Summer 2017 Market Commentary
Improving corporate earnings and revenue growth together with an upswing in global fundamentals provided a solid backdrop for companies in the Fund, especially those with exposure to international markets. With political gridlock and a weaker US dollar, the more defensive multinational component of the Fund has been showing solid progress. The growing global debt overhang combined with accelerating technological disruption makes it more important to scrutinize the strength of each business franchise, balance sheet, cash flow and managerial capital allocation more closely. Businesses today that are utilizing advanced data analytics, mobile communications together with a customer centric passion are gaining premium valuations. While the capitalization weighted indexes appear fully valued, we are finding selective opportunities where exceptional management is brought in to build value in mismanaged enterprises. AIG, for example, just added top-flight CEO Brian Duperreault in May. As Marsh & McLennan shareholders in 2008, we benefitted tremendously as Brian helped turn around that ailing franchise. Prior to that he excelled at ACE insurance.
Individual security selection and the understanding of the value drivers and managerial leadership becomes more important in expensive markets. The risk abounds when markets are overweight in “high expectation” stocks that can torpedo portfolio returns when they crash. Especially as global central bankers may be at an inflection point in reducing massive monetary stimulus that has encouraged speculation. We want to be positioned in businesses that can weather any kind of storm.
The Double Play
To compensate for the risk in stock ownership we are continually seeking the double or triple play return. We seek out of favor businesses selling at low valuations (ideally 10-13 times earnings) that have the potential to execute and grow earnings while enjoying a price-to-earnings (P/E) multiple expansion. Markets always cycle, fads come and go, but eventually long-term returns are tied to the fundamentals of underlying sales, earnings and cash flow growth. This past year with the negative press and uncertainty surrounding companies in the healthcare industry, we were able to pick up good buys of powerful global franchises with innovative products, strong balance sheets, and high free cash flow yields with able management teams. Many industry-leading medical device companies like Zimmer traded down to 11 times forward earnings, a steep 35% discount to their normal valuation.
Supply/Demand for US Public Companies
The Private Equity Industry has been raising record amounts of capital and is thought to have buying power of nearly $1 trillion. The supply of publicly traded companies in America has dropped by over 50% since 1997 to under 3,800. Many of the Fund companies have financial characteristics that are appealing to private equity buyers—low tech, high free cash. Today, prices being paid can be categorized as frothy as the funding for leveraged buyouts is far too easy. Covenant-lite loans have little protection for the l
|Top Equity Holdings on 6/30/2017||% Assets|
|Bank of New York Mellon Corp||4.0|
|Philip Morris International||3.9|
|UnitedHealth Group Inc.||3.6|
|Johnson & Johnson||3.1|
|Merck & Co. Inc. New||2.6|
|Zimmer Biomet Holdings||2.5|
ender and are a relaxation of loan restrictions. Former Fed chief Alan Greenspan recently commented that he sees a “bubble in bond prices.”
Auxier Focus Fund’s Investor Class returned 3.59% in second quarter vs. 3.09% for the S&P 500 Index. The stocks in the Fund returned 4.03%. Domestic stocks comprised 81% and foreign 14%, with cash at 5%. Since inception at the top of the market in 1999, the equity exposure has averaged 78%. A hypothetical $10,000 investment in the Fund, since inception, has grown to $35,794 compared to $24,379 for the fully invested S&P 500
Spring 2017 Performance Update
|Inception *||15 Year||10 Year||5 Year||3 Year||1 Year|
|Auxier Focus Fund
Investor Class Shares
|S&P 500 Index||5.08%||8.34%||7.18%||14.63%||9.61%||17.90%|
|Inception *||15 Year||10 Year||5 Year||3 Year||1 Year|
|Auxier Focus Fund
Investor Class Shares
|S&P 500 Index||143.74%||232.76%||100.08%||97.92%||31.70%||17.90%|
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. As stated in the current prospectus, the Fund’s Investor Class Share’s annual operating expense ratio (gross) is 1.10%. The Fund’s adviser has contractually agreed to waive a portion of its fee and/or reimburse Fund expenses to limit total annual operating expenses at 0.98%, which is in effect until October 31, 2017. Other share classes may vary. The Fund charges a 2.0% redemption fee on shares redeemed within six months of purchase. For the most recent month-end performance, please call (877)328-9437 or visit the Advisor’s website at www.auxierasset.com. The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future.
Contributors to the quarter:
UnitedHealth Group (UNH)
UnitedHealth has continued to execute since our original purchase of $46. The stock today is over $185. The company, through the heavy use of data analytics, has dominated a relatively dull industry. United’s market capitalization has continued to grow double digits every year for the last decade. The dividend was recently increased 20% to $0.75.
Deeply oversold in 2016 political uncertainties, the world’s largest standalone medical technology company rebounded sharply for the quarter. A leader in biomedical devices, they sold their medical supplies business for $6.1 billion and will pay down debt and repurchase shares.
Bank of New York (BK)
Bank of New York recently added an exceptional CEO in Charles Scharf who helped lead Visa in technology and international expansion. The company is benefitting from the relaxation in capital requirements and higher short-term interest rates. They are returning $4 billion to shareholders while raising the dividend 26% to $0.24.
Corning is an innovative company that now is a leader in Gorilla Glass 5 which has applications in mobile devices and automobiles.
Mastercard delivered net revenue gains of 12% as the labor markets continued to improve domestically and global retail spending improved as well. Mastercard is investing $170 million towards their E-wallet service Masterpass and partnering with PayPal Holdings to boost their mobile payment initiatives. Mastercard has delivered exceptional returns since our purchase at $22.14, compared to the current market of $128.
America Movil (AMX)
Controlled by the Slim family of Mexico, America Movil has been “hopelessly out of favor” as they are the number one telecom player in Latin America and have suffered with currencies and increased competition. However, they are good operators and showed an 18.5% increase in revenue for the quarter. They are adding 4.5G which is expected to be 7.5 times faster than 4G. The Slim family has several generations of cumulative business experience in many of the markets they serve.
Unilever under the leadership of Paul Polman has accelerated shareholder enhancing initiatives while improving operational execution. The threat of a takeover by Kraft Heinz provided a strong catalyst for action.
Oracle has found success in the continued development of the Oracle Cloud and Gen2 infrastructure which claims to be both faster and lower cost than Amazon Web Services (AWS). They expect cloud revenues to overtake license revenues in the next fiscal year.
Johnson & Johnson (JNJ)
AAA rated Johnson & Johnson is the world’s largest medical conglomerate. Johnson & Johnson just completed the acquisition of Actelion which gives them a sixth therapeutic area to address potential patients with pulmonary arterial hypertension. Johnson & Johnson expects the acquisition of Actelion to add $1.3 billion in sales for 2017.
Detractors to the quarter:
Kroger is the leading grocer in the US. The price of groceries has declined for 18 consecutive months which represents one of the longest declines in over 50 years. Egg prices are down over 60% in the past three years. Eating at home is a tremendous bargain compared to eating out. New competitors like Amazon/Whole Foods and foreign entrants Aldi and Lidl have added to the negative sentiment. Kroger has competed very well with Walmart for several years now. Kroger is a fierce competitor and after visiting several stores in three states we are convinced they offer compelling food value and strong execution. At 11 times depressed earnings it looks too cheap.
Molson Coors (TAP)
Molson is a beer brand that has endured over 150 years. They recently made a good buy on Miller which greatly enhances their distribution in the US. Despite being a leading player in craft beer, there is a plethora of brewers which has led to a correction in TAP’s share price. Free cash flow is over $1 billion.
John Malone is the largest shareholder and is on record with the intention of consolidating the media “content” space. This can act as a positive catalyst for Discovery which is a leader in European sports programing in addition to the US. We have been happy shareholders of John Malone for years. The stock trades for 11 times forward earnings.
Compounding at high returns over long periods continues to be our focus. To help improve the odds of successful compounding, we constantly seek to manage and mitigate risk through dedicated research and a cumulative knowledge of investment cycles. Costco’s former CEO Jim Sinegal used to say, “retail is detail.” When preserving and growing one’s life savings, we believe strongly in daily details and ledgers to drive long term results. Technological disruption is coming at a furious pace. There is a chorus of financial experts who claim investors don’t have to study, learn and think. It has been my experience, having operated in the market trenches for over 33 years, that a key to surviving in today’s investment landscape is having the humility to prepare through a consistent research effort while questioning conventional wisdom and maintaining flexibility to adapt to ever-changing facts and fundamentals.
We appreciate your trust.
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. 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.