Auxier Report: Fall 2023

Sep 30, 2023

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Fall 2023 Market Commentary

The “bond vigilantes” came out of hibernation in the quarter as longer-term bond rates moved up to compensate for growing government deficits, bond supplies and the new surge in defense spending needed in the fight against global evil. Just as Silicon Valley Bank and First Republic failed due to balance sheet mismanagement, the bond market is coming alive in the face of a deteriorating federal balance sheet.

For the past three years we have been reporting on bond market risk with record low yields leading to record high risk. This quarter, longer-duration Treasuries have suffered drops that rival some of the biggest US stock market crashes in history. According to data from Bloomberg, at the end of the quarter bonds with maturities over 10 years were down 46% since their highs in March of 2020.  This drop was almost as large as the 49% decline that the stock market saw during the dot-com bubble. Near the end of September, the 20-year Treasury bond had fallen by 48% from its 2020 highs. 30-year bonds have struggled even more, down over 50% which is nearly as high as the 57% drop equities saw during the 2008 financial crisis. US Treasury yields recently reached their highest level since 2007 with 30-year and 10-year Treasuries rising to over 5% and 4.7%, respectively. Using historical bond market data, strategists from Bank of America found that the current bond bear market is the worst in US history as shown in this chart detailing some of the largest peak-to-trough drops.

Years of low interest rates made it easy for the government to invest trillions into new programs and free money masked the issue of skyrocketing debt. The Congressional Budget Office estimates that if the government does not change course, they will add more than $20 trillion to the national debt in the next 10 years. However, higher rates may spur the government to return to a more reasonable spending budget. While the federal deficit has improved since the pandemic it is still higher than any time prior to the 2008 financial crisis. The last time the federal government was in a surplus was in 2001. With elevated rates becoming the new normal and the era of free and easy money seemingly at an end, more prudent debt management from businesses will be vital.

Historically a free functioning bond market has been just as, if not more, volatile than the stock market. I can remember 1994 when rates climbed 2.5% and 1987 when rates rose 3%. Both led to sharp declines and great investment opportunities in quality businesses.

The S&P 500 Utilities Index was the worst performing sector, down 9.25% and 14.4% year-to-date.  Utilities suffer from negative cash flow, a reliance on debt financing and high mandatory capital spending —a toxic combination in a rising interest rate environment. We see growing  legal liabilities in west coast utilities  due to fires, in particular for both PacifiCorp and Hawaiian Electric. This period of heavy capital investment reminds me of the late 1970s and early 1980s when the utility industry embarked on a massive investment in nuclear power plants. Rising inflation and interest rates led to cost overruns that state rate commissions were unwilling to absorb, hammering shareholders. Today, windmills are suffering from similar headwinds and do not pencil without major subsidies. Many are being replaced after only 10 years. That is why we gravitate to businesses with low mandatory capital spending, steady demand dictated by free markets (not government mandates) and high inventory turns with growing free cash flow.

Dangers of Buying into the Hype

Over the last several years, more companies have gone public with sky-high valuations, little-to-no profit and big promises of transforming their markets. When money was cheap it was easy for a new business to attract significant investment. Not so today as the spigot is shut off. One company that fell victim to overhype is Beyond Meat which went public in May of 2019. The alternative meat company’s stock surged 163% on its first day of trading which at the time made it one of the best day-one performances for an IPO in nearly 20 years. JPMorgan originally estimated that Beyond Meat would be able to grow their sales to $5 billion in 15 years. The hope was that millions would abandon traditional meat for plant-based meat which was deemed to be more environmentally friendly and sustainable. After the IPO, the market consensus was for Beyond Meat to turn free cash flow positive by 2022 and have compound annual sales growth of around 40%. Instead sales fell 10% that year and they have yet to attain positive free cash flow even today. The company continues to struggle due to factors like its premium price and low availability. Since the stock’s all-time high in July of 2019, it has fallen over 95%. Another more extreme example of a torpedo is WeWork. Its valuation ballooned to $47 billion in 2019 before crashing to less than $100 million today and it is closing in on bankruptcy. Euphoria surrounding the growth of electric vehicles led Rivian’s valuation to surpass  $120 billion before the company reported even a single dollar in revenue. The company’s valuation has since fallen to under $16 billion. The Robinhood trading app tried to capitalize on the massive IPO craze by going public in 2021 with a peak market cap of over $45 billion. Since then the stock has declined over 80% to a market cap of around $9 billion. Talk is cheap and the markets tend to eventually punish bad behavior.

Disruption in Weight Loss Drugs

New weight loss drugs have recently become increasingly popular; some are proclaiming them as the next big breakthrough in the health industry. These products, called GLP-1 agonists, work by making patients feel less hungry and can also affect how the body absorbs fat. Novo Nordisk and Eli Lilly are the two leaders in this new market which analysts at Goldman Sachs and JPMorgan estimate could reach $100 billion by 2030. Some investors are concerned that these drugs will be so effective at curbing appetites that they could fundamentally change consumption patterns and impact demand for businesses like food and beverage companies. Investors worry that fast food restaurants already contending with rising inflation will also have to deal with a potential loss in customers if the use of weight loss drugs becomes more common. It is estimated that just over 42% of US adults are obese and could potentially be prescribed weight loss drugs. Wall Street has been quick to herald these drugs as the ultimate healthcare product, but it is important to take a more cautious stance, especially in the early stages of research. There are still many unknowns surrounding these treatments, specifically around potential side effects like thyroid tumors, pancreatitis, diarrhea and nausea. It is expensive too, with an average monthly cost for shots of around $1000.

In the third quarter excitement over these drugs led to indiscriminate selling in food, beverage, medtech and medical devices to name a few examples. It is similar to the selloff in traditional food stocks when Beyond Meat went public as referenced earlier in the letter. McDonald’s believes there are currently about five million people using obesity drugs with the potential to increase to 15 million in the next few years, which they figure could hurt volumes by one half a percent. Pepsi and Starbucks have seen no change in demand year to date.

Energy was the best performing S&P 500 sector during the quarter, up 12.2%. Continued supply cuts by OPEC+ have kept oil prices elevated as the West Texas Intermediate (WTI) Crude rose by 29% in the third quarter. The US Energy Information Administration (EIA) expects that OPEC+ will keep production limited for the remainder of 2023 and into 2024. They forecast an average Brent Crude spot price of $91 per barrel in the fourth quarter and an average of $95 per barrel for 2024. Lower supply has been a boost to oil companies in the Fund like Valero Energy, BP, ConocoPhillips, Chevron and Phillips 66.  The recent conflict in Israel has fueled fears over the stability of global oil markets  as there are uncertainties around what countries like Iran will do in response to escalations. Iran is one of the largest producers of oil in the world and in August their output reached 3.1 million barrels per day, the highest since 2018 (Reuters). Potential Iranian involvement should lead the US to enforce stricter sanctions on the country’s oil exports. Iran also controls the Strait of Hormuz which is the most important oil checkpoint in the world, with around 20% of global oil supply passing through daily.

Insurance Hard Market

Property casualty stocks are enjoying a hard-pricing market. Global commercial insurance pricing increased for most lines of coverage in the third quarter, according to Marsh McLennan, marking the longest run of consecutive quarterly rate hikes since 2012. US property rates are up 14% for the quarter. Auto insurance rates are up 15.5%, with rates in Florida up 88% and electric vehicles up over 70%. Disciplined operators benefit from rising prices and rising premium volume. In addition, higher interest rates improve portfolio cash flows. The insurance component of the S&P 500 trades at 12 times next year’s earnings, a steep discount to the overall market.  We have a wide exposure to the property casualty industry with names like Berkshire Hathaway, Travelers, AIG, Marsh McLennan, AON and Ryan. In addition, health-related insurers like Aflac, UnitedHealth and Elevance are seeing positive fundamentals in pricing and volume trends.

Third Quarter 2023 Performance Update

Auxier Focus Fund’s Investor Class declined 2.28% in the third quarter 2023. The S&P 500 cap-weighted index declined 3.27% for the third quarter, while the equal weight declined 4.90%. The Russell 1000 Value Index fell 3.16%. Fixed income investments suffered with the S&P Aggregate Bond Index  and the IDC US Treasury 20+ Year Index (4PM) declining 2.67% and 13.00% respectively. The S&P 500 Utilities lost 9.25%. Smaller stocks as measured by the Russell 2000 declined 5.13%. Stocks in the Fund comprised 90.5% of the portfolio. The equity breakdown was 81.4% domestic and 9.1% foreign, with 9.5% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to September 30, 2023 is now worth $55,114 vs $48,175 for the S&P 500 and $44,226 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 877.55%. The Fund had an average exposure to the market of 81.9% over the entire period. Our results are unleveraged.

In Closing

On a recent multistate trip we visited the new $40 billion Taiwan Semiconductor (TSMC) facility under construction in North Phoenix. The amount of cement required is straining supplies for the entire metro area. Over 60% of the workforce for that plant will have a masters or higher degree. This is just one of several plants going in as a result of the government CHIPS act. That roughly $52.7 billion stimulus has attracted another $200 billion in private funds which is just starting to filter through the economy. In addition, $433 billion of government spending is earmarked over the next 10 years under the Inflation Reduction Act. It is hard to see a recession in those industries related to such massive fiscal stimulus.

Most stocks and bonds have been in a grueling bear market for two years. More than half the Russell 3000 stocks are down over the past twelve months. Usually the last third of a bear market is a capitulation and the most painful.  We are finally seeing attractive values in many businesses that have been experiencing multiple compression with tighter money, especially in smaller companies. Our biggest winners coming out of the 2000-2002 bear market were in smaller companies like Scottsdale credit card processor eFunds. It  traded at a single digit p/e under $10, was debt free and ultimately acquired by private equity for over  $37. During these challenging market conditions we strive to add value by mitigating risk through our cumulative knowledge and experience along with a ramped-up research effort. Our research centers on the earnings power and growing intrinsic value of the individual businesses we own. Longer term there is a direct correlation to the earnings and ultimate stock price return.

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 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 Value is published and maintained by FTSE Russell.  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 – or 0.2% of the index total at each quarterly rebalance. The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector. The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector. IDC US Treasury 20+ Year Index (4PM), is a 4pm pricing variant of the ICE US Treasury 20+ Year Index, which is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than twenty years. 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. S&P US Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. Brent Crude is the benchmark used for the light oil market in Europe, Africa, and the Middle East, originating from oil fields in the North Sea between the Shetland Islands and Norway. West Texas Intermediate is the benchmark for the U.S. light oil market and is sourced from U.S. oil fields. One cannot invest directly in an index or average.

OPEC+ represents around 40% of world oil production and its main objective is to regulate the supply of oil to the world market. The leaders are Saudi Arabia and Russia, which produce around 10 million barrels per day of oil each.

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

Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Multiple compression is an effect that occurs when a company’s earnings increase, but its stock price does not move in response.

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.

The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery.

As of 9/30/2023, the Fund’s top equity holdings were: UnitedHealth Group Inc. (6.7%); Microsoft Corp. (5.9%); Mastercard Inc. (4.8%); Kroger Co. (3.3%); Elevance Health Inc. (3.0%); Philip Morris International (3.0%); Merck & Co. Inc. New (2.7%); Visa, Inc. (2.7%); Pepsico Inc. (2.5%); Medtronic PLC (2.4%).

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 2023

Jun 30, 2023

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Summer 2023 Market Commentary 

Moderating inflation has been a positive tailwind for stock valuations, boosting price-earnings ratios even though earnings growth has generally been mediocre. The S&P 500 cap-weighted index gained 8.74% for the second quarter 2023, while the equal weight returned 3.99%. The Russell 1000 Value Index gained 4.07%, the Dow Jones Industrial Average returned 3.97% while the Lipper Balanced Fund Index returned 3.2%.  Since the first part of June there has been a noticeable broadening of the market breadth as the US economy has improved with GDP up 2%. Coincidentally, at the end of May short interest was near a 30-year high. Savers are finally enjoying the sharp increase in Treasury yields. For years interest on deposits was close to zero. Since March 2022 the Federal Reserve Board (the Fed) has raised rates by 5%. On $5 trillion this is a meaningful increase in household cash flow and should continue to support consumer spending. Home equity is a positive. The average US homeowner has more than $274,000 in equity vs $182,000 pre-pandemic with most mortgages fixed rate. More than 40% of all US mortgages were originated in 2020 or 2021 when the pandemic drove rates to historic lows. The unemployment rate fell to 3.6% in June and has been below 4% for 17 consecutive months. When people are working, they are spending. In addition, fiscal stimulus from the Inflation Reduction Act and CHIPS Act has increased construction in semiconductor plants, batteries and clean energy. US manufacturing construction spending hit an annualized $194 billion in May, up 76% year-over-year. Cheap natural gas prices, the rule of law and reshoring of supply chains have also contributed to strong investment flows into the US  and away from China and Russia. Americans continue to spend on leisure, cross border travel and experiences. Travel to Europe is thriving. Global defense industry fundamentals are positive. The excitement surrounding Artificial Intelligence (AI) is reinvigorating tech spending, offsetting poor personal computer and smart phone trends. So far it is a perfect storm for large scale, cash-rich technology leaders as it takes massive investment to build out AI infrastructure. This should boost new product demand for the mega-cap tech leaders in the US like Meta, Microsoft, Alphabet, Amazon, Nvidia and Oracle. As a result, the Nasdaq Composite increased by 13.1% for the quarter and recorded its best first half of the year since 1983, up 32.3%. This was the strongest half-year performance that the index has had since the peak of the tech bubble in the second half of 1999. The NASDAQ trades at 46 times earnings vs 113 in 2000 and Japan 83 times in 1990. Off that inflated price level Japan’s market declined from over 38000 to 7500 in the following twenty years.

Insurance Rates on the Rise

US property and casualty insurers have responded to elevated inflation and higher natural catastrophe losses with rate increases. Insured damages topped $90 billion in each of the past three years. Mid-year global reinsurance rates increased between 20% on average to 50% and higher for catastrophe-exposed risks. The Guy Carpenter US Rate on Line (ROL) Index reached all-time highs at the start of 2023 as reinsurance premiums have surged following a tough year in 2022. Along with higher premiums, record investment returns are also driving growth in the industry. Higher premium rates and investment yields are expected to lead to improved return on equity for US insurers in both 2023 and 2024 compared to 2022. The Swiss Re Group estimates a sector return on equity (ROE) of 8% in 2023 and 9.5% in 2024, up from 2.5% in 2022. The reinsurance company also estimates industry premium growth of 7.5% in 2023 and 5.5% in 2024. We recently attended the May Berkshire Hathaway annual meeting. A big takeaway was how aggressive Vice Chairman of Insurance Operations Ajit Jain—one of the industry’s most talented and disciplined  underwriters—took up property cat exposure 50% in April. He said, “We have written as much as our capacity will allow us to write” amid attractive April 1 prices. This kind of pricing tailwind should benefit our insurance holdings Berkshire Hathaway, Marsh & McLennan, Travelers, AIG, AON and Ryan.

Digitization Providing Opportunities for Global Players

Digitization trends have been increasing significantly over the years which has led to new opportunities for businesses with the scale and reach to take advantage. Use of cash continues to decline in favor of digital forms of payment like credit cards and mobile wallets. In 2022, Pew Research found that 41% of Americans said they don’t use cash for any of their purchases in a typical week, up from 24% in 2015. According to the Federal Reserve, only 6% of in-store transaction value is from cash. Payment processors like Mastercard and Visa have been some of the biggest beneficiaries of this shift away from cash and will likely remain a vital part of the digital global economy. Mastercard has a goal of connecting over 1 billion individuals to the digital economy by 2025. Digitization is also leading to a more connected world which also benefits these payment processors. Mastercard generated nearly 65% of their revenue in 2022 from international regions. Visa depends more on their domestic business but still generates over 40% of their revenue internationally. Booking Holdings is another global operator that we like. Booking was one of the earliest companies to take advantage of the digital revolution and has since grown into one the largest travel companies in the world. The company has built a global network of over 400,000 hotels, motels and resorts and over 2.3 million homes, apartments and alternative accommodations in more than 220 countries. After seeing significant declines during the pandemic, Booking Holdings’ revenue has since surpassed pre-pandemic levels. Travel has been recovering. The TSA screened the highest number of passengers in history on June 30 which surpassed the previous high on November 27, 2019. Booking is also embracing new digital innovations by implementing an AI trip planner using OpenAI’s language model technology that will allow users to plan and book their travel in a conversational manner. We like businesses with a global reach that are continually looking to use new technologies to innovate and expand their services.

Index Concentration Poses Risk for Passive Management

While the rally in the markets is good news, most of this growth has come off the back of a very small number of companies from the technology and communications sectors. Investors have been flooding into a select few names that are driving most of the growth in the S&P 500. According to the Financial Times, Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta accounted for 29.5% of the S&P 500’s total market cap in June. The explosion of growth in these seven names has brought the index to its most concentrated level since the 1970s. This kind of concentration can lead to overvaluation compared to the rest of the market as shown in this chart. Those who rely on passively managed funds are seeing less diversity which can put them at a higher risk as passive funds are forced to increase their holdings in the top names. While these big tech companies have been excellent performers, relying too much on a small pool of investments can lead to the potential of magnified drawdowns. New competitors could arise at any time in the technology space and threaten existing leaders. During the dot-com bubble the tech-heavy Nasdaq Composite fell 77% from its high in March 2000 to its low in September 2002. I remember in May of 2000 when the Fed raised rates to 6.5%, the speculative party was over. The index also fell by 40% in the 2008 financial crisis and took over six years to reach a new high. Without the ability to diversify holdings, passive funds have few options to defend against large downswings in uncertain or declining economic conditions.

Lessons Learned Since 1982

Don’t underestimate the value proposition of founder-led businesses. It takes incredible tenacity and grit to survive in today’s business environment. Some examples include Jim Sinegal (Costco), Sam Walton (Walmart), John Maccarone (Textainer), Warren Buffett (Berkshire), Elon Musk (Tesla) and Jensen Huang (Nvidia). You want the managers who love the business more than money. So often we put businesses in quantitative boxes without truly understanding the heart and soul of the enterprise.

No Shortcuts in Risk Management

Over the years we have seen numerous business failures as companies have tried to automate risk management with the use of models, algorithms and artificial intelligence. Shortcuts, especially in due diligence, can be devastating. Portfolio insurance in 1987 contributed to the 22% one-day crash in equities. Long-Term Capital Management in 1998, with more PhDs on staff than any investment firm globally, utilized leveraged mathematical models that failed and blew up the firm.  Zillow used algorithmic house pricing to flip homes and missed on critical cost inputs, which led to massive losses and a shutdown of the operation. More recently the spectacular failures of Silicon Valley Bank, First Republic and Signature Bank underscores the need for hands-on, nitty gritty attention to the details. These banks wiped out decades of hard work in hours due to flawed risk management.

More on Artificial Intelligence

Artificial Intelligence (AI) has dominated the headlines in 2023 generating significant investment in the space by companies like Microsoft, Alphabet and Meta. The Fund’s largest holding is Microsoft. Earlier this year it was reported that Microsoft’s investment into ChatGPT creator OpenAI had increased to $13 billion. Microsoft recently announced 365 Copilot which will bring generative AI capabilities to their Office suite. Wells Fargo analyst Michael Turrin believes that AI-driven demand and integration into Microsoft’s products and cloud services could lead to over $30 billion in new annual revenue for the company. Meta has stated that in 2023 they expect to spend $33 billion on expanding AI capabilities. Research from PwC estimates that AI could contribute up to $15.7 trillion to the global economy by 2030. Another technology company that has seen a boost from the rise in demand for AI is Oracle, whose cloud business recently reached an all-time-high quarterly revenue. Oracle has benefited from strong and consistent leadership as its co-founder continues to serve the company and its shareholders as CTO and Chairman of the Board. We like founder-led companies that maintain their commitment to investing in growth for the long term. The buzz surrounding this new technology has boosted tech companies to new highs, but it can also present risks if valuations get out of hand and exciting stories overshadow sound fundamentals. Many of the potential applications are still in their infancy and it remains to be seen if analysts’ optimistic estimates will come to fruition.

Contributors

While Microsoft was the biggest position and largest overall contributor in the Fund, several other smaller positions performed better. Arcos Dorados, the largest McDonald’s franchisee in Latin America, had very strong fundamental sales growth during the quarter, achieving their 5^th consecutive quarter of double-digit revenue growth and outperforming their parent by over fourfold. Molson Coors is enjoying strong sales  from an upheaval in the beer market. Lincoln Educational trains electricians for Tesla and CEO Scott Shaw is really executing. Alphabet has been a leader and investor in AI since 2014 and has an undervalued   media asset in YouTube. D.R. Horton and Lowe’s in homebuilding—52% of the US housing stock is now over 40 years old. Medical procedures are coming back which helps medical device companies like Zimmer, a leader in reconstruction of hips and knees. Insurance pricing is up and coverage is growing to the benefit of insurers AIG, Marsh & McLennan, Ryan and Berkshire Hathaway. Meta has corrected capital allocation mistakes and  was a big winner but a very low weight in the Fund.

Detractors

Declining energy and material prices negatively impacted oil stocks like Valero and Chevron. However, energy is one of the cheapest sectors with solid free cash flows.  Financials, namely banks like Bank of America and Bank of New York Mellon are  struggling in the aftermath of first quarter bank failures, although as scale players they should  stand to benefit  long term. Concerns over regulation, higher utilization and medical cost trends have hurt  health insurers like UnitedHealth, Elevance and CVS. Still, the fundamental demand for medical services is very strong, especially for Medicare Advantage.

Second Quarter 2023 Performance Update

Auxier Focus Fund’s Investor Class returned 4.04% in the second quarter.  The cap-weighted S&P 500 Index returned 8.74%, the equal weight 3.99% and the DJIA returned 3.97% over the same period. The Russell 1000 Value Index gained 4.07%. The MSCI Emerging Markets Index returned 0.90% for the quarter. Bonds as measured by S&P Aggregate Bond Index declined 0.56%.  Stocks in the Fund comprised 89.1% of the portfolio. The equity breakdown was 80.2% domestic and 8.9% foreign, with 10.9% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to June 30, 2023 is now worth $56,398 vs $49,805 for the S&P 500 and $45,672 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 901.74%. The Fund had an average exposure to the market of 81.9% over the entire period. Our results are unleveraged.

In Closing

We just celebrated Auxier Asset Management’s 25th anniversary, although we have verified separate account performance that dates back to 1989. According to the US Department of Labor, only 25% of US businesses make it more than 15 years. To survive we have learned the value of maintaining a sound balance sheet, high grade ethics, a consistent focus on the ledger and a determined daily research effort. Investor Ron Baron recently shared some great advice: “Don’t believe anything you hear…and only half of what you see. Good decisions, enabling consistent above average results in whatever you attempt, are based upon your own diligence and hard work. You can’t rely on the judgment and work of others. You can’t phone it in.” Another valuable lesson from our visit to the Berkshire Hathaway annual meeting in Omaha: Never make an investment decision based on emotion. Charlie Munger said, “We’re emphasizing the knowable by predicting how certain people and companies will swim against the current. We’re not predicting the fluctuation in the current. Warren Buffett said there will always be opportunity in value investing—all it takes is capitalizing on ‘other people doing dumb things.’ ”

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. The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. 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 Value is published and maintained by FTSE Russell.  The Guy Carpenter ROL index is a measure of the change in dollars paid for coverage year on year on a consistent program base. 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 – or 0.2% of the index total at each quarterly rebalance. S&P US Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. 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.

Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. 

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.

As of 6/30/2023, the Fund’s top equity holdings were: UnitedHealth Group Inc. (6.1%); Microsoft Corp. (6.1%); Mastercard Inc. (4.7%); Kroger Co. (3.4%); Philip Morris International (3.0%); Elevance Health Inc. (3.0%); Merck & Co. Inc. New (2.9%); PepsiCo Inc. (2.8%); Visa, Inc. (2.6%); Medtronic PLC (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: Spring 2023

Mar 31, 2023

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Spring 2023 Report

Large dominant cash-rich US technology companies with new innovations in artificial intelligence (AI) and a focus on cost cutting were major contributors to the S&P 500’s 7.50% first quarter advance, which followed a decline of 18.11% in 2022 for the index. The rapid bank failures of Signature, Silicon Valley, First Republic and Silvergate negatively impacted all banks and other financial-related stocks. That, together with declining energy prices, hurt the DJIA, up only 0.93%, as well as many value-oriented names with the Russell 1000 Value Index up 1.01% for first quarter. The bank failures so far have tended to be institutions dealing in more speculative investment areas where dramatic deposit flight took place due in part to the behavior of the “electronic herd.”  They also suffered “duration risk” on their bond portfolios as 2022 saw the worst bond decline in 250 years. To compound matters bond maturities were extended when rates hit historic lows. The banking industry suffered unrealized losses of $620 billion in the fourth quarter of 2022. The typical bank has $20 in assets for every $5 in equity. That leverage hits hard   when asset prices suffer major declines. A big culprit was the stretch for yield by many banks into mortgage-backed securities. On the downside these securities trade like 30-year bonds when rates go up and short-term bonds when rates drop. I remember back in 1986 after rates had plummeted there was an investor rush into GNMA pools. Many were shocked at the large losses that resulted as interest rates rose sharply in 1987. This serves as a reminder of the value of diligent, rigorous risk management. So often today we see automated models that substitute for nitty-gritty detail. Jim Sinegal, the founder of Costco would preach “retail is detail.” The same kind of attention to detail is critical just to survive in today’s competitive business environment as only 25% of US companies are still operating after 15 years.  In less than 36 hours Silicon Valley Bank, a franchise and reputation built over forty years, was wiped out. This company had 22 buy recommendations just prior to the failure.

Following an 11.21% return in the fourth quarter of 2022 the Auxier Focus Fund gained 0.70% in the first quarter of 2023. For the twelve months through March 31, 2023 the Fund lost 3.77% vs a loss of 7.73% for S&P 500.

Detractors

At the start of the quarter bank exposure in the Fund was 6%, with 85% of that in Bank of America and Bank of New York. The balance was in smaller “tracker” positions where we monitor industry fundamentals. The Fund was hurt by regulatory uncertainty surrounding managed care insurance companies (UnitedHealthcare, Cigna, Elevance). Still, the demographic trends for health care services are strong and earnings, which tend to hold up well during recessions, are good. UnitedHealthcare has suffered only four down years since 1990.  A correction in oil and natural gas prices negatively impacted energy stocks in the portfolio although most have very high free cash flow yields. The S&P GSCI Energy Index was down 10.36%. The uncertainty over losses in commercial real estate led to further selling pressure in the insurance sector. However, the property casualty industry continues to benefit from strong pricing and Fitch Ratings is forecasting further gains for the year. Our industry checks confirm severe weakness in urban office real estate, especially in areas where technology firms are downsizing, workforces are more mobile and crime is accelerating. In Portland, Oregon the commercial office vacancy rates are exceeding 50% and major life insurers are taking material property write-downs. Regional banks with large office exposure look vulnerable as well.

Contributors

Global leisure and business travel continues to improve, especially with the reopening of China after a three-year Covid-19 lockdown. In 2019 Chinese tourists contributed an estimated $253 billion to the global economy. Companies like Booking, Visa and Mastercard are direct beneficiaries. Cross-border transactions are up 24% at Visa and 35% at Mastercard. CAE trains pilots and sees a continued shortage. Innovative advances in artificial intelligence with ChatGPT have put a spotlight on the scale players who can best integrate AI into their platforms. Microsoft is now the second largest holding in the Fund. Alphabet has been a leader in this space since their acquisition of AI research company DeepMind in 2014.  Meta is a leader as well through their product Reels. It looks like AI can help to boost demand for cloud services when the two are bundled.   Medical procedures are finally picking up after Covid-19 delays and the return of nurses back to hospitals. We see fundamentals improving in med-tech medical device companies like Medtronic, Zimmer and Johnson & Johnson. Solid franchises dealing in low ticket necessities like Unilever, PepsiCo, Coca-Cola, Sally Beauty, Yum! Brands, McDonalds, Arcos Dorados and Monster Beverage have been able to survive and thrive with higher inflation. Walmart and Kroger private label sales are surging as well. Foreign holdings out of Europe and Latin America are finally outperforming. China’s reopening as well as plummeting natural gas prices have helped European equities rebound. We like the recurring revenue in replacement and maintenance businesses like Gates and FirstService. We search for businesses that have high returns on capital, freedom to price, low mandatory capital spending and a history of disciplined capital allocation. These sorts of businesses not only can better withstand higher inflation but tend to outperform in recessions. We see the markets purging speculative excesses  but savers and companies with cash-rich balance sheets are benefiting from higher short-term rates and sharp declines in energy. Diesel prices are now down by 50% since last May, while natural gas has corrected by 70%.  Quality companies that can execute and drive earnings and free cash flow are being rewarded with premium valuations, especially with bank failures in the headlines inspiring a flight to quality.

The Downfall of Silicon Valley Bank

Silicon Valley Bank (SVB)  failed when depositors initiated $42 billion of withdrawals in one day. The bank thrived during the tech boom in 2020 and 2021 as they were the banker to about 50% of all venture capital-funded tech and life sciences companies in the US. Due to a majority of their customers being high net worth, 93.9% of the deposits were uninsured at the end of 2022, the second highest percentage for all banks in the US. This led to a run on the bank. SVB was not able to withstand this run as they had tied up 94.4% of deposits in long-term hold-to-maturity securities and loans. Rising interest rates led to a drop in the value of those investments which they were forced to sell at a significant loss to meet demand. This event shined a light on many other large banks with their money locked up in long-term holdings that had fallen in value due to rising rates and caused significant turmoil in the banking industry. Regional banks experienced the largest oversold reading on record according to data from Nasdaq. Thanks to years of loose monetary policy and near-zero rates, banks bet a higher percentage of their deposits on riskier long-term securities and were not ready for the shock of rapidly rising rates and inflation.

Artificial Intelligence and the Potential for Disruption

Bill Gates has said that OpenAI’s GPT AI model is the most revolutionary advance in technology since he first saw a modern graphical desktop in 1980.  The use of artificial intelligence has been around for years now but recent advancements in the space have raised concerns and uncertainties about its future uses and its potential to disrupt industries. An appealing aspect of AI is the ability to automate certain processes which could save businesses and consumers time and money. A recent advance in AI has been in generative chat with the growing popularity of OpenAI’s ChatGPT which can generate complex, human-like responses to users’ questions by analyzing a snapshot of the internet using machine learning. This kind of technology can be used for things like answering simple questions, summarizing PDFs or videos or even writing poems, computer code and essays. This technology has been seen as a disruptor to traditional search engines as a more personalized and human-like approach to answering questions could be appealing to many internet users. In response to ChatGPT’s advancements, Microsoft invested $1 billion into OpenAI and Alphabet has fast-tracked their own AI and generative chat programs in order to compete. AI automation could increase the effectiveness and capabilities of even small companies and make them a threat to Big Tech. Industry leaders have been forced to put significant resources into remaining competitive with these small and nimble AI companies. Microsoft and Alphabet are currently leading the charge in areas like generative chat and machine-learning language models but other big players like Meta, Amazon and Apple have shown increased interest in the space. The recent growth of AI and machine learning comes with new risks that companies and consumers will have to navigate. Since machine-learning AI programs look at the open web for training its datasets, this data could be changed or corrupted in a way that would influence the program, change its answers or even trick it into bypassing its security protocols by revealing personal user information. There have been no reports of this kind of data poisoning attack yet but that is likely due to most machine-learning algorithms being trained on data up to 2021. As time goes on attacks could become an issue for any generative chat AI. These risks can be lessened but will require investments of time and money as engineers will have to work to ensure that their datasets are not compromised. While new advancements in AI are creating interesting opportunities many are concerned that the rapid evolution of the technology could lead to unintended consequences. An open letter with more than 20,000 signatures, including Elon Musk, Steve Wozniak and researchers from Harvard and Oxford, calls for AI advancements to be slowed down to allow for proper analysis of oversight and safety mechanisms. This uncertainty indicates an industry-wide concern of the potential disruptiveness of AI not just on tech companies but on the lives of everyday people.

First Quarter 2023 Performance Update

Auxier Focus Fund’s Investor Class returned 0.70% in the first quarter.  The cap-weighted S&P 500 Index returned 7.50% for the quarter while the DJIA returned 0.93% over the same period. The Russell 1000 Value Index gained 1.01%. The MSCI Emerging Markets Index returned 3.96% for the quarter. Stocks in the Fund comprised 88.5% of the portfolio. The equity breakdown was 79.6% domestic and 8.9% foreign, with 11.5% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to March 31, 2023 is now worth $54,209 vs $45,801 for the S&P 500 and $43,884 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 856.71%. The Fund had an average exposure to the market of 81% over the entire period. Our results are unleveraged.

In Closing 

Today’s current investment environment reminds me of past markets where rising interest rates and tighter money led first to crisis then opportunity. In 1994 a series of Fed rate hikes preceded the bankruptcy of Orange County, California and the collapse of the Mexican Peso. A hypothetical investment in Mexican food retailer Cifra SA de CV purchased at its lows during the Peso collapse would have increased over tenfold in the following 10 years. In the US the correction led to the S&P 500 gaining 37.58%, 22.96% and 33.36% in 1995, 1996 and 1997, respectively. In 1998, Long-Term Capital Management, a hedge fund with more PhDs on staff than any firm in the world,  borrowed $125 billion on equity of $5 billion. They relied on mathematical models which failed and the firm collapsed. At the same time Russia defaulted on their debt, which gave rise to a renewed appreciation of strong balance sheets and a major flight to quality companies. From 1986 to 1995 during the savings and loan (S&L) crisis, 1,043 or 32% of S&Ls failed. This led to unbelievable bargains and substantial outperformance in small banks,  propelling them into the number one performing stock category from 1991-1998 – up over sevenfold. We benefited from working for Elliot Knutson, the CEO of Washington Federal in Seattle who was voted the top-ranked thrift executive during the height of the crisis. He was outstanding and introduced me to a number of great bank operators he had met during a long and distinguished career.  When investing there is no substitute for knowledge and temperament to act when the consensus is gloomy. The cumulative knowledge of managements, businesses, industries and the history of market panics not only helps to mitigate risk but is also invaluable when taking advantage of crisis opportunities.

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. The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. 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 Value is published and maintained by FTSE Russell. The S&P GSCI Energy Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the energy commodity market. 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.

Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Duration risk is the risk that changes in interest rates will either increase or decrease the market value of a fixed-income investment.

As of 3/31/2023, the Fund’s top 10 equity holdings were: UnitedHealth Group Inc. (6.4%); Microsoft Corp. (5.3%); Mastercard Inc. (4.7%); Kroger Co. (3.6%); Elevance Health Inc. (3.2%); Philip Morris International (3.1%); PepsiCo Inc. (2.9%); Merck & Co. Inc. New (2.8%); Bank of New York Mellon Corp (2.6%); Visa, Inc. (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: Winter 2022

Dec 31, 2022

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Fourth Quarter and Full Year 2022 Report

Moderating inflation, declining longer-term interest rates and a depreciating US dollar contributed to a rebound in stocks for the fourth quarter. The S&P 500 gained 7.56% for the quarter but declined 18.11% for the year, while the Auxier Focus Fund Investor shares gained 11.21% and lost 4.52% for the full year. The Nasdaq Composite was the worst performing of the major benchmarks, down 32.5% in 2022 as high growth, longer-duration stocks experienced valuation compression. 2022 was tough even for conservative portfolios, with the Morningstar Global 60/40 Index falling by 17.73%, making it one of the worst years in history for the strategy. A record $18 trillion was lost in global securities as the world was caught off guard by rapidly rising inflation and a unified monetary tightening by most global central banks. Bonds, both domestic and international, suffered double-digit declines. It was the worst decline in US bonds since 1774. There is currently an entire generation of investors who have never faced the challenges of higher inflation and increasing interest rates.

Contributors

Financials represented one of the strongest sectors during the fourth quarter. In banking, disciplined spread lenders are enjoying improving net interest margins. The big risk is in the unregulated shadow banking and $1.3 trillion leveraged loan market. Property & casualty insurers are seeing higher renewal pricing and written premiums as insured losses from natural disasters were $132 billion. According to AON, total global economic losses were $313 billion which adds to worldwide demand as more than half of the losses in 2022 were uninsured. During challenging economic times, we like dull businesses with inspired management that sell low-cost necessities like insurance. This improved pricing environment and higher rates on bond portfolios helped earnings and cash flows for companies like Travelers and AIG. Health and supplement insurers like UnitedHealth, Elevance, Cigna and Aflac are benefiting from a rapid expansion of Medicare and Medicaid spending due to rising demand from aging baby boomers. As hospital staffing continues to be a problem it is projected that the healthcare services provided by retail could double by 2023 which is a positive for CVS, Walmart, Amazon and Kroger. In the pharmaceutical space Merck continues to perform well and was up about 44% in 2022. Merck’s recent success has been driven by strong sales of their blockbuster drug Keytruda, which fights cancer using immunotherapy. It is expected to become the highest selling drug in the world within the next few years and Merck is developing a new formulation that would extend its patent protection until at least 2040. The war in Ukraine, together with strong post-pandemic travel, is a positive for aerospace and defense industries. Companies like Raytheon, Lockheed Martin, Parker Hannifin, CAE (pilot training) and Boeing stand to benefit. The increased expenditures on global travel are leading to strong payment and cross border volumes for Visa, Mastercard and Booking. The energy sector has had a historically strong year as the US is now number one in global reserves while exporting 60% of production. Refiner Valero’s profits this year exceeded the prior five years combined. Others in the portfolio like Phillips 66, Conoco, Chevron and BP have enjoyed record results as well. The more reliable, lower cost energy supply is bringing jobs back to the US as manufacturers seek to be closer to customers through reshoring. However, as of this writing natural gas prices have hit their lowest levels since April 2021, down 74% from their peak last August. This is good news for the 48% of Americans who heat with natural gas. Don’t underestimate the ability of the US to produce and overproduce energy. Back in April 2014 Texas Utilities, that state’s biggest utility, filed for bankruptcy, which followed earlier petitions by Enron and Pacific Gas and Electric.

Detractors

Companies like Alphabet and Microsoft, which were major beneficiaries of the pandemic demand for all things digital, had a rough quarter and year. Digital ad sales have suffered as did sales for most tech hardware, especially personal computers. The flood of capital into streaming services crushed the valuations of most media including Comcast and Warner Bros. As the tech industry continues to be stressed due to fears of a recession valuations could return to more reasonable levels and present buying opportunities.

Stock market corrections are a fairly common occurrence though many of them are relatively short-lived. According to Yardeni Research, the S&P 500 has undergone 39 declines of 10% or more since 1950 and 24 of those reached their bottoms in 104 or fewer days. At the end of the quarter the S&P 500 had been in a bear market for over 280 days. According to Forbes the average bear market for the S&P 500 is 289 so we are heading for record territory. With the Federal Reserve (the Fed) not expected to enact interest rate easing until 2024 this could become the longest bear market in history, surpassing 2000-2002’s 929 days. Bear markets can provide new opportunities. Defensive industries like energy, utilities, consumer staples and healthcare performed well during the fourth quarter and significantly better than more expensive technology stocks for the full year 2022. The potential for a long-term bear market could refocus investors on these more defensive industries.

Normalizing Interest Rates

The Fed hiked rates by 425 basis points during 2022. This has greatly benefited savers and conservative businesses with large cash balances while harming many speculators reliant on easy money. We are seeing a normalization of interest rates which was desperately needed by the financial sector worldwide. The graph shows the historical levels of inflation in relation to short-term rates. At the extreme there were over $17 trillion in negative yielding bonds. Thankfully that has totally reversed with interest rates now globally in positive territory.

The Consumer Price Index (CPI) increased by 6.5% annually in December and declined by 0.1% month-over-month. Volatile energy prices have heavily impacted consumer inflation, but prices have declined significantly from highs in June. The Fed’s preferred inflation gauge is the core personal consumption expenditures (PCE) price index as it takes out volatile food and energy prices and was at 5.7% in December. Despite slowing inflation, Federal Reserve officials are projecting the target range for rates in 2023 will be 5%-5.25%. Currently the market is anticipating a lower range than Fed officials have indicated, and they are expecting some rate declines in the second half of 2023 which seem unlikely at this point. Rate increases are expected to be less aggressive in 2023 with the expectation being several 25 basis point hikes. The Fed will likely maintain rates until inflation begins to fall closer to their long-term 2% target. While goods inflation has been declining, the jobs market remains tight and could force the Fed to keep rates elevated for longer than expected. According to Paychex, small and medium-sized firms continue to add to payroll at a healthy pace while more bloated industries that were beneficiaries of the pandemic boom have been rightsizing.

One area that is seeing significant inflation is the food industry. McDonald’s CEO Chris Kempczinski recently projected continued upward pressure on food prices into the new year. According to the Bureau of Labor Statistics the food component of the CPI increased by 10.4% in December compared to 2021. A big factor in food inflation has been water shortages in big farming states. Arizona produces more than 90% of the country’s leafy greens and has seen massive cuts to the amount of water they get from the Colorado River. California is in the midst of the driest 3-year period since the late 1800s. Their Central Valley produces 25% of the food in the US. The drought is expected to have shrunk irrigated farmland by nearly 10% and led to $3 billion in losses for California in 2022. The state’s water troubles run deeper than just the drought with an infrastructure for containing and transporting water that was built nearly 100 years ago. Even though recent massive storms called “atmospheric rivers” have added welcome volumes of precipitation, much of the water was lost due to antiquated infrastructure.

Value Outperforming Growth

Since the financial crisis in 2008 value stocks have consistently underperformed growth stocks, but with rising inflation and price-earnings multiple compression for the most highly valued companies that trend is changing. Over the last 13 years, growth stocks benefited from slow economic growth which led to low inflation, near zero interest rates and easy money. When capital was cheap investors were more willing to invest in growth at any price which significantly drove up valuations. Tesla is an example of a growth company whose valuation took off without the backing of underlying fundamentals. At its peak market cap in November of 2021, it surpassed the market cap of all other global automakers combined while accounting for less than 2% of global car sales. During 2022, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by over 20 percentage points which was the second largest value outperformance since the indexes were created in 1979. Finding superior enduring businesses with cheap valuations and double play potential could be vital strategy in the coming years if higher inflation persists.

Fourth Quarter 2022 Performance Update

Auxier Focus Fund’s Investor Class returned 11.21% in the fourth quarter and -4.52% YTD through December 31. The cap-weighted S&P 500 Index returned 7.56% for the quarter and -18.11% YTD while the DJIA returned 16.01% and -6.86% over the same periods. Small stocks as measured by the Russell 2000 returned 6.23% for the quarter and -20.44% YTD. The MSCI Emerging Markets Index returned 9.7% for the quarter and -20.09% YTD. Stocks in the Fund comprised 88.8% of the portfolio. The equity breakdown was 80.4% domestic and 8.4% foreign, with 11.2% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to December 31, 2022 is now worth $53,830 vs $42,607 for the S&P 500 and $43,447 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 847.80%. The Fund had an average exposure to the market of 81.7% over the entire period. Our results are unleveraged.

In Closing

Several important lessons can be learned from the severe market correction in 2022. Highly valued, popular “story stocks” purchased in times of euphoria can torpedo a portfolio. It is important to identify bubbles and avoid them. When interest rates are close to zero, promoters come out of the woodwork. Talk is cheap. Like Peter Lynch used to say, the key organ when investing is the stomach. These challenging markets underscore the importance of transparency, truly understanding what you own and the ability to quantify risk. Stocks represent a share of a business with a heart and soul. The new book Kick Up Some Dust by the co-founder of Home Depot, Bernie Marcus, is a terrific story about how core values and culture are critical to creating long term shareholder returns. Home Depot went public on September 22, 1981, and a $5,000 investment has grown to over $74 million today.

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. 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. Morningstar Global 60/40 Index is a blended benchmark of 60% Morningstar Global Markets Net Return USD / 40% Morningstar Global Core Bond Gross Return USD. Morningstar Global Markets NR: The index measures the performance of the stocks located in the developed and emerging countries across the world. Stocks in the index are weighted by their float capital, which removes corporate cross ownership, government holdings and other locked-in shares. Morningstar Global Core Bond: The index measures the performance of the global fixed-rate investment grade debt market for securities with maturities greater than one year. 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 Value is published and maintained by FTSE Russell. 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.

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.

PCE Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services.

A basis point is one hundredth of one percent.

Multiple compression is an effect that occurs when a company’s earnings increase, but its stock price does not move in response.

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.

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

As of 12/31/2022, the Fund’s top 10 equity holdings were:  UnitedHealth Group Inc. (7.2%); Mastercard Inc. (5.1%); Microsoft Corp. (4.6%); Elevance Health Inc. (3.5%); Kroger Co. (3.3%); Philip Morris International (3.2%); Merck & Co. Inc. New (3.0%); Pepsico Inc. (2.8%); Johnson & Johnson (2.7%); Bank of New York Mellon Corp (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: Fall 2022

Sep 30, 2022

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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.