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Auxier Report: Fall 2022

Sep 30, 2022

Download Auxier Report: Fall 2022

Fall 2022 Market Commentary

Global stock and bond markets remained under pressure in the third quarter as the world continued to deal with higher-than-expected inflation and disruptive geopolitical events.  In the US, stocks as measured by the S&P 500 were down 4.9% for the quarter and 23.9% year-to-date. Energy remains the only industry that has recorded a positive return this year. The US dollar gained 7% during the quarter and 17.19% year-to-date. It is at its highest point in 20 years which hurts US multinationals and pressures emerging markets. The chart below shows how recent drops in Chinese markets have wiped out gains over the last three decades. It illustrates the dangers of communism as the government has turned extremely hostile toward free market capitalism. Harsh  COVID-19 lockdowns and an imploding real estate market are contributing to  slowing GDP (gross domestic product) growth which in turn negatively impacts global growth. China’s population is expected to shrink in 2022 for the first time in 70 years.

After being crippled due to the pandemic, international travel has been making a recovery throughout the year which has boosted cross-border payments for companies like Mastercard and Visa.  Despite ongoing inflation pressures and recession fears, both have seen their  volumes surpass pre-pandemic levels. In the first half of the year, Mastercard’s cross-border volumes were 140% higher than the same period in 2019. We continue to see positive pricing and strong fundamental demand in the insurance industry. Higher interest rates enhance the value of insurance float while increasing cash flow on investment portfolios.  Insurance companies tend to perform well during recessions as they offer something consumers need. Health insurers we own like UnitedHealth, Elevance, CVS and Cigna are seeing good demand with the growth in Medicare coverage. Conservative property casualty insurance companies like Travelers, AIG and brokers like Marsh & McLennan, Ryan and AON benefit from firm pricing and increasing coverage following disasters like Ian. Elsewhere in the healthcare industry pharmaceuticals like Merck are outperforming with strong revenue and earnings growth.  Positive results from their blockbuster cancer treatment Keytruda led to a 14% overall sales gain. Keytruda was the second highest-selling drug in the world in 2021 behind AbbVie’s Humira. Their cancer therapy could become the top-selling drug in 2023 as it is expected to earn $21.6 billion according to a peer reviewed journal from Springer Nature Group. The company generated cash flow of $13.12 billion in 2021 which they use to invest heavily into their new drug pipeline. Despite consistently good performance during the year, Merck trades at a reasonable valuation with a P/E on 2023 EPS of 13.

The energy sector outperformed nearly every other sector during the quarter and was a strong contributor for the Fund. The sector makes up about 5% of the S&P but is accounting for over 10% of the profits. OPEC+ plans to reduce oil production by 2 million barrels per day in November which adds further support to oil prices. In response to this reduced supply, the US has been releasing more of their strategic petroleum reserve (SPR) to help control prices at the pump. At the end of the quarter the US’s SPR was at the lowest level since 1984 and the White House is planning to release another 10 million barrels in November. Replenishing the SPR will add further to demand. Rising oil prices should benefit energy companies that we hold down the line such as BP, ConocoPhillips, Valero Energy, Phillips 66 and Chevron. US shale producers are seeing improved fundamentals due to more disciplined spending and are expected to wipe out $300 billion in losses just in 2021 and 2022. Deloitte forecasts that the global oil and gas industry will generate a record $1.4 trillion in free cash flow in 2022 and could become debt-free by 2024. The US exported a record five million barrels per day for the first time in August.

The technology sector was a detractor for the Fund during the quarter. In general, the past few years we have seen a massive capital spending boom in tech, telecom and media. The market is now punishing undisciplined, sloppy capital allocation. Many companies like Alphabet and Microsoft have reduced job openings or frozen hiring completely. However, Alphabet’s $140 billion in cash represents 14% of its market capitalization. One could argue that Google Search and YouTube are necessities for most Americans.  Advertising is a key revenue driver for Alphabet and ad spend is one of the first costs to get cut in a recession. In addition, personal computers have seen a massive glut after the COVID-19 supply chain bottleneck. According to the Wall Street Journal, demand for PCs has dropped off the fastest in 20 years. Technology stocks comprise less than 8% of the Fund vs close to 27% for the S&P 500.

Euphoria and Easy Money a Lethal Combination

Years of zero interest rates and ebullient market sentiment created unrealistic expectations for many investors. Reckless speculation led to the cryptocurrency (20,268 currencies as of July 2022) and IPO bubbles which we are now seeing collapse. According to Forbes, there were 1,073 IPOs in 2021 that raised $317 billion. Over 50% of these listings were done through the highly controversial special purpose acquisition company (SPAC) model. 2021 was a record year for IPOs. Companies that were chasing growth at any cost are now paying the price as higher inflation and interest rates crush money-losing enterprises no matter how popular the story.  This chart from the Financial Times shows how bad IPO returns have been over the last several years.

Poor performance has led to a collapse in new IPOs. The first half of 2022 saw a dramatic decline in listings with only 92 companies raising less than $9 billion. Forbes estimates just 184 total IPOs by the end of the year. The Reuters Venture Capital Index, which tracks the performance of venture-backed companies, ended the quarter down about 61% from its all-time highs. The power of compounding may be the most underappreciated investment phenomenon and to win you must first survive and not lose. This chart shows just how much a holding must recover after a significant drop in value.

Inflation Remains a Concern Despite Rising Rates

Despite record rate hikes by the Federal Reserve, consumer inflation does not seem to be slowing as overall CPI in September rose 8.2% year-over-year. Compared to August overall CPI increased by 0.4%. The European region is seeing record inflation readings over 10% as energy prices rise due to supply disruptions  from Russia. Heating oil and diesel are also rising in the US. States like Maine, where a majority of homes are still using heating oil, are seeing costs increase by over 50% year-over-year. Rising costs like these leave many consumers in the position of choosing to “heat or eat.”  The Capital Press recently  reported that  97% of California is under severe drought conditions which will likely contribute to continued food inflation. California grows more than 33% of the vegetables and 75% of the fruits and nuts in the US. According to the California State Board of Food and Agriculture costs for harvesting and processing crops like tomato, garlic and onion have increased by 25% this year. COVID-19 lockdowns in China and problems in barge shipments due to low Mississippi river levels further add to price pressures. Holiday air travel is more expensive this year as travel company Hopper is forecasting a 39% increase over last Christmas. Through August airfare had seen a larger year-over-year increase than nearly any other category. Las Vegas casinos are enjoying record-high performance for this past quarter. Even with inflation on the rise, consumer spending has been more resilient than expected as spending increased by 0.4% in August and 0.1% in September. Consumer spending accounts for about 70% of total US GDP.  Service spending and strong employment levels could keep the Fed on course to tighten throughout the remainder of the year. According to Deloitte, US firms are expected to reshore almost 350,000 jobs in 2022, up 25% from 260,000 in 2021.  History has shown that inflation can take a long time to normalize. According to data from Bank of America covering decades of economic history for advanced countries, inflation takes an average of 10 years to return to 2% once it surpasses 5%. It is likely that while the Fed’s rate hikes could soon start to show benefits in the inflation rate, it could be some time before we return to their target level of 2%.

Bond Market Troubles Continue

The US bond market has been facing another tough year for returns as high inflation and rapidly rising rates have sent bond prices tumbling. According to NYU there has not been a double-digit decline in bonds since 1931 when they fell 15%. The S&P 500 Bond Index, which has an average maturity of about ten years was down 4.5% for the quarter and 17.53% year-to-date. The US Treasury market is also feeling pain as typically consistent sources of demand like the Fed have begun pulling back purchases. Over the last two years the Fed more than doubled its balance sheet to over $8 trillion and that number could fall as low as $5.9 trillion by mid-2025 if they maintain their current pace of divestitures. Due to high rates and a strong dollar, many countries have had to sell treasuries to support their own currencies. For the first time since 1998 Japan had to support their currency.  According to the International Monetary Fund (IMF), emerging market central banks have had to reduce their foreign exchange reserves by $300 billion in 2022. In the UK liability-driven investment strategies or LDIs were sold as a safe way to match current and future liabilities of pension plans. They did not factor in a sharp rise in rates and with 7-to-1 leverage it led to massive collateral calls forcing the Bank of England to step in and provide emergency relief. We are seeing historic volatility in the fixed income markets which should lead to some great bargain buying opportunities in the months ahead. Edward McQuarrie, professor emeritus of business at Santa Clara University, calculated bond market returns dating all the way back to 1794 and concluded that if the market maintains its current trajectory 2022 will be the worst year for bonds in US history. Based on returns so far, 2022 could also be the first time in over 50 years that both stocks and bonds decline in a calendar year. We have been warning for years that the bond market was artificially suppressed by unprecedented Fed bond buying. We are now seeing the painful hangover from more than a decade of zero rates.

Third Quarter 2022 Performance Update

Auxier Focus Fund’s Investor Class returned -5.47% in the third quarter and -14.14% YTD through September 30. The cap-weighted S&P 500 Index declined 4.9% for the quarter and 23.87% YTD while the DJIA lost 6.17% and 19.72% over the same periods. Small stocks as measured by the Russell 2000 returned -2.19% for the quarter and      -25.10% YTD. The MSCI Emerging Markets Index shed 11.57% for the quarter and 27.16% YTD. Stocks in the Fund comprised 87.6% of the portfolio. The equity breakdown was 79.2% domestic and 8.4% foreign, with 12.4% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to September 30, 2022 is now worth $48,404 vs $39,612 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 735.01%. The Fund had an average exposure to the market of 79% over the entire period. Our results are unleveraged.

In Closing

This year reminds me so much of 1999-2002 when the Nasdaq dropped about 78% top to bottom and the S&P lost 49%. The Auxier Focus Fund during that difficult period gained over 9%. Indexing had reached a historic peak in 1999 with companies like AOL, GE, Lucent and MCI WorldCom dominating (both Lucent and WorldCom eventually went bankrupt). Today also reminds me of 1982-1983 when inflation was roaring and the Paul Volker Fed was aggressively raising rates. You had to make exceptional, well researched buys as there was no “Fed put” to bail out poor selections. Back then we focused on the cheapest businesses (low P/Es) selling necessities. Corrections and recessions are healthy as they purge excesses. The market is unwinding a venture capital boom (2.5 times 2000 level), a bond market bubble where rates hit lows not seen in 4,000 years and a vigorous private equity industry that gorged on easy borrowed money to buy inflated assets. We see the potential for accidents in the $1.2 trillion floating-rate leverage loan market as yields reprice higher. Conversely, quality undervalued conservative businesses with disciplined capital allocation, solid balance sheets, proven business franchises and ethical leadership should outperform in this challenging environment. Wars, reshoring, socialism, supply chain disruptions and decarbonization all contribute to higher inflation. Policies out of California, now one of the top six economies in the world, are very inflationary. Today we see good value in smaller businesses. Small cap value stocks not only outperformed 1999-2002 but also throughout the high inflation 1970s. From 1969-1979 the cheapest low P/E stocks outperformed the most expensive high P/E stocks 213.6% vs 25.8%. While investors often think bigger companies are safer, history proves that any class of investment that detaches from underlying cash flows can be highly risky. What matters is the fundamentals of constant demand, growing sales earnings and cash flow at a sensible price. The collapse in Russian and Chinese stock markets reminds us of the importance of the rule of law, checks and balances and integrity in free markets.

We appreciate your trust.

Jeff Auxier

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

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

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

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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 market-capitalization-weighted widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. S&P 500 Bond Index is market value-weighted and seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500. The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index. The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). Refinitiv (Formerly Thomson Reuters) Venture Capital Index tracks the gross performance of the US venture capital industry through a comprehensive aggregation of venture-funded private company values. One cannot invest directly in an index or average.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.

SPACs, A special purpose acquisition company, is formed to raise money through an initial public offering to buy another company.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.

 As of 9/30/2022, the Fund’s top 10 equity holdings were:  UnitedHealth Group Inc. (7.6%); Microsoft Corp. (4.9%); Mastercard Inc. (4.6%); Kroger Co. (3.5%); Elevance Health Inc. (3.4%); Philip Morris International (2.9%); PepsiCo Inc. (2.8%); Johnson & Johnson (2.7%); Medtronic PLC (2.7%); Merck & Co. Inc. New (2.6%).

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 2022

Jun 30, 2022

Download Auxier Report Summer 2022

Summer 2022 Market Commentary

The S&P 500 experienced the worst first half in 52 years and second worst half since its inception as the market declined 16% for the quarter and 20.1% year-to-date. Rising rates in response to surging inflation compressed valuations. The bond market as measured by intermediate 10-year treasuries had its worst six month decline since 1788, down 11%.  Long duration, money-losing growth stocks were hit hard. The tech-heavy Nasdaq Composite lost 22.3% for the quarter. The Morningstar US Growth Index lost 25.3%, its biggest decline since the 2008 financial crisis. The Morningstar Large Growth Index was down 29.6%, which was its worst since Q4 2000. The best performing sectors were consumer staples, healthcare, utilities and energy.    This was only the second time in the last 40 years where both bonds and stocks recorded losses for two straight quarters. The S&P Global Bond Index fell 8.51% in Q2. The labor market remained tight with a 3.6% unemployment rate and jobless claims consistently fell during the quarter.  At the end of April there were nearly two job openings for every unemployed person. Inflation creates a whole new challenge increasing the importance of valuation, enduring business models and sustainable cash flows.

The blistering pace of new initial public offerings (IPOs) has slowed now that rising rates and growing inflation have elevated the risk of betting on money-losing companies at any cost. 2021 was a record year for IPOs with over 1,000 new listings in the US, up from 471 in 2020 and 242 in 2019.  59% of these offerings were done through special purpose acquisition companies (SPACs). Around 80% of the IPOs in 2021 had operating losses. US IPO volume is down 95% in the first six months of 2022 compared to 2021. Biotech IPOs have also slowed, and the second quarter was the slowest for new offerings since 2009. Only about 10% of the 111 biotech IPOs in 2021 are trading at or above their offering price. Investors have been turning their eyes to companies with established business models and positive cash flows. Companies with negative cash flows are underperforming companies with positive cash flows for the first time in five years. Furthermore, we see the bubble in venture funding bursting. Venture funding hit $342 billion in 2021, up from $130 billion in 2020. This compares to $124 billion in the last mania peak in 2000. Grant’s Interest Rate Observer

Inflation Driving Recession Risks and Repricing Valuations

Inflation is a top concern for consumers, and many are cutting back on nonessentials. The consumer discretionary segment was the worst performing sector in the S&P 500 during the quarter.  Inflation rose 9.1% in June, up 1.3% from May and the largest year-over-year increase since 1981. The Fed has been accelerating their rate increases in an effort to curb inflation hiking rates by 50 basis points in May and 75 basis points in June. This was the first 75 basis point hike since 1994.

The hope is that these aggressive measures will lead to a soft landing for the economy, but with such a wide gap between inflation and the federal funds rate that appears difficult. Since the Fed started in 1913, 90% of attempts at monetary tightening led to hard landings. Economists at Bank of America believe that the rapid push for decarbonization and green energy could also fuel inflation due to the high costs of infrastructure investments that will be required and the increase in energy consumption due to electric vehicle (EV) growth. The International Energy Agency (IEA) estimates that their net zero energy transition will cost about $116T globally over the next 28 years. Housing costs continue to rise and represent about one third of CPI. According to the Bureau of Labor Statistics the average American is spending about 35% of their income on shelter. In May median rents surpassed $2,000 for the first time ever. Average rents as of June increased 14.1% year-to-date according to Redfin. In our local market we are seeing renters paying about 40% more than they were last year. The reshoring of supply chains could also contribute to higher inflation going forward.

Second Quarter 2022 Performance Update

Auxier Focus Fund’s Investor Class returned -9.11% in the second quarter and -9.17% YTD through June 30. For the quarter   the cap-weighted S&P 500 Index declined 16.1% while the DJIA lost -10.78%. Small stocks as measured by the Russell 2000 returned -17.2%. The MSCI Emerging Markets Index shed -11.45%. Stocks in the Fund comprised 89.3% of the portfolio. The equity breakdown was 80.5% domestic and 8.8% foreign, with 10.7% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to June 30, 2022 is now worth $51,204 vs $41,645 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a cumulative return of 699.92%. The Fund had an average exposure to the market of 81.50% over the entire period. Our results are unleveraged.

Contributors to the quarter:  Our outlook on sectors and positions with a positive impact on the portfolio for the quarter ended 6/30/2022.

With the rising rate of inflation and borrowing consumers have been spending more on necessities with regard to goods. Inflation restricts many discretionary purchases. This past quarter stocks of insurers, food, beverage, energy and healthcare outperformed. Major retailers selling non-essentials like Target are suffering from excess inventories and material markdowns. Travel and spending on services and “experiences” has been strong as people are getting out of the house after being locked down for two years. Marriott sees 25% gains in revenue per available room (RevPAR). Pent-up demand for international travel is showing up in surging cross-border volumes for Mastercard, up 58% in the recent quarter. Energy-related stocks continue to do well given the favorable supply-demand imbalance globally. Natural gas prices are soaring as Russia is drastically reducing supplies into Europe. The US is now the number one exporter of liquified natural gas (LNG). Gasoline, diesel and jet fuel demand is firm with the resurgence of travel.  This helps downstream operations of the major integrated oils and independent refiners like Valero.  Aerospace and defense industries are showing improving fundamentals from the escalation of the war in Ukraine as well as positive air travel trends. The Marsh Global Insurance Market Index recently showed price increases of 9% year-over-year. Since going public in 1962, insurance broker Marsh & McLennan has grown earnings in all recessions. Insurance bills have to be paid.

The   healthcare industry was a strong performer with a combination of low valuations and improving demographic demand.  Health insurers like UnitedHealth, Elevance (formerly Anthem), CVS and Cigna have all maintained consistent top-line growth throughout the second quarter and through the entire pandemic.  The Bureau of Labor Statistics projects that healthcare industry employment will grow 16% from 2020 to 2030, faster than the average for all other occupations. According to the Centers for Medicare & Medicaid Services, national health spending is expected to reach $6.2 trillion by 2028.

Detractors to the quarter:  Our outlook on sectors and positions with a negative impact on the portfolio for the quarter ended 6/30/2022.

Late in the quarter fears of a recession permeated the market. Economically sensitive stocks tied to advertising, industrials, many commodities and banks suffered meaningful corrections. Margin pressure due to surging costs and supply chain interruptions continues to be a challenge for most companies.  Major banks tied to the capital markets saw a sharp decrease in investment fees from less underwriting of IPOs. Added reserves may be needed in areas of private equity and hedge fund lending going forward.

In Closing

The results for the first six months show that momentum-based investment strategies in long duration (money-losing) assets that work in a world of free and easy money struggle in an environment of higher rates of inflation and more restrictive central bank policies.

The speculative excesses and avarice driven by historically cheap money and record fiscal stimulus have been sharply correcting in 2022. Roger Lowenstein, author of “When Genius Failed: The Rise and Fall of Long-Term Capital Management” writes, “Finance is often poetically just; it punishes the reckless with special fervor.”  Higher inflation and interest rates compress valuations leading to greater importance of individual business selection utilizing price, value and a margin of safety. We anticipate more headwinds and bond market volatility as the Fed reduces their massive $8.9 trillion balance sheet.

Over the very long term it has been important to pay close attention to intrinsic value, earnings and cash flows with the performance advantage favoring smaller businesses. Currently we are seeing some of the best bargains in smaller businesses.  Cumulative knowledge of sustainable business models and proven capital allocators is important. Managerial diligence becomes much more apparent in tough times. The old adage on Wall Street is that financial genius is “leverage in an up market.” We are now seeing the pain and downside of excessive leverage combined with overpriced assets. Going forward we are positioning for higher imbedded inflation given the reversal of globalization, growing acceptance of socialism, government interventions relating to pandemics and reshoring supply chains. Furthermore, the political decarbonization trend is expensive with high-cost construction and extraction which is prone to cost overruns.

Ideally in this climate, we look for undervalued businesses that earn high returns on equity, have freedom to price, and achieve growing free cash flow yields with nominal mandatory capital spending. We like low ticket products or services with high inventory turns that are deemed essential.  It is important to make exceptional buys as historically the stock market indexes tend to be rangebound in a higher inflation environment. This requires a rigorous research effort to identify compelling opportunities. We see the next ten years as similar to 1999-2009, when the indexes were negative due to a plethora of overpriced stocks. Through careful security selection, patience and discipline the Fund outperformed the S&P 500 by 87.94 percentage points cumulative during that negative period.

Another valuable observation by Roger Lowenstein, “Investors long for steady waters, but paradoxically, the opportunities are richest when the markets turn turbulent.”  Former US Treasury Secretary Larry Summers highlights the risk of blindly buying into indexes: “The efficient market hypothesis is the most remarkable error in the history of economic theory.” Looking back, some of the greatest bargains in quality companies took place  when energy prices went parabolic in 1973-74 during the OPEC oil embargo and in 1979 during the Iranian revolution. In addition, some of our best returns followed price declines from financial panics and rising interest rate cycles. The 1987 crash, the 1990 thrift crisis and the 1994 rate cycle, to name a few. Bear markets tend to be brutal grinding affairs. To benefit from the ultimate bargains, we first look to protect and mitigate the risk on the downside as the market cleanses the excesses.

We appreciate your trust.

Jeff Auxier

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

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

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

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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 market-capitalization-weighted widely held common stocks. Morningstar US Growth Index measures the performance of US stocks that are expected to grow at a faster pace than the rest of the market as measured by forward earnings, historical earnings, book value, cash flow and sales. Morningstar Large Growth Index measures the performance of US large-cap stocks that are expected to grow at a faster pace than the rest of the market as measured by forward earnings, historical earnings, book value, cash flow and sales. Stocks in the top 70% of the capitalization of the US equity market are defined as large-cap. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. S&P Global Developed Aggregate (Ex-Collateralized) Bond Index (USD) seeks to track the performance of investment-grade debt publicly issued by sovereign, quasi-government, and investment-grade corporate entities, excluding collateralized/securitized bonds. The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index. The Marsh Global Insurance Market Index is a proprietary measure of global commercial insurance premium pricing change at renewal, providing insights on the world’s major insurance markets. One cannot invest directly in an index or average.

A basis point is one hundredth of one percent.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Free cash flow yield is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. The ratio is calculated by taking the free cash flow per share divided by the current share price

Long Duration Growth Stock – Although long-term is relative to an investor’s time horizons and individual style, generally long-term growth means over a period of ten years or more.

Margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In other words, when the market price of a security is significantly below your estimation of its intrinsic value, the difference is the margin of safety.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity.

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 2021

Dec 31, 2021

Download Auxier Report Winter 2021

Winter 2021 Market Commentary

The US economy  finished the year with the strongest Gross Domestic Product (GDP) growth since 1984, up 5.7%. Earnings for S&P companies rebounded strongly from the 2020 pandemic lows, up nearly 50%. Share buybacks look like they will exceed $850 billion, up 63% from 2020 and 16% from 2019. Companies in the S&P have retired over $5 trillion through buybacks the past decade. US stocks overall had a strong year with the DJIA up 20.95%, the S&P up 28.71%, and the Nasdaq gaining 21.39%. The extremely high level of emergency monetary and  fiscal  stimulus throughout 2021 kept money funds close to zero. With  borrowing rates at historic lows it was like an open bar for easy money. Nobody stops at one drink. Private equity and   speculators gorged, leading to a number of  asset bubbles throughout the economy. According to Grants, the fiscal and monetary response to the pandemic over the past two years was greater than the 1960s Great Society welfare program and the Vietnam War combined. M2 money supply jumped 41% and the Fed’s balance sheet doubled to $9 trillion.

Inflation a Top Concern for the Market

Inflation has been a growing concern over the last few months as consumer prices rose by 6.8% in November and 7% in December, the fastest year-over-year increase since 1982. Recovery of the job market has contributed to rising inflation as the unemployment rate fell to 3.9%, nearing the pre-pandemic low of 3.5% in February of 2020. Average hourly wages increased by 4.7%, higher than the pre-pandemic average increase of 3%. According to the National Federation of Independent Business, about 49% of small businesses planned to raise their prices in the next three months. Starbucks recently raised prices 8%, the largest increase in 20 years, citing food, labor and transportation costs. For the full year 2022, Wells Fargo Investment Institute estimates that consumer inflation will average 5.3%. The trucking industry has also seen significant inflation as costs in the long-haul trucking sector annualized at 25% in December. Higher trucking costs are a significant contributor to rising consumer inflation due to nearly 75% of freight in the US being moved by trucks. In response to inflation, the Fed stated that they would double the pace of their previously announced QE tapering from $15 billion per month to $30 billion, now expected to end three months earlier in March. The Fed wants to end tapering before they begin to raise interest rates which are anticipated to be increased at least three times during 2022. By the end of 2022, rates could rise from their current range of 0%-0.25% to as high as 1%. Three Fed officials now believe that interest rates could reach 2.125% by the end of 2023.

Long duration assets tend to suffer disproportionately  when inflation and interest rates rise. With inflation running at 7% and the Fed Funds rate essentially zero, this is one of the largest negative real returns in history. Since 1965 the short term 3-Month Treasury Bill has averaged over 5%, vs. 0.2 % today. Bonds have already started to suffer with the domestic Bloomberg Barclays US Aggregate Bond Index down 1.54% for the full year.  Foreign bonds declined 4.71% based on the Bloomberg Global Aggregate Index.  Since November we have seen a meaningful “de-risking” in the markets as the most overpriced, unprofitable companies have suffered sharp corrections. We still see historically wide spreads between the most expensive and least expensive stocks with many of the cheaper names outperforming. Assuming just a 3% inflation rate for 2022  there could be price/earnings compression for the major stock indexes from current levels. In numerous meetings with management teams we repeatedly hear concerns over labor and the sticky nature of wage demands.  In addition, inflation appears understated as the real estate owners’ equivalent rent is far below reality, showing an artificially low 3.8% in December. The powerful global movement to decarbonize the planet and discourage  fossil fuel investment has led to surging prices of natural gas, up 47%, and oil up over 50% in 2021. Petroleum is used in over 150 household products.

Market Gains Becoming More Concentrated

Over the last few years, the market has become increasingly driven by a smaller and smaller set of powerful platform companies.  In mid-December, five stocks, Microsoft, Apple, Alphabet, Nvidia and Tesla, accounted for 35% of the S&P’s advance.  Tesla would need to decline over 70% to trade on par with the valuation of Toyota, the largest US auto seller.  That could torpedo the index.

 

Fourth Quarter 2021 Performance Update

Auxier Focus Fund’s Investor Class returned 7.94% in the fourth quarter vs. 11.03% for the cap-weighted S&P 500 Index and 7.87% for the DJIA. Small stocks as measured by the Russell 2000 returned 2.14%.  The MSCI Emerging Markets Index declined 1.24%, the MSCI China Index (USD) declined 6.06% and the CSI 300 Index returned 1.60%. A 60/40 S&P 500 and Bloomberg Barclays US Aggregate blended index returned 6.57%. Bonds, as measured by the Bloomberg Barclays US Aggregate Bond Index, returned 0.01% for the quarter. Stocks in the Fund comprised 96.0% of the portfolio. The equity breakdown was 86.4% domestic and 9.6% foreign, with 4.0% in cash and short-term debt instruments.  The Fund gained 20.03% for the full year 2021 with the equity component up 21.92%. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to December 31, 2021 is now worth $56,376 vs. $52,030 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a cumulative return of 761.29% since inception and the Fund as a whole has had a cumulative return of 463.75% vs. 420.30% for the S&P. This was achieved with an average exposure to the market of  81.20% over the entire period. Our results are unleveraged.

Contributors to the quarter:  Our outlook on sectors and positions with a positive impact on the portfolio for the quarter ended 12/31/2021.

The healthcare industry was a positive  contributor for the Fund during the quarter thanks to  a renewed push to expand the Medicare and Medicaid programs. Health insurers  UnitedHealth, Anthem and Cigna  enjoy solid fundamentals. In the fourth quarter, UnitedHealth, the Fund’s largest holding, grew their net income  to $4.19 billion compared to $2.35 billion in 2020. Over the last five years, UnitedHealth’s Medicare Advantage enrollment has increased at an average of 13% annually and they expect to add another 600,000 to 650,000 new members in 2022. According to MedPAC, the total enrollment in the Medicare program is expected to increase from about 62 million in 2021 to 78 million by 2030. Medicaid enrollment already reached record highs of over 80 million earlier in the year and continued expansion will benefit insurers. While the recent spending bill has been paused, the current administration has made healthcare expansion a priority and will likely break up the previous bill into smaller parts, making it more likely to be passed. These companies have remained resilient with consistent top-line growth throughout 2021 despite the pandemic headwinds impacting many other companies and industries. In addition to strong top-line performance, valuations for these health insurance companies are still relatively low when compared to the overall market. Our pharmaceutical company holdings such as Pfizer and Johnson & Johnson have fared well during the pandemic due to their COVID-19 vaccines which have greatly boosted profits. Pfizer and Merck also each have pills recently approved by the FDA that are designed to treat COVID infection.  Increased medical testing is driving gains at  Becton Dickinson, Abbott Laboratories and Quest Diagnostics. Medical device companies like Medtronic and Zimmer Biomet are trading at attractive discounts as elective procedure volumes remain pressured and delayed. The  pandemic-driven postponement of elective procedures will likely reverse as time goes on and the virus’s impact lessens.

For the full year housing was exceptionally robust, driving strong gains in portfolio holdings Lowe’s, Home Depot, FirstService and D.R. Horton.

Detractors to the quarter:  Our outlook on sectors and positions with a negative impact on the portfolio for the quarter ended 12/31/2021.

The fintech sector which for us would include companies like Visa and MasterCard  has underperformed this quarter. Large amounts of capital have gone into the fintech space resulting in investments away from incumbents. BNPL (buy now pay later) became the hot payment disruptor,  but regulators are now investigating this space as one third of users have already missed one payment.  The Visa and Mastercard networks  are very powerful.  Together they process over 900 million transactions daily and benefit from higher goods inflation.  Once  cross border payments (mainly payments people make when traveling) return to normal the stocks should rebound. Rising interest rates should continue to benefit financial services stocks that suffered with the Fed’s zero rate policy.  In addition, nearly 72 million millennials are well on their way into adulthood, leading to an increase in household formations and the need for borrowing and other services. Companies we own such as Bank of America, Franklin Resources and Bank of New York Mellon are some that we feel will benefit from this environment. The pricing environment for property casualty insurers is the best since 2003. Beneficiaries  that we believe are undervalued include Berkshire Hathaway, Travelers, AIG and Marsh & McLennan. Rising rates help to increase the value of insurance float too.

Positioning for Higher Inflation and Interest Rates

The level of greed and irrational exuberance in many speculative parts of the market in November was the highest I have witnessed since March of 2000. On average, since 1950, there have been two 5% corrections and one 10% correction a year. These help to purge market excesses and bad behavior, while unwinding leverage. With the rapid growth in exchange traded funds and algorithmic trading, we expect to see much greater volatility, especially with interest rates rising. Our approach tends to offer better relative performance in flat to down markets where rational  investment selection and cumulative knowledge can greatly mitigate risk. We have met more management teams this past year than in any other year to drill down deeper on the operating reality of the businesses we own. There are good bargains  in smaller, quality names. The valuation of the Fund portfolio is  15 times 2022 earnings vs. 20 times for the market as measured by the S&P.  We find it important to be mindful of the power of compounding. We always look at the downside risk first. A steady 8% gain over three years outperforms gains of  50% in year one, 50% in year two, and a declining 50% in year three. As of this writing over 42% of the Nasdaq stocks have declined 50% or more from their 52-week highs. A 90% decline requires  a 1000% return to recover.  When I first started in the business, inflation was running over 8%. I studied the prior 50 years to see what types of businesses  survived and outperformed during high inflation. In general, winners had high integrity management, strong franchises with products and services in constant demand,  high returns on equity, nominal mandatory capital spending, rapid inventory turns, strong balance sheets and growing free cash flow. I have seen some of these businesses purchased at bargain prices that led to double and occasionally triple play returns that trounced inflation in the past. The same company characteristics still dominate the Fund portfolio today.

In Closing

I have found it helpful to study history and great investors who managed to endure and thrive during the most difficult economic conditions. J. Paul Getty, who did exceptionally well during the depths of the 1930s Great Depression, said, “For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.”

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.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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 market-capitalization-weighted widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight (0.2%) of the index total at each quarterly rebalance.  The MSCI Emerging Market Index captures mid and large caps across more than two dozen emerging market countries. The index is a float-adjusted market capitalization index and represents 13% of global market capitalization. The 60/40 Hybrid of S&P 500 and Bloomberg Barclays U.S. Aggregate Bond Index is a blend of 60% S&P 500 Composite Index and 40% Barclays U.S. Aggregate Bond Index, as calculated by the adviser, and is not available for direct investment. The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.  The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.  The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index.  The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). CSI 300 Index is composed of 300 stocks with the largest market capitalization and most active liquidity from the entire basket of listed A share companies in China. The index aims to measure the overall performance of the A shares traded on Shanghai Stock Exchange and Shenzhen Stock Exchange. One cannot invest directly in an index or average.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.

M2 money supply is a measure of the money supply that includes cash, checking deposits, and easily-convertible near money.

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 2021

Sep 30, 2021

Download Auxier Report Fall 2021

Fall 2021 Market Commentary

A number of headwinds led to a corrective third quarter for stock markets globally. In the US worries ranged from  tax policy, rising  inflation,  the potential of diminishing Fed stimulus, supply bottlenecks, and the unpredictable  COVID-19 Delta variant, to name a few. The US GDP growth in the second quarter was 6.7% then plummeted to 2% by the third quarter.  Aggressive regulatory crackdowns by the Chinese government have negatively impacted Asian markets.  The secular shift  toward e-commerce has contributed to logistical challenges driving prices up for most goods around the world. According to the American Trucking Associations, the US currently has a shortage of 80,000  drivers, an increase of 30% since 2019. The shortage  has led to a record backup in California ports with over 100 cargo ships waiting to unload. This backup is expected to continue into 2022. The ambitious  movement to decarbonize  has led to a sharp 60% decline  in capital spending for fossil fuels the past seven years, yet the US still relies on these fossil fuels for 79% of  energy generation. The dependence on wind and solar has led to unpredictable  gaps in supply. In the UK, the North Sea wind stopped blowing for a period this summer,   leading to a  shortage in natural gas.  Shutdowns in fertilizer plants led to shortages of CO2 which is a source of carbonation for drinks. Natural gas prices  increased  more than five-fold this year throughout the UK and Europe (Reuters). Over 80% of UK residents heat with natural gas. Even in the US, where natural gas prices tend to be lower, futures touched a $6.31 per million British thermal units (Btu) which is a 12-year high. Research from McKinsey & Company shows that consumer inflation has been over 5% for four consecutive months which has not happened since 2008. Wage rates are showing some of the strongest gains in 30 years and the real estate owners’ equivalent rent is starting to kick in with reports of double-digit rent increases coast to coast. Higher inflation and interest rates should eventually cool the casino-like speculation we are seeing in many sectors.  Inflation is running at 30-year highs while interest rates are running at 4,000-year lows (Grant’s). A normal free-market functioning bond market will be just as volatile as stocks. The suppression by central banks has altered the importance of valuation and a margin of safety in the current investment environment, rewarding aggressive borrowing and risk-taking.

Fixed Income

Globally, many countries like Canada, Brazil and Russia   have started raising interest rates leading to one of  the worst years for bonds  in decades. So far,  the Bloomberg Global Aggregate Index, which tracks corporate and government debt, is down 4.2% through three quarters, the biggest decline since 1999. Not only do fixed income investors face purchasing power risk but also interest rate risk, as central banks around the world are  forced to raise rates to fend off inflation and defend their currencies. Fed Chair Jerome Powell said that the central bank plans to scale back bond purchases by $15 billion per month starting in December. Since the start of the pandemic, the central bank has been buying at least $120 billion of bonds per month. Bank of America sees central bank liquidity potentially  falling to $100 billion in 2022, which would be down from $2.1 trillion in 2021 and $8.5 trillion in 2020. Selectively, stocks with strong earnings, margins and pricing power should outperform bonds, in our view.   Strong earnings should overcome rising rates. I remember back in  1987 when  the market enjoyed a powerful advance for the first three quarters (up over 35%) on the back of improving fundamental earnings even as longer-term interest rates climbed from 7% to 10%.  There is a limit, however, as  the market corrected hard after rates hit 10%.

Focus on Cash Flow Over Stories

A young generation of investors who have seen essentially nothing but good times for the market are speculating on exciting and high-risk stories. Instead of valuing sustainable earnings and consistent cash flows, many new investors are focusing on small penny stocks and options, hoping for substantial price appreciation in a short period of time. Earlier this year in February, over-the-counter markets saw 1.9 trillion transactions, an increase of 2,000% from the previous year. As a result of the influx of cash into the markets throughout the year, there were record levels of mergers and acquisitions (M&A)  and Initial Public Offering (IPO) activity during the quarter.   Global M&A activity during the quarter was over $1.5 trillion, up 38% over Q3 2020, and was the highest ever recorded for a single quarter (NASDAQ). Year-to-date, M&A transactions surpassed $4.3 trillion which is higher than the $4.1 trillion in annual M&A in 2007. In just the first nine months of 2021, there have been 770 US IPOs, over three times the 10-year average of 205. The capital raised through US IPOs has surpassed both 1999 and 2008 levels. This means a plethora of supply. Just as fossil fuels are starved for capital today, many areas of new innovation and technology are incredibly exciting but also lead to dangerous levels of competition and supply.  Thematic ETFs like ESG (environmental, social and corporate governance)  can lead to gluts and shakeouts. The euphoria surrounding the legalization of marijuana led to irrationally excessive planting, which has decimated growers. The history of transportation bubbles dates back to canals, railroads, airlines, bicycles, etc.  The first electric car was developed in 1890 and ended by the 1930s. From 1900  to 1919, two thousand companies were involved in the production of autos in the US. Today, largely due to government mandates,  many manufacturers are committing to a fully electric future. The massive mandatory capital investment required make it a very high-risk proposition.

In 1999 two popular themes were internet hosting and fiber optic. We flooded the market with fiber optic supply and ended up using less than 20% of the capacity. In the decade from 1999-2009, the S&P 500 was down 9%, but the biggest and most exciting tech stocks fell over 50% during that same time (Financial Times). This chart from Bloomberg demonstrates how, despite having compelling stories in the year 2000, some of the biggest companies were materially overvalued and experienced substantial multiple compression in subsequent years. In referencing the chart below, I remember the period like yesterday. In March of 2000 the level of greed, envy and frenzy was the highest I had ever witnessed.  The technology fundamentals looked like they would be growing  for years into the future. Then the supply caught up with demand; many stocks with exciting concepts went bankrupt leading to a bursting of the bubble and subsequent 80% decline in the NASDAQ. The Auxier Focus  Fund was up over the three years 2000-2002 while many funds that had doubled in the late 1990s went out of business. As mentioned in our prior letter, AOL and Yahoo, two of the most popular stocks at the time, were sold this past year by Verizon after declining 95% from  their 2000 peak.

During the 1999 tech bubble, those who looked past these bubble priced  companies and instead  focused on value were rewarded. For example, the deeply discounted energy sector   gained nearly 150% during the decade from December 1999 to 2009.  That was also the best ten-year period for the Fund in relation to the market, with a gain of 83.67%  vs. -4.27% for the S&P.

Cryptocurrency Risks Could Lead to Regulation

The cryptocurrency market has exploded in 2021 and reached  a total market cap of nearly $2 trillion, a year-to-date gain of 156%. Much of the crypto boom has been due to the growth and popularity of Bitcoin, but alternative options have gained traction as the year has progressed. At the start of 2021, Bitcoin accounted for approximately 70% of the entire market but it now accounts for only 43%. Companies like Visa and Mastercard have begun to embrace the technology  with an eye on  potential disruption in the future. Visa has partnered with over 50 crypto platforms to allow their customers to eventually use Visa cards to pay with cryptocurrency.  Mastercard  has partnered with cryptocurrency firm Bakkt to  allow their users to hold and pay for card purchases with cryptocurrencies. However, even with increased adoption from reputable businesses, the rapid growth and unpredictability of cryptocurrency has brought with it the risk of increased regulation. In September, the Chinese government announced that all cryptocurrency transactions in the country were illegal. The US has taken a less aggressive approach with Fed chair Jerome Powell saying that he has no intention of banning cryptocurrency. Increased regulation  is critical to build  confidence and credibility.  We are carefully studying the evolution of the blockchain. The decentralized digital ledger could potentially  be a  disrupter to many centralized cloud-based models.

China Fundamentals

China has $52 trillion in bank assets or 56% of world GDP.  Their number two real estate developer, Evergrande, binged on easy money. With $300 billion in liabilities, it now faces bankruptcy. Other major developers are facing a similar challenge. 29% of China’s economy is tied to real estate and construction, with most savings in apartments. Vacant apartments could house as many as 80 million people. The Chinese government has been aggressive in reigning in excessive borrowing, poor accounting and monopolistic behavior by many of the major platform companies. In addition, they are suffering from severe energy shortfalls. This has led to some bargains in powerful franchises such as Alibaba.

Merck COVID-19 Treatment

In what could be a game changer in the fight against COVID-19, Merck has released data on a new antiviral pill that can lower the risk of hospitalization by 50%. The drug, called Molnupiravir, is designed to be taken orally for just five days and could be a viable treatment option for millions of people who have decided not to or are unable to receive a COVID vaccine. According to the World Health Organization (WHO), by the end of September there were 56 countries that had yet to vaccinate 10% of their population, so Merck’s treatment could be a very valuable option for these countries. In the US, treatment courses will cost $712. Merck will allow generic companies to manufacture the drug, which will cost an estimated $12-$15. This will help to disseminate the treatment in poorer countries. Trials of Molnupiravir have also shown that it is effective against the Delta variant, which gives management confidence that there will be long-term demand. Merck is hoping to produce 10 million treatment courses by the end of the year, with the US government already agreeing to purchase 1.7 million courses once the treatment is approved. The FDA is currently evaluating the drug and could approve it as early as December. Business Insider reported that industry analysts project Merck could make $22 billion from the drug through 2030. If approved, Molnupiravir could be yet another blockbuster drug for Merck who is already set to benefit from their cancer drug Keytruda, estimated to become the highest selling drug in the world in a few years.

Third Quarter 2021 Performance Update

Auxier Focus Fund’s Investor Class returned -1.84% in the third quarter vs. 0.58% for the cap-weighted S&P 500 Index and -1.48% for the DJIA. The equal-weight S&P 500 returned -0.22%. Small stocks as measured by the Russell 2000 declined -4.36%.  The MSCI Emerging Markets Index declined -8.09%. A 60/40 S&P 500 and Bloomberg Barclays US Aggregate blended index returned 0.40% and bonds, as measured by the Bloomberg Barclays US Aggregate Bond Index, returned 0.05% for the quarter.

Stocks in the Fund comprised 96.0% of the portfolio. The equity breakdown was 84.9% domestic and 11.1% foreign, with 4.0% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to September 30, 2021 is now worth $52,229 vs. $46,863 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a cumulative return of 697.31% since inception and the Fund as a whole has had a cumulative return of 422.29% vs. 368.63% for the S&P. This was achieved with an average exposure to the market of  80.8% over the entire period. Our results are unleveraged.

The uncertainty over proposed healthcare legislation hurt healthcare stocks in the Fund. However, many high-quality companies in the  industry are trading at the cheapest valuation to the market in over 20 years. Defensive staples in the Fund like Pepsi and Coke have also been underperforming. We tend to opt for the enduring over hypergrowth. Rising interest rates have helped to resuscitate many of the financials that looked awful two years ago but are dramatically outperforming this year.

Contributors to the quarter:  Our outlook on a cross section of positions with a positive impact on the portfolio for the quarter ended 9/30/2021.

Microsoft Corporation (MSFT)
Microsoft continued to benefit from tailwinds related to the pandemic and overall digitization in all industries. Azure cloud remains one of the most consistent sources of growth for the company. Recurring revenue is becoming a more important part of the business led by the success of their Office 365 subscription service which is growing at a faster rate than legacy Office products. Microsoft’s Xbox gaming segment has achieved record levels of revenue thanks to the release and continued popularity of their new gaming consoles. The company’s gaming subscription service has over 18 million subscribers. Management’s guidance for fiscal year 2022 calls for double-digit revenue and operating income growth. Microsoft’s board recently approved a new $60 billion share repurchase program. The company also raised its quarterly dividend from 56 cents a share to 62 cents a share.

Kroger Co. (KR)
Despite a slow return to more normal eating habits as restrictions have lifted, Kroger has been able to record solid performance. Year-over-year same-store sales have flattened out but are still above pre-pandemic levels. Digital sales on a two-year basis continue to grow over 100% as customers have become accustomed to Kroger’s delivery and pickup options. Management stated that they are on track to double digital sales by 2023. Data analytics on over 60 million households allows Kroger to more effectively target their advertisements. Kroger has been working hard on improving costs and is on track to achieve $1 billion in annual cost savings for the fourth year in a row. Management’s guidance for 2021 on a two-year basis calls for same-store sales growth of 12.6%-13.1% and EPS growth of 22%-24%. Guidance also calls for annual free cash flow of $1.9 billion-$2.1 billion. Higher food inflation benefits Kroger with their solid private label offerings.

Alphabet, Inc. (GOOGL)
The online advertisement business has seen impressive growth over the last few years due to digitization and that trend is expected to continue as more businesses move online and more connected devices are released. Morningstar analysts estimate that digital advertising will increase by 22.5% in 2021 and 17.5% in 2022. Alphabet remains the leader in search, with Google controlling over 90% of the market, and this consistent leadership has created a network effect for the company. Alphabet has over $136 billion in cash on their balance sheet and debt levels are at $14.3 billion, providing flexibility to continued investment in areas such as cloud and artificial intelligence. Cash on the balance sheet should also help maintain consistent shareholder returns with the company still approved to repurchase up to $50 billion of shares under its current program.

American International Group, Inc. (AIG)
AIG has been working to improve their flexibility and long-term profitability, and that focus was seen in the announcement of a strategic partnership with Blackstone, Inc. AIG will sell a 9.9% stake of its Life & Retirement business to Blackstone for $2.2 billion and will also sell certain housing assets for $5.1 billion. This deal will provide the company with the financial flexibility to deleverage the business and increase returns to shareholders. AIG has increased their dividend payout for eight consecutive years. The board has increased the stock repurchase authorization to $6 billion and management is targeting at least $2 billion in repurchases for the second half of 2021. They also intend to reduce the debt load by $2.5 billion. The company’s combined ratio has been improving throughout 2021 and is expected to continue to see improvement due to fewer business disruptions and pandemic-related claims for the remainder of the year. CEO Peter Zaffino has been executing well.

Detractors to the quarter:  Our outlook on a cross section of positions with a negative impact on the portfolio for the quarter ended 9/30/2021.

Zimmer Biomet Holdings, Inc. (ZBH)
A resurgence in COVID cases led to a slowdown in surgeries. However, Zimmer remains the leader in large joint procedures. Their business is very sticky as surgeons stay with the original provider  for 5-15 years on roughly 95% of all operations. They continue to innovate with smart technology like Persona IQ which provides data to the patient on their implant with details such as distance walked, range of motion and number of steps.  Ten thousand people are turning 65 every day. The obesity rate is now 42% and growing. These are positive fundamental tailwinds for hip and knee replacements, which tend to take place at an average age of  68.

Mastercard, Inc. (MA)
Mastercard was a laggard this quarter as concerns that the growing usage of “Buy Now Pay Later” (BNPL) will cut into their business coupled with continued global travel restrictions from COVID. In addition, cross border transactions are running at only 77% of  2019 pre-pandemic levels. Our research is finding that BNPL concerns are overblown, as they still need to utilize Mastercard’s network. The Federal Reserve also came out with a proposed rule requiring at least two unaffiliated network options. Some analysts see this cutting into revenue for Visa and Mastercard; however, the security and network effects that they provide are much better than smaller competitors who have not invested as heavily in security. The company is penetrating new, fast-growing payment verticals including peer-to-peer, business-to-consumer, and business-to-business.

Corning, Inc. (GLW)
Corning is well positioned in their optical fiber business with sales growing over 20%,  supplying companies like AT&T with fiber as 5G rolls out. Corning is seeing growth in the auto sector as they supply the glass for the digital screens in cars. They have Valor Glass that speeds up vial fill times by 70% and have  partnered with pharma leaders like Thermo Fisher. They also make the optics for augmented and virtual reality.   The stock has been hurt by higher costs due to supply chain disruptions.

Cigna Corp. (CI)
Cigna is a leader in providing customized  health-related services for 180 million customers in over 30 countries.  It  has fallen mainly on concerns over higher medical costs. The stock recently traded below 10 times earnings with a 10-12% growth rate. It sells at a very low price-to-free cash flow as well.

In Closing

We are on pace to see over 104 management teams this  year. We strive to know the fundamental earnings power of the companies we own. There is good value in smaller and midsized businesses with high integrity management teams.  Most businesses we talk to are seeing robust  demand, strong  pricing and good margins. Inflation appears to be up across the board with labor increasing 3.5%. For restaurants, wages are growing around 5.5% and over 10% in hospitality. Government mandates for vaccines and green energy are adding to the shortages for labor and fossil fuels. The service side of the economy is very robust. Companies with strong franchises are able to raise prices and so far, the customers are paying up. Inflation seems to be more persistent as wages are hard to retract and we are seeing rents, which are a large part of the consumer price index, showing double-digit  increases coast to coast. Companies that are executing with proven business models have been rewarded with  huge premium valuations.  However, higher inflation historically acts to compress valuations for all stocks, especially those speculative names with little earnings.  With vaccinations widely available and the potential for the  Merck antiviral, economic conditions should continue to recover from the worst pandemic in 100 years. Politically there remains a sharp divide. Gridlock can be a good thing, as it can mitigate the potential damage of unconstrained government spending and onerous taxation.

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.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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 market-capitalization-weighted widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight (0.2%) of the index total at each quarterly rebalance.  The MSCI Emerging Market Index captures mid and large caps across more than two dozen emerging market countries. The index is a float-adjusted market capitalization index and represents 13% of global market capitalization. The 60/40 Hybrid of S&P 500 and Bloomberg Barclays U.S. Aggregate Bond Index is a blend of 60% S&P 500 Composite Index and 40% Barclays U.S. Aggregate Bond Index, as calculated by the adviser, and is not available for direct investment. The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.  The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.  The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index.  One cannot invest directly in an index or average.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.

The combined ratio measures the incurred losses as well as expenses in relation to the total collected premiums.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.

Free cash flow yield is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. The ratio is calculated by taking the free cash flow per share divided by the current share price.

Margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value.

Price to free cash flow is an equity valuation metric used to compare a company’s per-share market price to its per-share amount of free cash flow.

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.

 Cryptocurrency (notably bitcoin), often referred to as “virtual currency” or “digital currency”, operates as a decentralized peer-to-peer financial exchange and value storage that is used like money. Cryptocurrency operates without control authority or banks and is not backed by any government. Even indirectly, cryptocurrencies may experience very high volatility. Cryptocurrency is not a legal tender. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency and regulation in the U.S. is still developing. Cryptocurrency exchanges may stop operating or shut down due to fraud, technical glitches, hackers, or malware.

Auxier Report: Summer 2021

Jun 30, 2021

Download Auxier Report Summer 2021

Summer 2021 Market Commentary

The market and economy continued a strong rebound during the second quarter as COVID restrictions eased further. The 7-day moving average for new COVID cases in the US recently reached its lowest level since the start of the pandemic. However, the spike in the Delta variant is adding headline uncertainty. Economic growth has been strong thanks to vaccine distribution efforts, businesses reopening and emergency fiscal and monetary stimulus. JPMorgan estimates full-year US GDP growth of around 6%, the highest since 1984. The ten-year treasury bond yields less than 1.5%. Back in 1984 we were buying Washington State general obligation bonds yielding 10% when the GDP had similar readings. Retail sales are 20% higher than pre-COVID levels, indicating strong consumer spending and sentiment. Back-to-school spending should be  boosted with the liberalized Child Tax Credit (CTC). Nearly 70% of US economic growth is tied to consumer spending. The housing market fundamentals are benefiting from record low mortgage rates, surging demand from millennials, buy-to-rent institutions, foreign buyers and Airbnb conversions. In addition, the pandemic and technology advances enabled millions to work at least part time from home, adding unanticipated demand from the migration out of the major cities. Home equity values now exceed $22 trillion.

We continue to meet with numerous management teams and see powerful earnings on the back of companies that have scale and have been aggressively digitizing, with a focus on improving the customer experience. The pricing power has been the strongest I have seen in my career across most industries. Surprisingly, margins have held up as well.

Inflation

The pandemic put a strain on global supply chains which has resulted in dramatic price increases in the shipping container space. According to research from Sea-Intelligence, the average price to ship a 40-foot container has increased by more than fourfold to $8,399 as of July 1. Some short-term rates have exceeded $25,000. Global vendors like Amazon cannot afford to delay their shipping in hopes of better rates and so they have been forced to pay these elevated prices, which has boosted global shipping companies. The leading  container company Textainer  has had tremendous operating results. Philip Damas, head of supply chain advisory at Drewry, expects that the strains on the container shipping industry will remain in place until early 2022. Ironically, just as consumers get used to online shopping, the cost of transportation is soaring.  The American Trucking Association projects a shortage of 100,000 drivers by 2023. Numerous CEOs are echoing the price pressures that seem to be accelerating. Unemployment benefits have been so attractive that it has been difficult to motivate workers to return, prolonging bottlenecks.

The ongoing microchip shortage has caused the used car market in the US to heat up as new car inventory in the US was 54% lower in June 2021 versus June 2019, which has boosted demand for used vehicles.  Prices are up 40% more than in February of 2020 before the peak of the pandemic. The average 9-year-old vehicle sold for $13,250 in June, which is approximately up 30% over June 2020. Microchips are a critical component of nearly every electronic device in the world so the shortage of new cars could continue for some time.

So far, we are seeing most businesses raise prices and consumers willing to pay up. This has contributed to a tremendous broad-based earnings improvement for our portfolio companies.

The dollar has depreciated over 85% the past 50 years. Purchasing power risk is hidden as people mistakenly perceive safety in fixed income. Today we are seeing negative real yields all the way out 30 years as inflation is running over 5.3%. Owning businesses is a better bet. However, you can’t just pay any price for stocks as higher inflation tends to compress P/E ratios. In 1972,  conventional wisdom was to simply buy the 50 most popular stocks known as the “Nifty Fifty.” The idea was to buy, hold and forget. In the frenzy the stocks traded over 80 times earnings on average. Then, despite strong earnings, a surge in oil and  inflation crushed valuations leading  to a 70%-90% decline for the group. A good general rule for a market multiple  has been 20 less the inflation rate. In 1979, with 11% inflation the P/E of the market sunk below 10.

It appears the current inflation is understated, especially if you add back energy, food  and housing which are all excluded. The consumer price index (CPI) only includes the rent component of housing; however, rents are now catching up too. Invitation Homes, the largest single-family landlord in the nation, recently boosted rents by 8% across the country. Back in the 1970s, Fed chairman Arthur Burns claimed that rising inflation was nothing to worry about—it was  “transitory” and best ignored. When oil quadrupled, they solved the problem by taking oil out of the index. Food prices, a 25% weighting, soared and were also removed. So was housing, a 16% weight. The Dow hit 1,000 in 1972 and was flat until 1983. As cost price pressure hits, consumer wage expectations and compensation demands go up, which are hard to reverse–especially in areas difficult to digitize like skilled labor. Historically, government intervention in the form of wars, extreme socialism and confiscations have contributed to supply disruptions and higher inflation. After the American Civil War, inflation drove interest rates to 20%. When Zimbabwe confiscated private farms their inflation soared 3000%. As Venezuela nationalized most of their businesses inflation exceeded 500%. Inflation in Argentina recently gained 70% as the government interrupted free markets and politics moved to the extreme left. Domestically, recent bans on natural gas turbines and pipelines have led to a reduction in fossil fuel capital investment which should contribute to higher sustained power prices. Over the years, societies with free market competition and innovation have generally kept inflation in check. However, heavy-handed socialism is a recipe for more permanent price increases. The potential for the Delta variant could further extend the interruption in supply chains.

Companies That Can Thrive During Inflationary Periods

When I started in the business, inflation was one of the biggest headline worries. I initially went back over the prior 80 years and studied the types of businesses that could survive, thrive and outperform during high inflation. Generally, undervalued companies that had powerful brands with freedom to price, consistent and growing demand, rapid inventory turns and high returns on invested capital with low mandatory capital expenditures tended to outperform. Drug stores and supermarkets with low ticket necessities were notable winners. Investment selection becomes much more important as higher inflation can put a lid on valuations. Often markets can become rangebound and can go flat for years. In 1983 when the Dow rallied to 1,000, I remember experienced investors wanting to sell out as the market had been stuck in a narrow trading range for the prior 18 years with 1,000 the top. A higher inflationary environment  is not a friendly environment for the “growth at any price” momentum approach. Making an exceptional buy becomes much more important as inflation acts as a headwind to breakout valuations.

Kroger Shows Confidence Amid Fears of Rising Inflation

Kroger is an example of an inexpensive (13 P/E), low expectation stock that has survived well during periods of higher inflation. The company turns over inventories 14 times a year, which helps to maintain a high return on invested capital and pricing power. They recently recorded another strong quarter and beat consensus estimates for both revenue and non-GAAP (generally accepted accounting principles) EPS. Kroger has been able to maintain their momentum despite the lifting of pandemic restrictions and restaurant re-openings. Digital sales continued to grow, up 16% on the quarter and 108% over the last two years. Due to their success this quarter, the board announced a new $1 billion share repurchase program. Management also raised their guidance for full-year 2021 adjusted EPS to $2.95-$3.10, up from their previous guidance of $2.75-$2.95. Since Amazon’s acquisition of Whole Foods in 2017, some investors have feared that Kroger would begin to lose market share to the e-commerce giant. The pandemic has  bolstered their position as a leader in the US grocery market with an 11.7% share. Despite all the fear surrounding Amazon’s Whole Foods purchase, they have only been able to amass a market share of 2.6% since entering the grocery space. Management has also addressed fears that future inflation could dampen growth, stating that they operate at their best when the inflation rate is around 3%-4% and more shoppers move away from large brands, opting for Kroger’s lower-cost private label options. Kroger also continues to build their Ocado automated warehouses that will greatly enhance the company’s delivery capabilities and allow them to better compete with e-commerce giants like Walmart and Amazon. In addition, they are well positioned to benefit from the robust back-to-school market this fall.

Reality of Automation in the Auto Industry

The advancement of AI technology has increased interest in developing self-driving cars and has led to over $120 billion in investments from 2017 to 2019, according to research from McKinsey. Companies like Tesla, Uber and Lyft have bet big on driverless technology, but it may take longer than expected before fully autonomous vehicles are available to consumers. Elon Musk, CEO of Tesla, recently stated that creating AI programs that can adapt to complex roadways and unpredictable human drivers has proven to be a greater challenge than they originally thought. Tesla is still committed to the technology as they continue to test an advanced beta version of their self-driving software that Musk believes could one day solve the challenge of autonomous vehicles without the use of expensive lidar and radar sensors. Companies like Alphabet’s Waymo have been able to achieve fully autonomous vehicles using lidar sensors and highly detailed maps of specific areas around Phoenix, Arizona. However, this approach will likely be difficult to scale and could be cost-prohibitive for the average consumer. It remains to be seen if these challenges will be solved any time soon, and companies may be better off investing in safe and effective driver assist systems until AI technology advances further. McKinsey also estimates that any company that intends to remain competitive in the driverless car market could potentially have to invest $70 billion through 2030. As always, talk is cheap, and  it is important to look past the hype and focus on execution.

Value Potential

In 2000, Yahoo and AOL were two of the most exciting technology stocks that were going to transform the world. In the dot com mania they reached a combined valuation in excess of $250 billion. This year Verizon sold both companies to Apollo Global Management for $5 billion—a 98% decline. AT&T acquired DIRECTV for $49 billion in 2015 and recently sold 30% of the business for $1.8 billion. Overpaying and overborrowing are the recurring sins that consistently destroy shareholder capital. Just like in 2000, the spread between the cheapest and most expensive stocks is now one of the widest in history. Historically, the Russell 1000 Growth Index trades at a 5.6 times point premium over the Value Index but is currently trading at a 10.3 premium. We expect a reversion to the mean, especially if the economy broadens and inflation continues to rise.

Second Quarter 2021 Performance Update

Auxier Focus Fund’s Investor Class returned 4.91% in the second quarter vs. 8.55% for the cap-weighted S&P 500 Index and 5.08% for the DJIA. The equal-weight S&P 500 returned 6.90%. Small stocks as measured by the Russell 2000 were up 4.29%.  The MSCI Emerging Markets Index gained 5.05%. A 60/40 S&P 500 and Bloomberg Barclays US Aggregate blended index returned 5.84% and bonds, as measured by the Bloomberg Barclays US Aggregate Bond Index, returned 1.83% for the quarter.

Stocks in the Fund comprised 96.3% of the portfolio. The equity breakdown was 85.1% domestic and 11.2% foreign, with 3.7% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to June 30, 2021 is now worth $53,206 vs. $46,591 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a cumulative return of 775.05% since inception and the Fund as a whole has had a cumulative return of 432.05% vs. 365.91% for the S&P. This was achieved with an average exposure to the market of  80.6% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of positions with a positive impact on the portfolio for the quarter ended 6/30/2021.

Microsoft Corporation (MSFT)
As a tech-focused company, Microsoft has  benefited from digitization and the shift to working from home that was accelerated by the pandemic. Since 2017, revenue has grown by at least 10% every quarter and that has continued this year. Microsoft Teams, the company’s virtual collaboration tool, now has over 145 million daily active users around the world. This is up from just 32 million daily active users back in March of 2020. Microsoft management believes that the pandemic will forever change how people work and learn, and that their software and cloud services will enjoy improving fundamentals from this change in the long term. Azure cloud revenue has grown over 40% every quarter for well over three years now. As the second largest cloud player in the world, Microsoft’s scale in the Cloud industry will be hard for smaller competitors to replicate any time soon.

Philip Morris International, Inc. (PM)
Philip Morris is executing on their transition towards more smoke-free products. The success of their heated tobacco product IQOS has led their smoke-free portfolio to account for nearly 30% of total revenues.  Management expects that heat-not-burn products will account for about 40% of total revenue by 2023. Volumes for their IQOS device are growing in the double-digit percentages every quarter. Philip Morris is targeting a compound annual growth rate for EPS of 9% from 2021 through 2023. The company maintains a strong dividend with a yield that has remained above 4% since 2018 and they have increased the payout for 12 consecutive years. It ranks as one of the top performing stocks in the market since 1926.

Biogen, Inc. (BIIB)
Biogen stock had an incredible quarter and was up 24.24% due to the approval of their Alzheimer’s drug Aduhelm. This is the first new treatment approved for Alzheimer’s in nearly two decades. Alzheimer’s is the sixth leading cause of death in the US and affects more than 30 million people worldwide. Due to few treatment options for the disease, Biogen anticipates that Aduhelm will grow into a multibillion-dollar product over the next several years. Bernstein analysts estimate that Aduhelm could reach peak sales of $10 billion, which would lead to record levels of revenue for Biogen. Along with their work on Aduhelm, Biogen will continue to invest in other areas of need such as neurodegenerative diseases and retinal disorders. The company expects to invest $2.3 billion to $2.4 billion into research and development in 2021. Biogen is committed to returning capital to shareholders through share repurchases as they have $4 billion of authorized share repurchases remaining.

Alphabet, Inc. (GOOGL)
Alphabet continues to benefit from the strength of Google Search, which controls over 90% of the global online search market. There are over four billion internet users worldwide and Google is the dominating presence in the global online space. Alphabet owns Google.com and YouTube.com, the #1 and #2 most visited websites in the world. Google gathers large amounts of data from their users, enabling them to advertise more effectively than their competitors. Alphabet benefits from a network effect and as their userbase grows, more advertisers will be drawn to their services. They maintain a solid balance sheet with over $120 billion in cash, allowing them to continue to invest in new products and technologies such as their cloud service which is now a top five player globally. Alphabet is also actively investing in the areas of drone delivery, autonomous vehicles and quantum computing. The company is buying back $50 billion of their stock.

UnitedHealth Group, Inc. (UNH)
As the largest private health insurance provider in the US, UnitedHealth has proven to be resilient to uncertain market environments. The company also has a top three pharmacy benefits manager with OptumRx. UnitedHealth’s integrated strategy has led to consistent performance with revenue growing every quarter for over 20 years now, including during the 2008 financial crisis and the COVID-19 pandemic. The company’s scale and integration also create cost advantages that make it hard for smaller competitors to take substantial market share. Analysts call for earnings per share of $18.57 for 2021 and $21.37 for 2022. Management is targeting 13%-16% earnings growth for the long term. UnitedHealth recently announced their plan to acquire Change Healthcare for $13 billion, which would strengthen their digital health capabilities.

Detractors to the quarter:  Our outlook on a cross section of positions with a negative impact on the portfolio for the quarter ended 6/30/2021.

Discovery Communications, Inc. (DISCA)
Discovery has had dramatic moves in stock price this quarter, mainly due to a major blow up of the hedge fund Archegos and the announcement of a merger with AT&T’s WarnerMedia. The combined company, which should be finalized in a year, puts a current EBITDA multiple under 10x. Amazon just paid close to 40x for MGM. With lots of streaming competition, the market has been uncertain about how well Discovery and WarnerMedia will perform. However,  John Malone  is a major investor  with an excellent track record. We have held his companies for over 20 years. We expect further consolidation in streaming with the new Warner Bros. Discovery, an attractive candidate due to their global franchise.

Johnson & Johnson (JNJ)
Though Johnson & Johnson underperformed during the quarter, the company is seeing a boost to sales and earnings as virus-related restrictions are lifted. The second quarter saw record levels of both sales and earnings thanks in large part to previously deferred medical procedures being completed. Johnson & Johnson expects to produce up to 600 million doses of its COVID vaccine in 2021 though, unlike Pfizer and Moderna, they do not expect to make a profit on the sale of the vaccine. Management has increased their full-year guidance and now expects EPS of $9.60-$9.70 and base business sales growth of 10.5%-11.5%. Johnson & Johnson continues to invest heavily in their future growth with one of the top 10 largest pharmaceutical pipelines in the world. The company also has a solid history of returning capital to shareholders with 59 consecutive years of dividend growth.

Mastercard, Inc. (MA)
Concern over the Delta variant of COVID-19 spreading and hampering travel has been reflected in Mastercard’s performance this quarter. Cross-border transactions have suffered. However, unless lockdowns are reinstated, we don’t see Mastercard’s growth slowing down. They continue to be a duopoly with Visa, controlling the toll road of payments.  They are relentlessly focused on the future. Mastercard’s CEO was quoted saying, “If you wandered around the office and asked people, from the junior most employee, to the employee who has been here 35 years, ‘what do you think Mastercard’s mission is?’ they will say ‘killing cash.’ It’s embedded in everything that we’re doing. And it’s not mixed in with other things. Our mission is to kill cash.”

Abbott Laboratories (ABT)After having benefited from COVID testing this past year, Abbott Labs fell when it guided for lower earnings due to decreased demand in equipment. Abbott has a fortress  balance sheet and has  grown earnings at 17% annually over the last five years. Innovative products like the FreeStyle Libre blood glucose monitor franchise continue to drive growth.  Healthcare stocks in general have lagged this year  and we see many names that sell at the  cheapest valuation  versus the market in over 20 years, despite favorable demand demographics.

Corning Incorporated (GLW)
Corning pared back gains after having a nice 25% runup from the start of the year. Corning makes everything from the glass that is on iPhones, to pharmaceutical vials, to their largest business segment, which is focused on 5G specialized fiber, an area of strong future growth.  Their advanced fiber technology is only matched by one other competitor, YOFC, who charges more for a similar product.

In Closing

We strongly believe that investing is “the craft of the specific.” There has been such a proliferation of passive pools and ETFs that nobody truly knows what they own. The real advantage of following an active, rigorous research approach covering hundreds of individual companies and managements comes when we hit long  periods of flat to declining markets. In the 20th century, the Dow went up 180-fold. However, while the market rose for 43.75 years it was down for 56.25 years. During the period 1900-1921 the Dow rose from 66 to 71, less than 10% over 21 years. Between September 1929 and December 1948, the Dow declined from 381 to 180, over 50% in 19 years. For the years 1964-1981 the Dow gained one point from 874 to 875. More recently Tokyo’s Nikkei 225  plunged from a high of  38,915 at year-end 1989 to 7,862 by March of 2003. Being passive works great in raging bull markets, but in the flat-to-down periods returns are much more dependent on well-researched individual buys. Knowing intimately what you own, what to buy and  when to buy is where the years of cumulative knowledge become valuable.

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.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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 market-capitalization-weighted widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight (0.2%) of the index total at each quarterly rebalance.  The MSCI Emerging Market Index captures mid and large caps across more than two dozen emerging market countries. The index is a float-adjusted market capitalization index and represents 13% of global market capitalization. The 60/40 Hybrid of S&P 500 and Bloomberg Barclays U.S. Aggregate Bond Index is a blend of 60% S&P 500 Composite Index and 40% Barclays U.S. Aggregate Bond Index, as calculated by the adviser, and is not available for direct investment. The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.  The Russell 1000 Value Index refers to a composite of large and mid-cap companies located in the United States that also exhibit a value probability. The Russell 1000 Growth Index measures the performance of the large cap growth segment of the US equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.  One cannot invest directly in an index or average.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Return on invested capital (ROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.

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 Computer Link Northwest, LLC.