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Auxier Report: Summer 2018

Mar 31, 2018

Download Auxier Report Summer 2018

Spring 2018 Market Commentary

The first quarter of 2018 brought back more normal volatility which has been rare in this recent era of artificially low interest rates. We are seeing a long overdue, much needed correction to help purge excesses in the global markets. Speculation has been boiling in the cryptocurrencies, along with pre-public technology stocks and can also be seen with record margin debt used to buy stocks. The excitement in January over lower tax rates, deregulation and strong corporate earnings has been replaced with concerns of higher commodity prices (oil up over 30%), wage pressures, transportation costs and rising interest rates which can threaten profit margins.  Aggressive trade rhetoric between the US and China has fueled fears of global trade wars. With the growth of online shipping and driver regulation, there is a meaningful shortage in both trucks and truck drivers leading to an unprecedented rise in logistics costs often climbing over 20% this past year. Amazon’s recent shipping costs are up over 35%.  Housing prices are still showing gains in excess of 6% year over year, driven in part by a strong job market and millennial demand which now exceeds baby boomer demand. Housing inventory is down 12% this past year. Seattle has seen housing prices appreciate 45% the past three years (Zillow). Higher inflation and interest rates tend to compress price-to-earnings ratios making high expectation, highly valued companies vulnerable to steep declines as there tends to be a reversion to the mean.

We are currently amidst the longest stretch in history where growth has outperformed value.  Price and value have taken a back seat to momentum and the rate of change in earnings and sales. However, according to the Wall Street Journal, from 1926 through the end of 2017 value outearned growth stocks by an average of 3.1 percentage points annually. Higher interest rates in time tend to alter behavior and punish the “buy at any price mentality,” especially stocks sporting exciting stories that lack healthy cash flows. Digital disruption and the “Amazon effect” have negatively impacted share prices in numerous industries like grocers, media, healthcare, and logistics companies like FedEx, creating selective opportunities resulting from material misappraisals. The massive inflows to pooled vehicles with little transparency and “skin in the game” has increased the risk of emotional and irrational behavior via the “electronic herd.” It is easy to sell when you don’t know what you own.  Much like the 2008 crash, where bundles of low-quality mortgages were all the rage, compiling a group of overpriced stocks may have the same effect on those investing in pools based on upward momentum without adequate due diligence. We believe we are entering a time where cumulative knowledge of managements, business models and the supply/demand characteristics of industries is critical to mitigate risk.

First Quarter 2018 Performance Update

 

Auxier Focus Fund’s Investor Class declined 2.64% in the first quarter vs. a decline of 0.76% for the S&P 500 Index.  Domestic stocks comprised 78% and foreign 15%, with cash and “workouts” 7%.  Since inception at the top of the market in 1999, a hypothetical $10,000 investment in the Fund has grown to $37,394, with an average equity exposure of 78% compared to $26,952 for the fully invested S&P 500. Bonds as measured by the Bloomberg Barclays US Aggregate Bond Index declined 1.5%. The STOXX® Europe 600 declined 4%, and the FTSE 100 declined 8.2%. The foreign component detracted from Fund performance for the quarter.

Contributors to the quarter:

Mastercard Inc. (MA)
Mastercard ended their fiscal year with fourth quarter sales up 20% to $3.31B benefiting from strong holiday spending. The continued focus on international growth opportunities has paid off as there are now three times as many cards outstanding worldwide than in US markets. Vocalink, a payment system headquartered in the UK, and Oltio, a mobile payments and banking technology company out of South Africa, along with other acquisitions contributed 3% to overall sales growth in the quarter.

Microsoft Corp. (MSFT)
Microsoft Corporation’s focus and investment in their Intelligent Cloud continues to be beneficial with overall segment revenue growth of 15% to $7.8B. This was driven by Azure revenue growth of 98% with computer usage more than doubling year over year. Adjusting for the $13.8B net charge related to the Tax Cuts and Jobs Act, net income grew 20% in the quarter to $7.5B. Management has done an excellent job transforming the company to the cloud over the past three years.

Bank of America (BAC)
At the end of 2017, Bank of America had total loans and leases of $936B and total deposits of $1.3T. Given the large low-cost deposit base there is considerable positive leverage in a rising interest rate environment.

America Movil (AMX)
With around two-thirds of the wireless and broadband market controlled, the largest wireless carrier in Latin America is executing well. Industry growth is resulting from growing mobile data usage and low market penetration. AMX has a strong competitive position with family ownership,  high returns on invested capital,  a strong balance sheet  and scale.

Raytheon Company (RTN)
The defense contractor’s stock spiked up this quarter due to increased defense spending set by the Trump administration. International sales, which account for 30% of revenue, are expected to increase due to greater political instability. Raytheon’s backlogs remain robust, although we worry that margins are peaking.

Visa (V)
Visa has a strong business model that is continuing to perform well. They are global leaders in electronic payments with their market share of digital transactions accounting for around 58% worldwide. Visa produced over $8 billion in free cash flow in 2017, has been growing earnings at a double-digit pace, and has great room to increase their dividend.

Detractors to the quarter:

Johnson & Johnson (JNJ)
Despite beating Wall Street’s fourth quarter earnings and revenue expectations, Johnson & Johnson lost investor confidence on a projected 2018 operational revenue growth of 3.5% to 4.5%. J&J’s $30B acquisition of Actelion last summer contributed 4.2% towards their Worldwide Pharmaceutical sales growth of 8.4% to $36.3B in the quarter.

DowDuPont Inc. (DWDP)
Although DowDuPont recorded a $1.1B benefit from the Tax Act, restructuring and goodwill impairment items of $3.11B led to a reported pro forma loss of $1.21B, or loss of $0.52 per share, in the quarter. The plan to split into three different companies post-merger was originally anticipated to take up to two years but is now expected to take between 12 and 14 months. DowDuPont also increased its expected annual cost savings by 10% to $3.3B. We really like the Chief Executive Edward Breen who has an exceptional capital allocation record and will oversee the split up of the company. Low natural gas inputs continue to be a material benefit to chemical producers.

Biogen Inc. (BIIB)
On February 15, 2018, Merck discontinued a phase 3 trial of their BACE1 inhibitor, verubecestat, adding the potential Alzheimer’s treatment to a growing list of clinical failures from pharmaceutical companies. This shook investor confidence in Biogen who also has a BACE1 inhibitor currently in late-stage testing. However, Biogen’s leading Alzheimer’s candidate, aducanumab, takes a different approach than BACE1 inhibitors by reducing amyloid plaques in the brain vs. preventing the build-up. Biogen’s expansion by 510 patients in aducanumab’s late-stage study to confront the high variability in the primary endpoint has increased fears of another industry failure. With earnings over $22 this year the stock seems very cheap.

PepsiCo (PEP)
The North American beverage unit has struggled but management is focusing on fixing the problem with innovative new offerings. Beverage companies in general have fallen out of favor in the market and lower prices could provide an attractive entry level for long-term investors.

Mergers and Acquisitions

On January 22, 2018, Sanofi announced the acquisition of Bioverativ for $105 per share in cash, a 64% premium to their previous closing price. The cost basis in the Fund was $41.14.  Bioverativ is the hemophilia business unit that was spun-off from Biogen in 2017. Sanofi completed the $11.6B takeover at the beginning of March adding Bioverativ’s two hemophilia extended half-life therapies, Eloctate and Aprolix, which represented the first major treatment advancements in almost 20 years when launched in 2016. While most acquisitions destroy value, we like to see spinoffs as they generally energize management teams and enhance intrinsic value.

On January 29, 2018, Dr. Pepper Snapple Group and Keurig Green Mountain Inc. entered into a definitive merger agreement to create Keurig Dr. Pepper (KDP) for $123 a share. The Fund’s cost is $15.23. We bought Dr. Pepper shortly after it was spun out of Cadbury Schweppes for less than ten times earnings. We discovered a highly focused and competent management team.  The two companies will bring iconic brands such as 7 Up, A&W, Mott’s and Sunkist together with Green Mountain Coffee Roasters, Keurig’s single serve coffee system, and more than 75 owned, licensed, and partner brands. Dr. Pepper Snapple shareholders will receive $103.75 per share, or $18.7B, in a special cash dividend and retain 13% of the combined company. KDP is targeting $600M in synergies on an annualized basis by 2021 and a dividend of $0.60 per share at the close of the transition. Total net debt is expected to be approximately $16.6B with a target net debt/EBIDTA ratio below 3.0x within two to three years after closing. KDP will have combined proforma 2017 annual revenues of approximately $11B. This is another example of private equity firms buying our high free cash flow generating businesses–which has been a common occurrence in our portfolio over the years. Private equity firms have close to one trillion dollars in buying power and could be a material source for mergers, especially as prices correct and become more enticing.

On March 8, 2018, Cigna entered into a definitive agreement to acquire Express Scripts Holding Company for $67B, or $92 per share. This buyout would broaden the portfolio of Cigna’s specialty services and boost their focus on advanced analytics. Combining the companies’ strengths will allow them to use a patient’s medical history to improve treatments and lower costs while simplifying the healthcare supply chain. The merger consideration will consist of $48.75 in cash and 0.2434 shares of stock of the combined company per ESRX share. Upon closing the transaction, Cigna shareholders will own approximately 64% of the company and Express Scripts shareholders will own 36%. Current CEO of Cigna, David Cordani, will lead the combined company with Tim Wentworth, current CEO of Express Scripts, transitioning to President of Express Scripts, Inc. The deal is being closely watched and scrutinized by the Department of Justice who recently asked both companies for additional information. The Justice Department successfully blocked both Aetna from buying Humana Inc. and Anthem Inc. from acquiring Cigna in 2017, but Cigna is still confident in their ability to gain regulatory approval and complete the acquisition by the end of 2018.

Opportunities

Negative headlines when detached from strong fundamentals create opportunities. Companies like FedEx and UPS recently hit attractive levels due to fears over global trade wars. Google and Facebook have suffered sharp declines due to the mishandling of personal data by Facebook and uncertainty over tightening regulation. However, both have strong underlying demand trends and powerful platforms driven by predictive data analytics, artificial intelligence and a network effect. As a group, industry leading biotechs have been trading at a very cheap 12 times 2018 earnings vs. 17 times for the S&P. Exciting research breakthroughs are leading to major advances against many diseases. Quality medtech firms like Medtronic and Zimmer trade at very reasonable valuations versus free cash flow. A good buy results when a powerful franchise suffers under horrible emotional headlines. Like John Train, author of The Money Masters has said, “The safe time to invest is when investors are discouraged and desperate.” An example is our purchase of Visa and Mastercard. Back in 2010 they were under a cloud of negative headlines regarding interchange fees. The fundamental digital trends were strong. Our cost basis in Mastercard is $22 and it recently traded above $174. Our Visa basis is $16, and it recently hit $125.  It can be so expensive to get caught up in news headlines and the emotion of markets if it detracts from focusing on facts underlying operating reality. As financier and Presidential advisor Bernard Baruch used to say, “Facts are facts even in the height of emotion.” Strong sales, earnings and cash flows together with diligent managerial capital allocation will drive intrinsic value and ultimately stock returns. Consumer staples like beverages have been declining in 2018 but we see private equity stepping in if prices remain weak as those businesses are enduring, generate attractive free cash and are better able to handle increased leverage.

Risks

Nearly a quarter of the S&P is weighted in technology stocks with a trailing price earnings of 33. Huge capital investments (over $90 billion) are entering the industry via the likes of Softbank, a Japanese conglomerate dedicated to technology investment. Back in 2000, Softbank dropped over 90% due to enthusiastic purchases of inflated technology stocks. We are watching the IPO markets for even further supply. The cloud is so popular that it is attracting enormous capital spending, just like fiber optic in the late 1990s and more recently the farm sector and natural gas. Exuberance over exciting growth prospects can often lead to a flood of entrants and capital, leading to overinvestment and supply gluts.

We continue to see increasing volatility with headline risk. However, overall the fundamentals for US earnings look the best since 2011. The supply of public stocks is still down over 50% since 1998. Private equity has over $1 trillion in buying power. Companies in the S&P 500 could retire an additional $800 billion in stock this year via buybacks. In the first quarter corporate mergers and acquisitions are up 60%. The rule of law in the US is stronger this past year compared to Venezuela which has no rule of law and suffers annual inflation over 10,000%. After the Reagan tax cuts in 1986, I remember a period where earnings were so strong the market survived a three percent rise in long term interest rates before correcting in a major way in 1987.

In times of market turbulence and uncertainty we have found it is helpful to go back in history and study great, enduring investors. J. Paul Getty was one of the best during the 1930s. He writes, “The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in stride.”

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 Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. FTSE 100 Index, also called The Financial Times Stock Exchange 100 Index, FTSE 100 Index, FTSE 100, FTSE, or, informally, the “Footsie” /ˈfʊtsi/, is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.  The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. 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 2017

Dec 31, 2017

Download Auxier Report Winter 2017

Year-End 2017 Market Commentary

Major tax legislation signed into law in December of 2017, the Tax Cuts and Jobs Act, has been a powerful positive for US companies. This together with meaningful reforms in onerous regulations has energized and created attractive incentives to start new businesses. Earnings growth in 2018 for the S&P 500 Index could exceed 16% after a similar gain in 2017 (Standard & Poor’s). I remember investing after the 1986 Reagan tax cuts and witnessing strong new business formations, which were very stimulative. Corporate earnings accelerated even with a dramatic increase in interest rates. Partly due to a rollback in regulation, American Banker estimates that the top ten banks in America now have enough excess capital to retire one-third of their outstanding shares. A drop in corporate rates from 35% to 21% together with repatriation of foreign earnings could add further to stock buybacks, dividend increases and mergers. 100% expensing of depreciable property should enhance capital spending and could add up to half a percent to GDP growth. Many foreign manufacturers are locating to the US due to the lower tax burden and low natural gas prices. Private equity buying power adds another $1 trillion in demand (Fortune) just as public stock in the US has dropped by over 50% since 1997 (Economist). We watch the initial public offering (“IPO”) market closely for signs of oversupply. While both the Reagan tax cuts in 1986 and the Kennedy tax cuts (Revenue Act of 1964) added firepower to the economy they also contributed to higher interest rates, hurting holders of bonds. Today, the tax stimulus combined with a low 4.1% unemployment rate could lead to much higher interest rates. Companies with poor balance sheets or those dependent on debt funding like real estate investment trusts (“REITs”) and utilities suffered in the past. We have learned it is critically important to study the tax code as the changes in 1986 really hurt commercial real estate, ultimately contributing to the thrift crisis. This time ultra-high-end housing along with municipal bonds look vulnerable.

Globally, a movement toward free market solutions and efforts to clean up corruption contributed to huge moves in cheaper emerging markets. Argentina was the number one performing market in the world for 2017, returning over 76%, as represented by the Merval Index, due largely to free market reforms. Brazil has targeted corruption while privatizing many industries. China continues to add to market solutions as well. The internet is creating greater financial transparency, exposing and cleaning up bad behavior. Companies that are executing and have proven platforms are enjoying almost monopolistic market power. As an investor, it is so important to tune out crazy news headlines and relentlessly focus on facts and fundamentals pertaining to company cash flows, revenues and execution. We have learned over many years the importance of exceptional management, integrity and private property rights. Companies that are operationally efficient with a network effect on the right side of digitization can enjoy enormous pre¬mium valuations. While fear is the friend of the fundamentalist, euphoria is the enemy of the diligent capital allocator. Recently, bullish sentiment has reached extremes which can often portend a short-term correction. Bad loans and most mergers are made in good times, often at bad prices that fail to compensate for the risk taken.

Entry Housing

The average age for first time home buyers is 31. According to the Wall Street Journal, home ownership hit a 50-year low in 2016, at 62.9%. In 2017, the rate increased for the first time in 13 years. While fundamentals look good for low-end housing, the high-end has been hit hard by the limits to the deductibility of interest and property taxes. The millennials now outnumber baby boomers.

Bigger is Not Necessarily Better

According to the outstanding investor Joel Tillinghast of Fidelity Investments, if you continuously invested in the single largest S&P 500 stock by market value between 1972 and 2016, your compounded return would have been less than 4% while the index earned over 10%. General Electric in October of 2000 was one of the most highly valued companies in the world at $60. Today it is under $20. It is so important through diligent research to identify risks and strive to mitigate them. Overpaying for complex investments in times of euphoria can lead to problems that threaten to interrupt the compounding process. Price-earnings ratios do matter. In the four decades through 2015, in years

where the S&P 500 earnings growth was the fastest, P/Es contracted. Sky high valuations can torpedo a portfolio if price-earnings ratios compress. I can remember buying food stocks at a bargain six times earnings in the 1980s after high inflation in the 1970s.

Infrastructure

The president has deep experience in construction in New York City. He was skilled in fighting the permit process. Look for the streamlining of permitting for roads, bridges, water systems, waterways, etc. With manufacturing unemployment running under 2.5%, healthy wage growth should follow.

Year-End 2017 Performance Update

Auxier Focus Fund’s Investor Class returned 5.67% in fourth quarter vs. 6.64% for the S&P 500 Index. For the year ended 12/31/2017 the Fund returned 17.71% vs. 21.83%. The stocks in the Fund returned 6.24% for the quarter and 20.35% for the year. Domestic stocks comprised 79% and foreign 15%, with cash and “workouts” 6%.  Since inception at the top of the market in 1999, a hypothetical $10,000 investment in the Fund has grown to $38,410, with an average equity exposure of 78% compared to $27,158 for the fully invested S&P 500.

Contributors to the quarter:

Kroger Co. (KR)
After a rough start to the year, Kroger delivered a net earnings increase of 1.5% vs. an earnings decline of 56% year over year. This improvement was driven by their record-setting Black Friday results for general merchandise and record sales at Fred Meyer. Digital revenue was up 109% from the continued positive response to Kroger’s online-grocery ordering service. Recently the company has been in discussions with Chinese online powerhouse­ Alibaba. We have been very impressed with Kroger’s use of data analytics. With a nationwide shortage of both trucks and drivers, shipping costs are up over 18% this past year. This will pressure margins for the online delivery model. Companies like Kroger with a vast store base should have an advantage. Additionally, 2017 saw some of the biggest price declines in food since 1950. Recently those price fundamentals show signs of improving.

UnitedHealth Group Inc. (UNH)
UnitedHealth’s data and technology platform, Optum, had another quarter and now full year of double-digit percentage earnings growth in all of its segments. Due to positive results, UnitedHealth raised their 2018 adjusted earnings guidance by 16% at the midpoint to $12.45 per share. CEO David Wichmann expects Corporate Tax Reform to boost earnings and cash flows by $1.7B in 2018.

Microsoft Corp. ­(MSFT)
In 2012 the company’s cloud revenue totaled $700 million. Today, Microsoft has quarterly cloud revenues exceeding $5 billion with 55% margins. Driven by Azure’s revenue growth of 90%, revenue in Microsoft’s Intelligent Cloud segment increased 14% to $6.9B with commercial cloud annual recurring revenue exceeding $20B. Total revenue grew 12% as their Productivity and Business Processes and Intelligent Cloud segments made up for the stalling Personal Computing.

Bank of America Corp. (BAC)
Loan and deposit growth of 3.3% and 3.8% along with higher interest rates led to net interest income growth of 11% to $11.5B in the quarter. After a $2.9B charge related to the Tax Cuts and Jobs Act, Bank of America plans to benefit from more rational regulation and lower tax rates.

Anthem, Inc. (ANTM)
Anthem’s three reportable segments all had operating revenue growth in the most recent quarter while cutting total expenses by 5%. After ongoing accusations of Express Scripts overcharging by billions of dollars, Anthem announced its plan to set up its own pharmacy benefits management unit called IngenioRx and secured a five-year agreement with CVS Health Corp. that will go into effect at the end of 2019.

PepsiCo Inc. (PEP)
PepsiCo saw overall organic revenue growth of 1.7% despite its North American Beverages sector revenues decline for the first time in two years. Latin America and ESSA had operating profit growth of 14% and 12% respectively to pick up the slack. By 2025, PepsiCo plans to have at least two-thirds of their beverages contain 100 calories or less per serving. PepsiCo continues to expect $7B in free cash flow for the full fiscal year.

Express Scripts Inc. (ESRX)
Express Scripts recently acquired eviCore Healthcare, an industry leader in evidence-based medical benefit management services.  EviCore helps manage medical benefits for 100 million people, and Express Scripts expects the acquisition to be accretive to adjusted diluted earnings per share in 2018, which they now estimate in the range of $7.67 to $7.87. At a P/E of 12 times 2018 the stock seems very cheap.

Johnson & Johnson (JNJ)
Johnson & Johnson saw a 10.3% growth in net sales as their Pharmaceutical segment–which represents 49% of overall sales–jumped 15% in the quarter. This has been due in part to the consistently growing sales of their lymphoma treatment, Imbruvica, increasing 46.7% year over year as additional implications continue to be approved by the FDA.

Mastercard Inc. (MA)
Mastercard had a record-setting quarter, increasing revenues by 18% and growing net income by 21% to $1.4B. This year, Mastercard will be Costco’s exclusive co-brand partner in Japan as they continue to focus on international growth opportunities. On the innovation front, Mastercard continues to push forward providing payment options on smartphones, workspace connected communities, and virtual reality. They have recently landed large retailers Kroger and Cabela’s.

BP plc (BP)
BP had a productive quarter as group oil and gas production averaged 3.6M barrels of oil equivalent a day, a 14% increase over last year, while downstream underlying quarterly earnings were the highest in five years growing almost 67%. All seven of the major projects they expected to start this year are online, including starting production in three major upstream projects in Australia, Trinidad, and Oman. BP re-entered the solar power market with the purchase of a 43% stake in Lightsource Renewable Energy Ltd. for $200M. Aggressive cost cutting is finally paying off as oil prices have improved by over 25% in four months.

Wal-Mart Stores Inc. (WMT)
Walmart’s continued effort to strengthen their online offerings to compete with Amazon is gaining more traction as eCommerce sales grew 50% in the quarter. As a result, 63 Sam’s Clubs are slated to close and approximately 12 will be converted to online fulfillment centers while scaling back Walmart brick-and-mortar growth in the US.

Corning Inc. (GLW)
Corning is edging their way into the medical field with Valor Glass. Working with Merck and Pfizer, Corning is developing a damage-resistant glass for vials that will reduce flaking, contamination, and breaking while being more efficient to manufacture. Corning’s Gorilla Glass continues to be a big seller as Apple, Samsung, and other phone manufacturers use it on ­their flagship devices. Specialty Materials net earnings were up 71% over last year helping the decline of LCD screen prices in Display Technologies.

The Travelers Companies Inc. (TRV)
The Travelers Co. had record-setting net written premiu­ms of $6.6B and growth in all segments as retention remained at historic highs in Commercial Businesses. Hurricane Harvey, Irma, and Maria are estimated to have damages exceeding $250B causing Travelers’ net income to be impacted by $455M of catastrophe losses. The pricing for many property and casualty products is showing signs of firming going into 2018.

LyondellBasell Industries N.V. (LYB)
LyondellBasell was able to deliver double digit revenue and earnings growth despite Hurricane Harvey affecting each of their major US Gulf Coast sites. Even after the impact of increasing feedstock prices and production outages, they were able to produce 13% more ethylene across their global system compared to the previous year. LyondellBasell also plans to build the world’s largest propylene oxide and tertiary butyl alcohol plant in Houston in the second half of 2018. 

Detractors to the quarter:

Merck & Co. Inc. (MRK)
Merck & Co. had a challenging quarter as total sales declined 2% due to a temporary production shutdown from a cyber-attack. Merck’s Pharmaceutical segment–making up 89% of sales–fell 3% as they lost market exclusivity for two of their top cholesterol treatments and are facing increasing pricing pressure on their top-selling drug. On a positive note, the outlook for cancer-fighting immunotherapy Keytruda is very encouraging.

Philip Morris International (PM)
Philip Morris’s reduced risk, heated tobacco product IQOS accounted for 40% of shipments to Japan in the quarter, surpassing combustible cigarettes for the first time in that market. Although it has seen impressive growth in the Japanese market, it is still waiting for FDA approval in the US. We believe it will be approved.

Unilever (UN)
Turnover headwinds from a stronger euro and overall weak market demand led to a challenging quarter for Unilever. Underlying sales growth of 2.6% was driven by their emerging markets’ 6.3% growth while developed markets declined 2.3% in the quarter.

Cerner Corporation (CERN)
Although revenues were up 8%, they came in below analysts’ expectations. Bookings were down 22.5% year over year due to several large contracts being delayed, causing it to come in below the company’s guidance. However, it could lead to all-time high levels of bookings once these deals are signed.

America Movil (AMX)
Natural disasters in Mexico and Puerto Rico along with a costly Colombian arbitration panel ruling led to a net loss of 9.5B pesos vs. a net income of 2.1B pesos year over year. America Movil is working on rolling out a 4.5G network which is expected to be 7x faster than 4G in parts of Mexico, and gearing up for 5G by 2020.

American International Group (AIG)
After a year of catastrophic events leading to aggregate pre-tax catastrophe losses of $3.0B in the quarter, American International Group’s CEO is looking forward to 2018 as “The Year of the Underwriter.” AIG will be focusing on commercial underwriting, enhancing underwriter tools, and their talent base to position themselves for long-term growth. With over $130B in insured losses for 2017, the industry pricing environment is firming on projected 2018 renewals. In the past, we have enjoyed solid returns with the new AIG CEO Brian Duperreault when he successfully turned around a troubled Marsh & ­­McLennan.

Oracle Corp. (ORCL)
Oracle’s cloud revenue growth of 44% drove performance for the quarter. They will soon deliver the Oracle Autonomous Database in the Oracle Cloud claiming it to be 10x faster at less than half the cost of running a database in the Amazon Cloud. The fully-autonomous database will not require any human labor for administration, will detect security vulnerabilities and patch itself immediately while running, and will reduce planned and unplanned downtime to less than thirty minutes per year.

Closing Thoughts

Policies out of Washington DC this past year have reduced taxes and regulations while reinforcing property rights and the rule of law. This has enhanced business fundamentals and encouraged risk taking. Global economies have been improving as well. On the downside, we are now seeing signs of increased digital speculation in the form of cryptocurrencies, pre-public technology companies and extreme readings of bullish sentiment. In times of easy money, price momentum can overtake fundamental cash flow analysis. We are long overdue for a correction which is both needed and healthy. Over the past century the general US stock market has averaged a 10% correction about every 18 months.

This year the New England Patriots played their eighth Super Bowl with Tom Brady and Bill Belichick at the helm. This dynasty will go down as the best of all time. Yes, they tend to outwork their opponents, but their true advantage may be the fierce discipline in adhering to their proven strategy. In the new documentary “Tom vs Time” Brady explains his mindset for getting ready for the Super Bowl, saying, “You have to put all the noise and hype aside and focus on what you have to do.” In a time where there are so many distracting headlines and speculations, we see the need to zero in on implementing a proven enduring investment approach to the markets by drilling down daily on the fundamental drivers of intrinsic value.

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 MERVAL Index (MERcado de VALores, literally Stock Market) is the most important index of the Buenos Aires Stock Exchange. It is a price-weighted index, calculated as the market value of a portfolio of stocks selected based on their market share, number of transactions and quotation price.  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 2017

Sep 30, 2017

Download Auxier Report Fall 2017

Fall 2017 Market Commentary 

For the first time in five decades, 45 countries globally are enjoying improving economic fundamentals as tracked by the Organization for Economic Cooperation and Development. Global economic momentum has picked up with growth projected to rise 3.6% in 2017 and 3.7% in 2018. Business spending has been accelerating. Emerging markets in aggregate are growing for the first time in six years. Brazil is recovering from the worst downturn in a century. Japan recently recorded a surprising 4% GDP growth. Advances in smartphone technology and internet access are helping to fuel growing middle class prosperity. Positive fundamentals may finally lead to a shift in monetary policy as well. Since 2015, the European Central Bank has driven rates to zero or negative through $2.35 trillion in buying stimulus. On average, European junk bonds now yield less than US treasuries. This continues to propel a boom in private equity and leveraged buyouts, further shrinking the shares of public companies.

In the US, pro-business policies in the form of regulatory rebalancing, a less onerous banking climate, tax reform and a strong rule of law continue to bolster investor sentiment. Since the inauguration, the flow of new government rules has slowed by 60%. The Economist. Rising home equity, low fuel prices (12-year low) and robust employment with rising wages are contributing to strong consumer spending which accounts for over 67% of the US economy. Increasing home equity loans should offer further stimulus in the months ahead.  The rebuilding efforts following recent floods, earthquakes, hurricanes and devastating fires are invigorating construction. The services sector continues to show solid results. If the proposed tax reform passes and corporate rates drop to 20%, operating earnings for the S&P 500 could rise an additional 10% next year (Standard & Poor’s). While growth is improving, inflation is still relatively subdued due in large part to advances in technology and strong competition. Interest rates are being priced globally by the ECB and Japan so there really is not a free market at work for bonds. The effect of technological disruption has been dramatic in retail with the “Amazon effect” rapidly transforming how goods are delivered and consumed.

Easy Lending Leads to Crushing Debt

A risk in exchange traded funds is that it is difficult to examine individual balance sheets and assess the operating reality and management of the underlying securities. Declining markets inspire panic if you don’t know what you own. US investors stampeded into Puerto Rico to take advantage of triple tax-exempt bonds in a frantic search for yield. The country of 3.8 million residents was flooded with “easy money” leading to crushing debt levels-$74 billion with another $25 billion in pension liabilities. General obligation bonds with a coupon rate of 8% have recently declined to 35 cents on the dollar. Toys “R” Us bonds recently dropped from 80 cents to under 20 cents on the dollar. The extreme debt levels of Payless ShoeSource and Sports Authority led to bankruptcy filings for both, sending negative shockwaves throughout the sporting goods, footwear and apparel markets. Cheap financing tends to lead to sloppy capital allocation in good times. Currently there is very little protection for bondholders as bond covenants are nearly nonexistent. AT&T’s borrowing for acquisitions recently exceeded $250 billion, not including leases, which dramatically increases the company’s vulnerability in a downturn.

Tough Times in Food and Packaged Products

Traditional “safe havens” like food and packaged goods are under attack as innovation and private label offerings proliferate. Price wars and competition are intense in grocery and food delivery. Data is the fuel for artificial intelligence. Data is the new battleground. Companies that execute and aggressively invest in predictive data analytics are being rewarded with premium valuations in the market.

Insurance Pricing

Hurricane devastation in Texas and Florida together with fires in California may lead to insured losses in excess of $110 billion for 2017. This will reduce capacity in reinsurance, leading to higher prices for policies on renewals in the next year. Ironically, this may benefit insurers like Travelers, Berkshire Hathaway, Marsh & McLennan and AIG as more insurance is written at higher prices

Portfolio Highlights

Digital disruption is transforming numerous industries and companies. Streaming is upending traditional cable and  broadcast media. 1.5 billion users of YouTube watch 60 minutes a day on mobile devices. In addition, 100 million hours are watched on YouTube television, up 70% over the past year. There is a plethora of content in media with too many outlets for viewing. Movie theatres are suffering. Online retailers with delivery choices are hurting traditional brick and mortar stores, especially malls. Younger customers tend to be more health-conscious and customization with product integrity is important.  A dedicated daily fact-finding research effort has never been more important in allocating capital into areas that can continue to survive and thrive. Buy hold and forget can be hazardous in today’s world as the pace of digital disruption accelerates. Eastman Kodak and Polaroid were once part of the Nifty Fifty in 1973, where conventional wisdom suggested you could buy the 50 top growth stocks of the time without regard to “price and value” then hold forever. Not only did they crash due to extreme bubble valuations, they also suffered from changing technological trends. We are seeing many industries where a “winner take all” phenomenon is taking place, so analyzing and monitoring business models becomes even more critical.

Many chemical companies are thriving with the upturn in the global economy, together with lower cost structures. Two examples:

LyondellBasell (LYB)

Hurricane Harvey closed almost 25% of US refining capacity. LyondellBasell is a Netherlands-based chemicals producer and one of the largest independent chemical manufacturers in the United States with operations headquarters in Houston. The stock recently traded down to 9 times earnings on a glut in ethylene, yielding 4.5%. With the hurricane, ethylene went from a glut to shortage adding to stronger pricing. The chemical sector continues to be ripe for consolidation.

DowDuPont (DWDP)

The Dow Chemical Company and E.I. du Pont de Nemours successfully completed their planned $130B merger to form DowDuPont (DWDP). Edward Breen from DuPont became CEO, and Andrew Liveris from Dow became chairman of the board. Mr. Breen has a strong track record in allocating capital. He successfully restructured Tyco, returning more than 600% over a ten-year period.  DowDuPont plans to split into three publicly-traded companies within the next 18 months – Material Sciences, Specialty Products, and Agriculture. The most recent plan now expects Material Sciences to bring in $40B in annual revenue, Specialty Products $21B, and Agriculture $14B. Management plans to cut $3B in yearly costs and increase growth synergies by $1 billion annually with savings occurring within 24 months.

If the global central banks pull back on bond buying and interest rates do rise, we are seeking companies that can do well in such an environment. Bank of New York fits the bill.

Bank of New York Mellon (BK)

Bank of New York Mellon operates as a custodian bank that holds assets for institutional clients and provides the back-end accounting services to keep everything running smoothly. They tend to thrive in a rising rate environment and recently earned 21% return on tangible equity while selling for a reasonable 13 times projected 12-month earnings. CEO Charles W. Scharf is an exceptional manager who helped transform Visa into a powerhouse through an in-depth understanding and heavy investments in technology. We see the potential for a double play—improved earnings and expanding price-to-earnings ratio.

Fall 2017 Performance Update

Auxier Focus Fund’s Investor Class returned 1.55% in third quarter vs. 4.48% for the S&P 500 Index. For the nine months of 2017 the Fund returned 11.39% vs 14.24%. The stocks in the Fund returned 1.90% for the quarter and 13.35% through three quarters. Domestic stocks comprised 78% and foreign 15%, with cash and “workouts” 7%.  Since inception at the top of the market in 1999, a hypothetical $10,000 investment in the Fund, has grown to $36,348, with an average equity exposure of 78% compared to $25,466 for the fully invested S&P 500. Recently, the more defensive names in the Fund have lagged in the quarter as economic growth surprised on the upside. The more cyclical oriented names have been stronger. High debt levels have driven our conservatism.  Today US government debt is more than 100% of GDP which historically has proved to be a major headwind for growth.

Contributors to the quarter:

Mastercard (MA)

A pick up in the global economy has improved operating momentum at Mastercard. Over two-thirds of their volume comes from outside of the US as Mastercard continues to push towards international growth opportunities. The digital trends away from cash together with higher spending have contributed to improving fundamentals. Mastercard is a proxy for global spending. Companies that execute with a powerful network effect are enjoying premium valuations.

America Movil (AMX)

In the past quarter, Mexico’s Supreme Court ruled that a law allowing other competitors to use America Movil’s network free of charge was unconstitutional. Although this was a win, the court also decided AT&T and Telefonica would not have to retroactively pay back an estimated $600M to $800M in fees. The Federal Telecommunications Institute is expected to decide on a rate to be paid to America Movil in the next month.

Biogen (BIIB)

Biogen has been one of the most focused companies on research in neurological brain and myelin related diseases such as MS, Parkinson’s, ALS and Alzheimer’s. They may have a leading position in the treatment of Alzheimer’s with the drug aducanumab. The memory loss and functional decline in Alzheimer’s is linked to amyloid plaques, which are abnormal deposits built up in the brain. That’s where aducanumab, an antibody that “binds” to amyloid plaque in the brain, comes in. Based on preclinical and Phase 1B trials to date, treatment with aducanumab has been shown to reduce plaque levels. Alzheimer’s is now the top killer in the UK. Biogen continues to drive innovation in neuroscience using biomarkers, biological mechanisms and other cutting-edge therapies.

Microsoft (MSFT)

In July, Microsoft announced a reorganization overhaul to encourage cloud growth that will cut up to 3,000 jobs in sales positions primarily outside of the US. This reorganization will be focused on how sales are handled as opposed to cutting costs. Azure, Microsoft’s cloud business, continues to show exciting progress. The company has returned $200 billion to shareholders the past ten years.

BP p.l.c. (BP)

In their second quarter, BP posted a profit of $144M, up from a loss of $1.4B in the previous year. BP recently announced their plan to issue an initial public offering of its US Midwest and Gulf Coast pipeline assets in the fourth quarter of 2017. BP Midstream Partners would spin-off in a Master Limited Partnership to raise cash and enter a tax-advantaged structure. Stronger global growth with the cutbacks in OPEC supply have helped to reduce the glut of oil.

Visa (V)

Visa saw payment volume growth of 38% to $1.9 trillion and total processed transactions of 28.5 billion, up 44% over last year and is looking at annual net revenue growth of 20% in 2017. Like Mastercard, Visa benefited from the shift to electronic payments and an uptick in global spending. PayPal is a smaller position we own, and it is enjoying exemplary execution in the payments space.

UnitedHealth (UNH)

UnitedHealth has continued to outperform on its strategy of evolving from disease management to predictive approaches leading to material reductions in medical costs. Their data and technology platform, Optum, produced double digit percentage earnings growth in all its segments. This company continued to expand its lead in predictive data analytics.

Unilever (UN)

Unilever delivered a strong performance in the first half of the year as net profits increased over 22% and turnover increased 5.5% while all four of its core segments showed improved margins. Group volume remained relatively flat in the first six months, but management anticipates accelerating growth in the second half of the year on the back of innovation plans and increased marketing spend.

Boeing Company (BA)

Boeing shares experienced their largest jump in value since 2009, growing more than 8% to an ever-increasing record high price after releasing impressive quarterly earnings. Revenues were down 8% due to planned cuts, but through lower production and development spending, Boeing was able to greatly improve profit and cash flow while benefiting from high demand for air travel.

Detractors to the quarter:

Medtronic (MDT)

Medtronic experienced an IT system crash in the quarter that left them unable to process, ship, and manufacture orders for a week. Demand for their automated insulin dosing sensors has more than doubled in the past ten quarters, outstripping production capacity. Accelerated plans to increase capacity are not expected to be ready for commercial production until Q4, leaving less units available for the higher revenue generating new patient system sales. The company suffered damage to manufacturing facilities in Puerto Rico from Hurricane Maria. Medtronic is a very cheap market leader for the quality, based on improving free cash flow and a high return on invested capital.

Zimmer Biomet (ZBH)

Zimmer lowered its full year revenue guidance by 1.5% after experiencing production delays and slower-than-expected sales recapture from customers in the US. David Dvorak unexpectedly resigned as CEO and from the board of directors in July, but many see this as a possible positive and a step in the right direction. Zimmer is the low-cost producer of hips and knees and is well positioned to serve worn out, aging baby boomers.

Kroger Co. (KR)

Increasing competition in the grocery industry led to lower average spending per customer visit and continues to put pressure on their already slimming margins. Price wars in the grocery business are impacting all grocery participants. However, Kroger is a leader in the use of data analytics and is a very focused competitor, having successfully competed with Wal-Mart Stores for several years. Eating at home offers the best bargain in decades versus eating out at restaurants.

Quest Diagnostics (DGX)

News of the proposed 9-10% cut in reimbursement rates for clinical laboratory tests by the Centers for Medicare and Medicaid Services caused shares of Quest to drop more than 7.3%. As a result of the recent hurricanes and having a large presence in Florida and Texas, Quest expects a 1.5% reduction in revenues and a negative $0.10 EPS impact in the third quarter, per their 9/27/2017 press release. With a stronger employment picture, utilization rates look to improve.

Molson Coors (TAP)

Despite delivering increasing constant currency revenues, diminishing demand for beer and increasing competition from microbreweries lowered the valuation for Molson Coors in recent months. Generation Z–those born on or after 1996–are estimated to be drinking 20% less than millennials and are the first generation to prefer spirits over beer.

Oracle (ORCL)

Oracle has been benefiting from the ongoing rapid growth and success of its cloud platform, but shares took a dive when they forecasted cloud revenue would increase between 39% and 49% in the quarter versus 51% in the previous quarter.

Risk

We have never seen so many investment decisions driven by mathematical quantitative systems. In 1998, Long-Term Capital Management with more PhDs on staff than any investment firm in the world collapsed as it relied on mathematical models that supported borrowing over $200 billion on a $2 billion equity base. The next year passive “indexing” peaked as the market hit the highest price to GDP in history. A painful 40% decline followed. A contributing factor to the 1987 stock market crash was the belief that institutions had “portfolio insurance” which failed badly when the herd headed for the exits. Today many participants in the market are attracted to pools of stocks in the form of exchange traded funds that greatly outnumber the shares of publicly traded companies. If the fundamentals of the market turn down, it will be difficult to break out the operating reality of the underlying securities. The emotions and behavior of crowds tend to be predictable over time with little tolerance for declines. There is scant managerial ownership of these funds (no skin in the game) and the holding period tends to be over months not years. Buying overpriced assets blindly for free is no bargain at all. We prefer to know the business, management and balance sheet so when times get tough we have a good idea of the fundamentals based on years of day-to-day research. Having negotiated through numerous recessions and market declines over many years, we have seen no effective shortcuts to risk management. Our focus continues to be on approaching markets in a systematic, disciplined way, never losing sight of the power of compounding. We look at the potential loss of each holding constantly and seek to add value through the mitigation of undue risk.

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: Summer 2017

Jun 30, 2017

Download Auxier Report Summer 2017

 

Summer 2017 Market Commentary 

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

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

The Double Play 

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

Supply/Demand for US Public Companies

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

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

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

Portfolio Highlights

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

 

 

Spring 2017 Performance Update

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

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

Contributors to the quarter:

UnitedHealth Group (UNH)

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

Medtronic (MDT)

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

Bank of New York (BK)

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

Corning (GLW)

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

Mastercard (MA)

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

America Movil (AMX)

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

Unilever (UN)

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

Oracle (ORCL)

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

Johnson & Johnson (JNJ)

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

Detractors to the quarter:

Kroger (KR)

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

Molson Coors (TAP)

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

Discovery (DISCA)

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

Compound Interest

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

 

We appreciate your trust.

Jeff Auxier

 

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

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

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

Foreside Fund Services, LLC, distributor.

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

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

Auxier Report: Spring 2017

Mar 31, 2017

Download Auxier Report Spring 2017

Spring 2017 Market Commentary

 

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

The Great Equity Shrink

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

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

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

Restructuring in Retail

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

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

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

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

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

Be Careful Extrapolating Returns in Technology-related Businesses

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

Spring 2017 Performance Update

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

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

Portfolio Highlights

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

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

Contributors to the quarter:

Unilever

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

Medtronic plc

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

Zimmer Biomet Holdings

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

PepsiCo, Inc.

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

Philip Morris International

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

Corning Inc.

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

Oracle Corp.

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

Merck & Co.

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

Anthem, Inc.

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

Cerner Corp.

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

Visa

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

Detractors to the quarter:

Kroger Co.

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

Chevron /ConocoPhillips/BP

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

Bank of New York Mellon Corp.

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

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

We appreciate your trust.

 

Jeff Auxier

 

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

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

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

Foreside Fund Services, LLC, distributor.

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

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

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