Auxier Report: Spring 2025
Spring 2025 Market Commentary
The first quarter was turbulent as the market braced for uncertainties brought on by a new administration and the potential impacts of increased tariffs. Stagflation is a major concern. According to White House data the US trade deficit in goods is $1.2 trillion but they have ignored an offsetting $300 billion surplus from services. This imbalance of trade is one of the leading issues for the current administration and is driving most of the volatility in markets. The S&P 500 ended the quarter down 4.27%, which was the worst quarterly performance since Q3 of 2022. All major domestic benchmarks declined during the quarter with the tech-weighted benchmarks hit the hardest. Energy and healthcare were the two best performing sectors during the quarter, up 10.6% and 5.6%, respectively.
Investors Rotate Out of Growth and Into Value
After a solid performance in 2024, high-growth tech stocks were the biggest drag on the market during the first quarter. The Magnificent 7 stocks, Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta and Tesla declined 16%. Until this quarter these stocks had been driven by the exponential potential of Artificial Intelligence (AI). Hyperscalers like Meta, Amazon, Alphabet and Microsoft intend to spend as much as $320 billion combined on AI technology in 2025. This would be an increase from $230 billion in 2024. The monetization potential of this investment has come into question. Value outperformed growth during the quarter with the S&P 500 Value Index finishing up 0.28% while the S&P 500 Growth Index finished down 8.47%. This was the best performance for the value index relative to the growth index since 2022. Bonds have performed better as well with the S&P US Aggregate Bond Index up 2.63% for the quarter. By the end of the quarter 10-year US Treasury yields had fallen below 4% for the first time since November of 2024.
Tariff Fears Drive Caution in Corporate Buybacks
US corporations have responded to the uncertainty in the markets by lowering stock buybacks in order to hold more cash. According to Bloomberg, in March US companies announced the fewest stock buybacks in dollar value since the start of the pandemic. Data from Birinyi Associates indicates that announced buybacks have reached $39.1 billion so far. This decline in confidence from corporations is a stark contrast to 2024 where we saw the second-highest level of buybacks ever. Buybacks are not the only area expected to be hit, with UBS forecasting relatively flat earnings for companies across the S&P 500 in 2025 due to the potential of long-term tariffs. These forecasts are down from the 11.5% growth projected in early March. An extended period of pressured earnings will highlight companies with the strongest fundamentals that will be able to endure higher costs.
Speculative Investing Leading to Big Losses and De-risking
Speculative investing strategies have been on the rise in recent years due to high market confidence and new technologies. Strategies like zero-day options and double or triple-leveraged assets have become more popular with retail investors and hedge funds. Since April 2020, the double-leveraged ETF market has grown from $50-$60 billion to $100-$150 billion. Hedge fund managers like leveraged funds because they can amplify their gains in a short period of time. Data shows that overall hedge fund leverage in equity positions was 2.9x their books, the highest level over the last five years. However, these hedge funds have been experiencing the other end of the equation this year where leveraged assets also greatly amplify losses in down markets. By the start of March Goldman Sachs reported hedge funds and multi-strategy funds had already given up half of their average yearly gains in 2025. To combat increased volatility, hedge funds have been pulling back some of their portfolios to reduce concentration. In early March Goldman Sachs reported that hedge funds unwound the largest number of positions in single stocks in over two years. This kind of mass unwinding is a risk that comes with the increased use of algorithmic trading that tends to chase growth and big headlines.
A recent example of the potential risks of leveraged funds in single stocks can be seen with the iSTOXX Leveraged 3x Tesla fund which ended the quarter down nearly 80% compared to the roughly 30% decline in Tesla’s common shares. Recent events highlight why we emphasize in-depth, rigorous research. We strive to know our companies better than the market which helps mitigate the portfolio risk during these unpredictable algorithmically-driven swings. We favor a systematic lower risk approach.
Contributors
Consumer staples were the best performing sector as investors favor defensive stocks that provide essential goods and services in the face of increasing economic and market turbulence. Some of the Fund’s best performers in this sector were Altria, Kroger, Philip Morris, Coca-Cola and Monster Beverage. Kroger offers low ticket necessities with high inventory turns that remain in demand regardless of the economic environment or activity in the stock market. Reduced-risk products (RRPs) have been a key driver in positive nicotine consumption for Philip Morris. Nicotine is showing promising “cognitive benefits” in the treatment of Parkinson’s. Historically, our positioning in resilient, high cash generating business models has paid off during difficult market periods.
The financial sector outperformed with insurance companies Aflac, American International Group, Berkshire Hathaway, Marsh & McLennan, Unum and The Travelers Companies. Data from MarketScout indicates that US commercial insurance rates rose an average of 3% during the first quarter. According to market research from AON, global insured losses for the first quarter were expected to be $53 billion. This would be more than three times higher than the first quarter average over the last 25 years. Projections for full-year losses could exceed $145 billion. While insured losses can pressure insurance companies in the short term, these companies should benefit from higher premium growth in the future. The string of recent natural disasters has supported premium increases in homeowners insurance as well. Fixed income investment portfolios play a significant role in the earnings of most insurance companies which adds to their stability. The insurance component of the S&P 500 currently trades at 11.6 times 2025 earnings, a significant discount to the 20.45 for the S&P 500.(1)
Detractors
Despite strong tailwinds from AI demand, information technology was the worst performing sector during the quarter. Technology stocks in general traded lower for several reasons, including active regulatory attacks, questions over returns on massive capital spending and extreme tariffs as export markets are an important source of revenues. Many of the leveraged option strategies have included the leading tech businesses as well. Companies in the Fund like Alphabet, Meta Platforms and Microsoft are also growing at a slower pace and are suffering from a compression in p/e multiples. Still, they are powerful high return businesses with unique platforms and recurring revenues; leaders in the digital AI transition with scale to adapt. Microsoft is replacing 1/3 of software coding engineers with AI.
The consumer discretionary sector was a weak performer given high costs and the impact of tariffs. Companies like Lowe’s and Home Depot are seeing lower consumer spending on big ticket items given the stagnant housing market. The median age of owner-occupied houses in the US is approximately 40 years. We continue to favor those businesses that deal in repair/replacement goods and services in areas of aging infrastructure like housing, aerospace and autos.
First Quarter 2025 Performance Update
Auxier Focus Fund’s Investor Class gained 4.63 % in the first quarter 2025. The S&P 500 cap-weighted index declined 4.27% for the fourth quarter, while the equal weight fell 0.61 %. The Russell 1000 Value returned 2.14%. For the 12-months ended 3/31/25 the stocks in the Fund returned 9.20% while the Fund gained 7.99%. vs 8.25% for the S&P 500. Fixed income investments as measured by the S&P US Aggregate Bond Index returned 2.63% while the longer dated ICE US Treasury 20+ Year Index returned 4.76%. Stocks in the Fund comprised 93.4% of the portfolio. The breakdown was 84.7% domestic and 8.7% foreign, with 6.6% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to March 31, 2025 is now worth $68,810 vs $64,396 for the S&P 500 and $56,568 for the Russell 1000 Value Index. The equities in the Fund (entire portfolio, not share class specific) have had a gross cumulative return of 1,028.33%. The Fund had an average exposure to the market of 82.7% over the entire period. Our results are unleveraged.
In Closing
We are seeing a major unwinding of many speculative leveraged positions by both retail and hedge funds in 2025. The proliferation of double and triple levered single stock ETFs, zero-day options and “basis trade” hedge fund leverage has accentuated volatility in both stock and bond markets. The old saying goes, “financial genius is leverage in an up market.” Unpredictable and extreme policy directives by President Trump with blunt tariffs placed on 185 countries add to market risk. History has shown that tariffs escalating into retaliatory trade wars is bad for the economy. The 1930 Smoot-Hawley Tariff Act is widely deemed a policy mistake that worsened the Great Depression. The McKinley Tariff Act of 1890 was considered a contributing factor to the economic depression of 1893. Both disrupted established relationships while eroding consumer confidence and destabilizing the global economic environment. During this time of heightened market unrest, we put greater scrutiny on valuation as well as the enduring nature and underlying operating reality of each business. When the euphoria fades, story stocks and those based on momentum can become torpedoes to the portfolio. We view volatility in the markets as an opportunity to find more misappraised businesses at compelling price points. We don’t try to predict markets but instead invest in businesses with proven long-term resiliency and relentlessly focused leadership; those that can navigate and thrive during the worst economic conditions. This approach has served our shareholders well over the 26-year life of the Fund, which was founded during the frenzy of the 1999 internet bubble.
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.
Earnings growth is not a measure of future performance.
Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.
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).
Reduced-Risk Products (RRPs) are tobacco products designed to potentially reduce the health risks associated with tobacco use compared to traditional cigarettes.
(1) YCharts
Foreside Fund Services, LLC, distributor.
The S&P 500 Index (also known as the S&P 500 Cap-Weighted 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® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy 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. The S&P 500® Growth measures constituents from the S&P 500 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum. The S&P 500® Value measures constituents from the S&P 500 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price. S&P US Aggregate Bond Index is designed to measure the performance of publicly issued US dollar denominated investment-grade debt. The S&P US Treasury Bill 0-3 Month Index is designed to measure the performance of US Treasury bills maturing in 0 to 3 months. ICE 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 US dollar-denominated, fixed rate securities with minimum term to maturity greater than twenty years. One cannot invest directly in an index or average.
As of 3/31/2025 the Fund’s top ten equity holdings were: Mastercard Inc. (5.6%); Microsoft Corp. (5.3%); UnitedHealth Group Inc. (4.9%); Philip Morris International (4.9%); Kroger Co. (4.5%); Bank of New York Mellon Corp (4.0%); Visa, Inc. (3.5%); Berkshire Hathaway Inc. Class B (3.0%); Bank of America Corp (2.9%); Medtronic PLC (2.5%).
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.