology investments have allowed them to reduce overhead and cut their operating costs. BP has a dividend yield of over 5.5%.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 3/31/2019.

Biogen Inc. (BIIB)
Biogen dropped sharply on news it was canceling its once-promising Alzheimer’s drug, Aducanumab. One of the first Alzheimer’s drugs to make it to phase three trials, Aducanumab, had extraordinary potential but was canceled after disappointing trial results led Biogen to determine it was no longer a cost-effective investment. Still, they are the most focused company we can find in researching diseases of the brain like multiple sclerosis, Parkinson’s, and ALS.  Biogen is now trading at under 11x earnings and has remained flexible with nearly $5 billion in cash and equivalents.

The Kroger Co. (KR)
Kroger is in the first year of its 2020 Restock Kroger program that aims to improve efficiency and differentiate the company with exclusive brands. In 2018 Kroger achieved over $1 billion in cost savings through process improvements, adjusted earnings per share on the high range of guidance, and operating profit and free cash flow goals. In addition, they raised dividends for the 12th consecutive year, announced partnerships with Home Chef, Microsoft, Nuro, Ocado and Walgreens and expanded pickup and delivery to reach 91% of Kroger households. Like most grocery stores, Kroger has a high inventory turnover ratio of over 14x allowing them more flexibility in response to changes in the economy.

UnitedHealth Group (UNH)
UnitedHealth Group’s stock price  has corrected  mostly due to  a push for Medicare-for-All by presidential  candidate Bernie Sanders. The company has been successful with the use of data analytics and scale to serve clients at a lower cost than rivals. This has resulted in strong enrollment growth and industry leading returns on capital. They have been a leader in product innovation as well. UnitedHealthcare grew in the first quarter to now serve over 2 million people while Optum continues its strong performance with double-digit revenue and earnings growth. UnitedHealth had over $13 billion in free cash flow in 2018.

Berkshire Hathaway Inc. (BRK.B)
The holding company famous for its CEO Warren Buffett, Berkshire Hathaway has made a major bet on bank stocks which has hurt them due to the headwinds of a flat yield curve and slow loan growth. In addition, goodwill write-downs on Kraft Heinz cost Berkshire over $3 billion on its 26.7% stake. Still Berkshire is probably the best run property casualty insurance company in the world led by skillful managers like Ajit Jain.

The Coca Cola Co. (KO)
Coca Cola continues to be the leading brand in the beverage industry.  In order to adjust to evolving market trends they just announced a new product called Coca Cola Coffee that will soon be released in 25 global markets.  Their stake in Monster Energy Drinks and focus on healthier beverage options such as Coke Zero continues to pay off.  Despite strong top-line organic revenue growth of 6% in the quarter the company has still trailed Pepsi in the push for healthier drinks.  The company is reinvesting heavily in its brands and enjoys significant economies of scale and unit cost advantages over competitors.  Over the last 8 years Coke has returned over 90% of their free cash flow to investors through share buybacks and dividends.

Is Inflation Dead?

Businessweek recently had a cover entitled “Is Inflation Dead?” In 1979 when stocks were a compelling generational buy at nine times earnings, Businessweek ran a cover “The Death of Equities.” We are seeing the potential for food inflation as China has lost close to a third of their hogs to disease. Ethanol mandates are rising from 10%-15%, boosting corn demand. Most agriculture crops are close to or below cost of production as farm incomes are off nearly 50% from 2013 highs. We could be close to the bottom of a long downturn in agriculture. Shipping costs are climbing as truck driver shortages intensify. Companies such as PepsiCo and Procter & Gamble have been able to raise prices. Pepsi and Procter are  showing some of the best growth in over five years. We can’t predict macro events, but we can intensively research well-managed  companies that have the ability to endure through the most difficult economic environments. Many of our investments have low mandatory capital investment needs, high and growing free cash flow yields and attractive returns on invested capital. This type of model is best in periods of increasing inflation.

Conclusion

While we are encouraged by the market recovery, earnings in general have not been materially improving. In an environment that is enthusiastic about “growth at any price” we remain focused on making careful buys in outstanding businesses, with strong ethical leadership, durable models with solid balance sheets and improving free cash flow. We are looking to buy  at a discount to intrinsic value with the goal of a double or triple play over five to ten years. We believe the pendulum has swung too far in the direction of  money-losing speculative ideas many of which lack sustainable earnings. When asset classes go parabolic  it has been our experience that  an inflection point is close where markets will purge the excesses.

 

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: Winter 2018

Dec 31, 2018

Download Auxier Report Winter 2018

Winter 2018 Market Commentary

In the fourth quarter, the S&P 500 fell 13.52%. We just endured the worst December market downturn in 88 years.  For the first time since 1994, Treasury bills beat most major investment classes as over 95% of global assets declined in 2018. Speculation in the energy sector over Iranian sanctions was purged in the quarter as oil prices plunged 39% from their peak in early October. The energy sector was the worst performer, down 24%. Due in large part to amazing output from the Permian Basin, US crude production grew to a record 11.9 million barrels per day late last year. The US is now the number one producer in the world. This is like a huge tax cut for Americans who are traveling more in larger vehicles and valuing “experiences.” Global travel and tourism have outstripped growth in GDP the past seven years by a large margin. With consumer spending comprising over two thirds of the US economy, oil declines are a big plus. The deep economic downturns in the 1970s were largely a result of parabolic price increases in oil. Today just the opposite. Oil, natural gas, wind, solar, battery storage, etc. point to ample supplies while technology is helping to mitigate demand. This together with strong employment gains are a stabilizing force for the US economy. Skilled workers are finally seeing a real reward for their labor. There now is a shortage of 60,000 truck drivers. While the domestic economy has been strong, we are seeing a deceleration in earnings growth for many sectors of the S&P as the world economy slows.

It is estimated that over 85% of trading on the exchanges is now tied to momentum-based mathematical algorithms. With the proliferation of exchange traded funds, investors may have miscalculated liquidity. An exchange traded fund can’t be more liquid than the underlying securities. It was the high expectation momentum stocks that suffered the most in this correction. In a momentum market it is easy to lose price discipline, to overpay and over-borrow both for acquisitions and stock buybacks. The good news on the buy side, we are seeing a meaningful compression in price earnings multiples which benefits long-term investors seeking double-play returns. The semi-informed electronic herd is creating great opportunities for the diligent investor, armed with cumulative knowledge of underlying facts, fundamentals and cycles. Rigorous day-to-day research can pay off big in bad markets by understanding where you are in the cycle and being able to quantify and minimize risk while increasing odds.

I like to study high achievers in any field. I am reading a biography on the champion New England Patriots football coach Bill Belichick. He was watching game film at age six. He talks about the grinding day-to-day process. Not the results. There are no easy formulas. It is day-to-day nitty gritty grinding focus on details. Costco founder Jim Sinegal was famous for his saying “retail is detail.” That is what serious investing is all about. Otherwise you are speculating.  With a normalization of interest rates and the reduction of the Fed’s balance sheet at $50 billion a month, there seems to be a shift from momentum and “growth at any price” to cash flow and valuation. Our most profitable investments have usually started with bad headlines, some pain and a bargain price. Conversely, investment cycles end when everything looks great. In 2000 market darling Cisco looked terrific.  Then, over the 13 months ended April 6, 2001, it plummeted from $82 to $13.83. We remain focused on the operating fundamentals and cash flow of individual businesses and where we are in each industry cycle.

Fourth Quarter 2018 Performance Update

Auxier Focus Fund’s Investor Class declined 10.36% in the fourth quarter vs. a drop of 13.52% for the S&P 500 Index. For the full year the investor class returned -4.06%. The S&P gave back 4.38%. The NYSE Composite Index which includes all the common stock listed on the New York Stock Exchange lost 11.2%. Foreign emerging markets declined 17% with China’s Shanghai Index surrendering 24.6%.  In the Fund, domestic stocks comprised 77%, foreign 14%, with cash and “workouts” 9%.  From inception at the top of the market in July 1999 to December 31, 2018, a hypothetical $10,000 investment in the Fund has grown to $36,852 with an average equity exposure of 80%. This compares favorably to $25,968 for the fully invested S&P 500. We would encourage investors to check out our risk-adjusted results in the most difficult down markets over the past 19 years.  Our focus is on a systematic low risk approach to the markets and in harnessing the power of compounding.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 12/31/2018.

Yum! Brands, Inc. (YUM)
The parent company of some of the largest chain restaurants in the world, Yum! Brands manages Taco Bell, KFC, Pizza Hut and WingStreet outside of China. Between all their brands, Yum! operates over 46,000 restaurants with over $46 billion in annual sales. KFC, Pizza Hut and Taco Bell are number one globally in the chicken, pizza and Mexican food categories respectively. With approximately 98% of their restaurants franchised, Yum! Brands has managed to create a global fast food empire while remaining capital light and reducing their own risk.

The Coca-Cola Co. (KO)
Coca-Cola is working to expand into other markets and make strategic acquisitions that align with their expertise while continuing their current dominance in the carbonated beverages market. They recently acquired Costa Limited to enter the $500 billion annual hot beverage market and have launched Smartwater in 20 new markets in 2018.

McDonald’s (MCD)
Management led by CEO Steve Easterbrook has been aggressively offering delivery, mobile order and digital menu boards. They have reduced overhead costs while improving the quality and consistency of their stores. So far this year, their company-operated restaurant expenses are down 17% and their selling, general and administrative expenses are down 9%. McDonald’s recently partnered with Uber Eats to deliver their food and launch a new ad campaign.

Merck & Co. (MRK)
Merck is known for its signature drug, Keytruda, an immunotherapy drug currently registered to treat seven different types of cancer that brings in nearly $2 billion quarterly. Despite having a blockbuster drug that is still on the upswing, Merck has continued to strengthen their pipeline and invest in new drugs such as Gardasil, an HPV vaccine that is already bringing in over $1 billion per quarter, and Bridion, the first selective relaxant binding agent on the market.

Procter & Gamble Co. (PG)
Management has focused on reducing their costs of products sold and their selling, general and administrative expenses in order to maximize the amount of capital they can return to shareholders.  In the first quarter of their fiscal year, Procter & Gamble returned $3.2 billion to shareholders through dividends ($1.9 billion) and stock repurchases ($1.3 billion). Led by activist investor Nelson Peltz, PG has restructured its business around six “small business units” each with their own management team. They have reduced brands from 165 to 65 in order  to  compete with smaller, more nimble companies such as Harry’s Shave Club while still granting them the cost synergies of a massive company.

Arcos Dorados Holdings Inc. (ARCO)
The largest McDonald’s franchisee in the world, Arcos Dorados exclusively operates and manages McDonald’s restaurants in twenty countries in Latin America and the Caribbean. Despite taking severe losses in Venezuela due to the country’s problematic macro environment, Arcos Dorados has managed to increase revenues by 8.3% on a constant currency basis while increasing their net income by 68%. Brazil’s newly-elected president Jair Bolsonaro and finance minister Paulo Guedes are working to privatize more industries and instigate pension reform, while rooting out corruption. Guedes was educated at the University of Chicago.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 12/31/2018. 

Zimmer Biomet Holdings (ZBH)
Fundamentals at Zimmer Biomet are steady with a powerful franchise in hip and knee replacements. ZBH  generates over $1 billion annually in free cash flow.  They are close to an FDA approval for their  total knee replacement Rosa robot. A Zimmer Biomet manufacturing plant in Indiana has been hampered by regulatory issues the past two years but management is showing steady progress in fixing the problem. We see good upside in the stock when this problem is ultimately corrected.

Discovery, Inc. (DISCA)
Discovery continues to build their media influence of unscripted content.  As the leading  provider of nonfiction content, Discovery has built a global market focusing on “superfans.”  They have tapped into offering shows that no other platform runs, while also picking up the rights to niche sports like golf and tennis.  Recently, news was released that CBS is looking to grow their balance sheet, in order to renew the rights to the NFL.  Bankers have pitched Discovery as a merger target.  While we don’t know if CBS will acquire them, we do feel consolidation in this space will happen due to the need to scale up against players like Amazon and Netflix. The stock seems really cheap at nine times earnings with a double-digit free cash flow yield.

Altria Group, Inc. (MO)
Altria has aggressively pushed its way into the new E-cigarette (also known as vaping) and cannabis markets by making deals with Cronos and Juul. With Cronos, Altria gets a 45%, with an option to increase to 55%, stake in a Canadian marijuana company with a strong research division and an asset-lite approach that avoids the actual cultivation of marijuana. With Juul, Altria gets a 35% stake in one of the fastest growing E-cigarette companies while also providing it with the cash to continue its rapid growth. Sales for Juul grew from $200 million in 2017 to over $1 billion in 2018.  However, they paid a very steep price for entry.

Microsoft Corp. (MSFT)
Microsoft has been transitioning away from personal computing and toward services, which now make up over 60% of revenues.  Under the leadership of Satya Nadella the company has made huge strides in cloud computing. The Azure cloud business has been growing over 75%. Like many companies, their stock has taken a hit since reaching record highs in the fall of 2018, yet they have a fortress balance sheet with over $135 billion in cash and short-term assets and less than $70 billion in long-term debt. Microsoft had over $10 billion in free cash flow in their last quarter.

Bank of America Corp. (BAC)
Management at Bank of America, led by CEO Brian Moynihan, is working on reducing risk and becoming more efficient while enhancing the customer experience.  In early 2019, Bank of America was awarded the first J.D. Power and Associates’ website certification for online experience while last year they were awarded J.D. Power’s first mobile app certification. The stock looks inexpensive at less than ten times 2019 earnings estimates.

Mastercard Inc. (MA)
Despite strong performance with currency neutral revenue growth of 17% and earnings growth of 36%, Mastercard has fallen from its peak in the fall of 2018 due to macroeconomic concerns. Mastercard has done a great job in fending off the competition in the digital payments space while taking advantage of the digital trends away from cash payments.

Risks 

It is difficult to endure long term without a vigilant eye on risk. Risk management is most valuable in expensive markets as torpedo drops interrupt the compounding process. Rapidly growing debt loads are often a precursor to economic panics and downturns. Rising interest rates tend to expose poor capital allocation. As the Federal Reserve has been reducing their balance sheet by $50 billion a month, that has led to increased volatility and shifted investor focus away from just revenue growth to cash and balance sheet strength. This past year  digital speculation in the form of Bitcoin crashed from over $20,000 at the peak to under $4,000. US venture-backed companies raised a record $131 billion in 2018 topping the $105 billion set in 2000 according to PitchBook. This combined with record funding out of Japan with Softbank and China points to the potential for oversupply in many areas of technology. This could get worse if the tech initial public offerings overheat in 2019. The cash burn1 on startups in Silicon Valley is far greater than the mania peak in 2000.  The growth in borrowings out of China and the lack of price discipline in foreign acquisitions is very similar to the behavior of the Japanese in the late 1980s. They were paying crazy prices for trophy properties like Pebble Beach and Rockefeller Center. The past few years the Chinese have overpaid for the Waldorf Astoria and many other “trophy” names. This led to the seizure in 2018 of the largest Chinese insurance conglomerate Anbang. The Japanese Nikkei Stock Index hit a peak over 39,000 in 1989 only to drop to 7,500 twenty years later after their debt binge. The true cost in investing is not knowing what you own or what you are doing.

Other misperceptions of risk include the safety of utilities and big companies. Recently the largest utility in the country, Pacific Gas and Electric, declared bankruptcy over wildfire liabilities in California. In 2007 Texas Utilities went bankrupt. In 2001 Enron was the largest bankruptcy in history, a year after Fortune magazine featured them as having industry best practices. In 2000 CFO magazine named Enron’s Andrew Fastow CFO of the year. Enron had acquired our local utility Portland General Electric and we saw the rapid buildup of off-balance sheet debt and sold the stock at $80 before it dropped to zero. Overpaying and overborrowing are the recurring sins of capital allocation.

Opportunities  

Corrections and recessions are necessary to purge imbalances in a market-based economy. They should be welcomed as an opportunity to shop for the best quality investments at bargain prices. I remember like yesterday personally investing in 1994, the last time T-bills outperformed stocks (S&P 500). The number two economy at the time was Japan which suffered from crushing debt, crashing stock and real estate markets. The fears proved to be overblown. Fast forward to today, and China’s slowdown has captivated the investment news. In 2017 US exports to China were $130 billion or .6% of our $21 trillion economy. Imports from China were $506 billion.  Our portfolio’s valuation is an attractive 13.9 times forward earnings with good free cash characteristics. Our greatest investments have been made in the time of market panics or recessions. Today, emerging markets (MSCI Emerging Markets Index) are interesting at 12 times earnings. The Fund is positioned for a slowdown based on quality, balance sheet strength and free cash flow yields.  Being late in the economic cycle, we have remained weighted in healthcare despite negative headlines. Since 1946 healthcare has outperformed the market, as measured by the S&P 500, 75% of the time in down markets. We like the innovation we are seeing in medical technology with data analytics leading to rapid advances in tackling cancer, brain and other chronic diseases.

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.

1 Cash burn aka burn rate is normally used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations; it is a measure of negative cash flow.

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 2018

Nov 16, 2018

Download Auxier Report Fall 2018

Fall 2018 Market Commentary

In the third quarter the US was a global leader in equity returns. Strong GDP growth, tax cut stimulus, deregulation, employment gains and higher wages contributed to strong consumer confidence and spending. However, after recently meeting with CEOs and CFOs of over 50 companies we learned firsthand about negative headwinds weighing on earnings forecasts for 2019. Namely, a strong dollar hurting export demand, tariffs, higher oil, transportation, labor and interest costs, which all can negatively impact profit margins. China’s depreciating currency has posed additional challenges while emerging market currencies have reached multi-decade lows. The stocks of industrials, autos, chemicals, semiconductors and homebuilders have been discounting a global growth slowdown–possibly an earnings recession.  Rising mortgage rates, loss of deductions in high-tax states and overheated markets are hampering high-end housing. Auto affordability has declined with high prices and tighter bank credit as most buyers make payments, although domestic truck sales are surging. With US oil companies solidly profitable at $50 a barrel, fundamentals support lower fuel inputs as commodities will tend to trade close to the cost of production over time.

Rising Interest Rates Are Bringing Back Discipline to Capital Allocation

For the past decade momentum strategies continued to outpace those based on price, value and buying at a discount to intrinsic value. That may be changing. Overpaying and overborrowing are recurring investment sins that tend to destroy intrinsic value over time. General Electric is a good example of a company that mispriced long term care policies, and grossly overpaid for energy assets. A $10,000 investment in GE in July of 1999 when GE was one of the most popular and highly valued companies in the world is now worth less than $6,300. When money is free and easy it is common to pay for “growth at any price.” Rising interest rates are starting to expose the misallocation of capital while flushing out excesses.  Money losing speculations are suffering. Bitcoin has corrected over 75% from its speculative high earlier this year (source Standard & Poor’s.)  83% of initial public offerings (IPOs) are losing money (WSJ) while the cash burn1 of the top 200 private Silicon Valley startups is 5-10 times worse than at the peak of the tech mania in 2000 (source Benchmark Capital.)  Do we really need 130 food delivery companies? Wall Street tends to ignore signs of excess supply which often follows exuberance in an industry doing well.

Overall supply of publicly traded stocks in the US continues to decline as stock buybacks in the US is expected to reach $1 trillion in 2018 according to Goldman Sachs. This demand is favorable, although ultimately rising revenues and cash flows are the critical metric in building underlying intrinsic values. Global mergers exceeded $2.5 trillion in the first half of 2018, up 61% over the prior year. Mergers for the full year 2018 are on pace to exceed $5 trillion (source Thomson Reuters.) According to KPMG over half of mergers negatively impact shareholder value.

Watch the Growth in Borrowed Money

Historically, a financial crisis usually follows a rapid buildup of debt. We are witnessing steep corrections in countries where economic policies are poor and where there has been excessive borrowing, especially in dollar denominated debt. Turkey, Argentina, Italy and China are a few examples of countries that have been struggling with deteriorating balance sheets. Excess borrowings can create a risky situation for companies perceived to be conservative. AT&T has accumulated a massive $250 billion in liabilities. Leverage loans seem to be the preferred method for funding speculative grade companies and excesses continue to build with the proliferation of covenant-lite loans. That market now is larger than the high yield bond market. The price to EBITDA (earnings before interest, taxes, depreciation and amortization) paid for acquisitions between 2007-2015 averaged nine times. The past two years that price has jumped to 15 times EBITDA, reflecting increased risk from higher acquisition costs.   It is vitally important to know the status of individual balance sheets. Higher interest rates and the withdrawal of liquidity should help to normalize volatility in the stock markets where the average NYSE stock has typically fluctuated 50% a year.

Third Quarter 2018 Performance Update

Auxier Focus Fund’s Investor Class returned 7.37% in the third quarter vs. 7.71% for the S&P 500 Index. The stocks in the Fund returned over 8.3%. Domestic stocks comprised 80%, foreign 15%, with cash and “workouts” 5%.  From inception at the top of the market in 1999 to September 30, 2018, a hypothetical $10,000 investment in the Fund has grown to $41,111 with an average equity exposure of 80%. This compares favorably to $30,027 for the fully invested S&P 500. Healthcare names, from health insurers, pharmaceuticals and biotech were strong recent performers in the Fund. Many were purchased at attractive prices in the teeth of negative headlines over the past two years.

Contributors to the quarter:  our outlook on a cross section of portfolio positions with a positive return for the quarter ended 9/30/2018.

Express Scripts Holding Co. (ESRX) 23.05%
Cigna is acquiring pharmacy benefit manager Express Scripts for an estimated $67B or over $95 a share. The deal includes $48.75 in cash and 0.2434 shares of Cigna for each share of Express Scripts and is expected to close by the end of the year. We originally invested in ESRX at $7.63 a share after a face-to-face meeting with management late on a Friday.

Abbott Laboratories (ABT) 20.79%
Abbott is a leader in nutrition, diagnostics, pharmaceuticals and medical devices. One of their new devices, MitraClip, did better than expected on the Cardiovascular Outcomes Assessment of the MitraClip Percutaneous Therapy leading to high expectations for the future of the device. The introduction of the FreeStyle Libre blood glucose monitor is an exceptional new innovative product.

Biogen Inc. (BIIB) 21.73%
Biogen is a market leader in the treatment of Multiple Sclerosis (MS) and Spinal Muscular Atrophy (SMA). In addition to their current treatments, Biogen has been heavily investing in research into Alzheimer’s drugs with two drugs, Aducanumab and E2609, currently in phase three trials. According to analytics company GlobalData, the Alzheimer’s market is expected to grow to over $15 billion over the next decade. Biogen’s free cash flow for 2018 appears likely to exceed $4 billion.

Zimmer Biomet Holdings (ZBH) 18.21%
According to AARP, 10,000 baby boomers in the US turn 65 every single day. The demographics for Zimmer Biomet medical devices are improving. Zimmer Biomet is a leader in hip, shoulder, elbow and knee replacements as well as producing vital devices for heart and spinal surgery. Their free cash flow is over $1 billion annually.

Merck & Co. (MRK) 17.80%
Merck’s signature drug, Keytruda, is an immunotherapy that is currently approved to treat seven types of cancer. Keytruda works by blocking the PD-1 pathway that cancerous cells use to hide from the body’s T cells and then letting the patient’s own immune system destroy the cancer. Keytruda was recently approved in China for adults with unrespectable or metastatic melanoma. In addition to Keytruda, Merck has a strong pipeline that includes nineteen drugs in phase 3 trials and three drugs that have already passed phase 3 trials and are awaiting FDA approval.

Microsoft (MSFT) 16.43%
Microsoft has been very successful in their transition into the new age of computers. Personal computing now only makes up 33% of their revenue and that includes their Xbox, Surface and advertising revenues. LinkedIn now has over 575 million users while Office 365 reaches over two billion first-line users. Microsoft Azure, growing over 70%, is a cloud product that is not in direct competition with its customers. The company has over $130 billion in cash and short-term assets.

Medtronic (MDT) 15.55%
Hoping to take advantage of the rapidly growing medical sector, Medtronic has focused on four high growth areas: Cardiac and Vascular, Restorative Therapies, Minimally Invasive Therapies, and Diabetes. The diabetes group has seen particularly strong growth from the MiniMed 670G featuring Smartguard, which is the world’s first hybrid closed loop insulin system. The Tax Cuts and Jobs Act freed up over 40% of their cash helping them towards their goal of returning 50% of free cash flow to shareholders.

Corning Inc. (GLW) 29.05%
The maker of Gorilla Glass, Corning has enjoyed a rebound period with the introduction of the new iPhones and surging demand in the automotive sector. Gorilla Glass is a durable, light, scratch-resistant glass that is in high demand in smartphones, tablets and laptops. As automobile companies look to add touch screens in their new cars, the demand for Gorilla Glass looks solid.

Detractors to the quarter:  our outlook on a cross section of portfolio positions with a negative return for the quarter ended 9/30/2018.

Quest Diagnostics Inc. (DGX) -1.15%
Despite missing top line expectations, Quest Diagnostics has established a close partnership with UnitedHealth. They are now the in-network lab for all of UnitedHealthcare’s 48 million patients as well as collaborating with UnitedHealth on a variety of programs designed to increase standard of care while reducing costs.

Lamb Weston Holdings (LW) -2.51%
Based in Idaho, Lamb Weston is a leader in the frozen vegetable industry with a focus on potatoes. They saw a significant boost in earnings per share from the Tax Cuts and Jobs Act as well as rapidly increasing sales after their spin-off from Conagra Brands in November of 2016.

Bank of New York Mellon Corp (BK) -4.95%
Under the leadership of Charles Scharf, BK is investing heavily to improve operating platforms and their technology infrastructure while working to keep their costs down across the rest of the company. Mr. Scharf had great success using the same formula at Visa. Higher interest rates should also enhance earnings power as the company is a huge generator of free cash. We see good value in the banks both large and small, with many selling at price earnings ratios of 10-11 times 2019 earnings estimates.

Cognizant Technology Solutions (CTSH) -2.08%
Cognizant is one of the world’s top regarded IT firms with operations all over the world. Management is excited about the possible program servicing opportunities that come with growing Medicare and Medicaid. They are a leader in connecting companies to the cloud.

Central Pacific Financial Co. (CPF) -7.02%
With most of their holdings in Hawaii, Central Pacific has recently suffered from the unusual hurricane season in the Hawaiian archipelago. Despite the strange hurricane season, total deposits increased year over year to $4.98 billion while core deposits also increased to over $4 billion. On September 27th, Central Pacific announced that Paul Yonamine would take over for Catherine Ngo as president and CEO effective October 1st. John Dean has done an exceptional job turning around this franchise.

Manitex International Inc. (MNTX) -15.62%
Manitex International was helped in their deleveraging efforts by Tadano buying 14.9% of their shares in May of this year. After seeing steady growth in market share in straight-mast cranes over the last five years, Manitex management is excited about the opportunities for knuckle boom cranes where their current market share is under 5%. After meeting management a little over a year  ago we were very impressed with their plans to turn the business around.

Molson Coors Brewing Co. (TAP) -9.02%
Molson Coors is working to reduce costs and diversifying their brand as consumer demand has shifted away from macro beer brands. In addition to investing in spiked seltzer, iced coffee, kombucha, non-alcoholic beer and craft beer Molson Coors has been testing non-alcoholic cannabis infused teas, seltzers and beers. Recreational marijuana became legal across Canada on October 1st and is currently legal in nine US states covering over a quarter of the US population. Coors  has been in business since 1873.

Franklin Resources Inc. (BEN) -4.43%
Franklin Resources has had several quarters of negative growth in operating revenues, net income, and assets under management as they work to improve their company. Management at Franklin Resources is focused on reducing risk and augmenting their investment capabilities. Their earnings per share have not decreased as much as the rest of their financials due to management’s aggressive share buyback program. Over half the companies market capitalization is in cash. The Johnson family has run the company since 1947.

A Proven Approach to Volatile Markets

We strive to invest carefully in well-researched businesses that have enduring products or services with the historical ability to survive and thrive in the most stressful market and economic downturns. We see meaningful advantages to our size, cumulative knowledge and experience negotiating severe market declines. We don’t pay steep premiums, sometimes referred to as control premiums2, like private equity firms who are attempting to gain a controlling interest and have a wide mandate with flexibility to try to protect in down markets.  We have major “skin in the game.”  It was the “other people’s money” syndrome that contributed to the last financial downturn. The true cost in investing is the lack of knowledge in what you own.  The big advantage to buying pieces of businesses in the auction markets is the emotion, volatility and liquidity that can contribute to bouts of irrational behavior and unprecedented bargains when compared to private markets. Panic may be a profitable backdrop for investing whereas euphoria may be disastrous. The proliferation of exchange traded funds (ETFs) and mathematical algorithms have further enhanced volatility.  We generally know ahead of time–usually after years of research–what we want to own, and welcome negative headlines to provide the best entry point. In the past many attractive purchase prices below intrinsic value, combined with quality operating performance, lead to the double-triple play investment return over time while deferring tax bites. There are so many forces at work to separate you from your hard-earned savings. Without cumulative knowledge and the right temperament, the risks to compounding returns can be very high.

 

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.

1 Cash burn aka burn rate is normally used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations; it is a measure of negative cash flow.

2 Control premium is an amount paid to gain enough ownership interest to control a corporation or other entity. This would typically be an amount in excess of the simple fair market value of the shares sought to be purchased.

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.

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