AUXIER FOCUS FUND
March 31, 2013
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.29%. The Fund’s adviser has contractually agreed to reduce a portion of its fee and reimburse Fund expenses to limit total annual operating expenses at 1.25%, which is in effect until October 31, 2015. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase. For the most recent month-end performance, please call (877)328-9437 or visit the Fund’s website at www.auxierasset.com.
Spring 2013 Market Commentary
Auxier Focus Fund returned 9.56% in first quarter 2013, versus 10.61% for the S&P 500 Index. By comparison, the equity portion of the Fund returned over 11.8%, outpacing the S&P 500. Risk adjusted, our exposure to stocks averaged 80% for the quarter. Among other asset classes, the Dow Jones–UBS Commodity Index declined a corresponding 1.13%. The Dow Jones Credit Suisse Core Hedge Fund Index gained only 0.76%. Bonds, as measured by the Lipper Intermediate Investment Grade Average returned a scant 0.19%.
Toward the end of 2012, pessimism over tax policy and government cutbacks weighed down stocks of many high-quality, high-return business franchises. We were able to accumulate a bunch sporting high free cash flow yields at bargain prices. Examples include Molson Coors, Bank of New York, Tesco PLC, Western Union, Franklin Resources, and Hospira. We like enterprises intensely focused on delivering exceptional, much needed products and services, particularly in the face of today’s economy characterized by slow growth, deleveraging and higher taxes. These tend to have low mandatory capital spending, high inventory turns, lower ticket goods and services, and they typically see profits in cash. Our goal is to achieve disciplined buys that have the potential for double or triple plays over a number of years, thereby benefiting from compounding while deferring the tax bite. This approach works particularly well in a higher-tax environment that could result if, as some politicians are contemplating, preferential tax rates on capital gains are increased or eliminated by 2015. Our stocks often enjoy an added attribute–interest from private equity buyers who seek similar dynamics and then apply high levels of debt.
Instead of trying to predict markets, we are concentrating on businesses that can endure the worst economic and market scenario. We believe the best investment is a superior business nurtured by talented management, run for the very long term and purchased at a deep discount to intrinsic value. Experience has taught me that crisis, recessions, and depressions are among the best times for long term buyers of quality assets to be adequately compensated for the risk. Conversely, purchases in periods of euphoria and high prices invariably lead to bad outcomes.
Favorable Supply/Demand for U.S. Stocks
Corporate stock buybacks exceeded $200 billion in the first quarter—the highest level since 1985. New supply such as IPOs (Initial Public Offerings) remains low, only 100-150 annualized. Contrast this with the late 1990s, when we saw 400-500 new IPOs a year. What’s more, high corporate cash balances and cheap debt are poised to spark a pickup in merger activity, which would further reduce the supply of publically traded companies. The total of investable publicly traded stocks has now declined by over 50% since 1998. Combining this with aggressive central bank easing creates a strong backdrop for U.S. equities.
Cheaper Commodity Inputs Ahead
Many of our portfolio holdings have had to manage extraordinarily high commodity prices the last several years. China’s construction boom drove many commodities to unsustainable heights—far above the cost of production. The slowdown in China has generally contributed to softer demand for stuff, perhaps deflating a 115-month boom of heightened speculation and borrowed money. Additionally, thanks to record capital spending in energy, higher supplies should lead to stable or lower fuel prices ahead. For example, Mexico is privatizing its oil industry, the fourth largest in the world. And two more major U.S. oil field discoveries, similar to the Bakken shale formation, should be announced soon. All this could act like a major tax cut for the consumer.
Why Food and Beverages Are So Appetizing
Exciting forces are transforming the food chain. Consumers are willing to pay more for better quality. Pepsico, our second largest holding, has been leading the trend for healthier food and beverages. Food and water safety are major concerns in Asia. So Pepsico and other trusted providers are enjoying terrific volume gains. With increasing transparency, a vibrant and growing emerging middle class is rewarding firms that intensely focus on providing topnotch products and services. Demand for necessities continues to grow two to three times faster than the overall economy. While Europe’s stagnation captures headlines, real fundamental improvement is occurring in emerging markets, such as Mexico, Indonesia, Malaysia, and Philippines, where hardworking, aspiring populations are moving up the economic ladder.
Managing Risk and Complacency
Long periods of excessively low interest rates and easy credit often lead to investment bubbles. We are witnessing aggressive central bank intervention that has distorted true market supply and demand. Asset inflation far above underlying cash flows is problematic, unsustainable and eventually purged by market forces. Many of the problems in Europe can be tied to easy credit that allowed weak countries to piggyback their interest rates on strong Germany’s low borrowing costs.
A major misperception among investors is that bigger equates with better and safer. Only nine companies have earned the crown of market capitalization king over the past 40 years. Each time that valuation was achieved, dramatic underperformance followed. Big banks were thought to be secure in 2008. The housing industry before that. Today there is a mistaken notion that bonds and certificates of deposits are “safe,” when in fact the Federal Reserve’s printing of $85 billion a month is rapidly depreciating the value and purchasing power of these investments.
There is a large school of thought that markets are efficient. So you’re wasting your time thinking critically or applying rigorous analysis. Many believe you can put funds in various “style boxes.” In my 30 years of investing, I have yet to see a formula work consistently. Recall the so-called Nifty Fifty, one decision stock mania beginning in the 1970s. The perception at the time was that you could “buy, hold and forget” the best 50 growth companies. The herd of mutual fund managers bid up the group to 80 times earnings, only to see it crash back to 9 times, a level better characterized as “buy, hold and regret.” There simply is no substitute for a rational, fact finding daily research effort. There are no shortcuts. When it is too easy, the game is about to change for the worse. Billionaire hedge fund manager Seth Klarman, author of the definitive investing treatise Margin of Safety, puts it succinctly: “attention to risk must be a 24/7/365 obsession.”
The Cost of Conventional Wisdom
When investing, it can also be extremely costly to blindly bet on conventional wisdom–or against human ingenuity. In 1875, Henry E Wrigley headed the Pennsylvania geological survey. He issued a doomsday warning that the state’s (effectively the world’s) production of oil had peaked and would soon experience a precipitous decline, aggregating fears that had overshadowed this industry since inception. (Source: Titan: The Life of John D. Rockefeller, Sr.) The value of the companies that just the Rockefeller family held (at the time of the Standard Oil Trust 1911 break up) would exceed $300 billion in today’s dollars. Moreover, Pennsylvania recently announced the receipt of $200 million in additional taxes and levies from new discoveries of shale oil and gas in the state.
We appreciate your trust,
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.
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The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones-UBS Commodity Index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The index is composed of futures contracts on physical commodities. The Dow Jones Credit Suisse Hedge Fund Index is an asset-weighted benchmark that measures hedge fund performance and seeks to provide the most accurate representation of the hedge fund universe. The Lipper Intermediate Investment Grade Average is an unmanaged index considered representative of intermediate investment grade debt funds tracked by Lipper. One cannot invest directly in an index or average.
The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter. These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.