Jeff Auxier with some interesting commentary in his Q2 letter.
* Fund inception: July 9, 1999
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. 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.
Summer 2013 Market Commentary Auxier Focus Fund returned 2.03% for second quarter 2013 and 11.79 % for the six months through June 30. The Fund ended the quarter with 84.7% in stocks, 4.1% in bonds and 11.2% in cash. Our stockholdings gained 3.55% for the quarter and 15% for the first half. These returns beat the Standard and Poor’s 500’s (S&P) corresponding 2.91% for the quarter and 13.82%. Since inception in 1999 the Fund’s cumulative return is 159.50%, three times the S&P’s corresponding 48.52%, despite the index’s much higher risk profile. While the S&P is always fully invested in 500 stocks, Auxier Focus’s sturdier allocation averages 77% in stocks.
Commodities as measured by the Dow Jones UBS Commodity Index continued to correct, dropping 9.45% for the quarter. Gold dropped 23 %. The long boom in commodities (over 115 months) brought with it higher levels of debt that tend to accelerate the price declines during corrections. Global production has clearly caught up with demand. Reduced commodity speculation and lower raw material costs typically are favorable for the quality businesses we own.
Bonds as measured by the Lipper Intermediate Investment Grade Index declined in price 2.73% for the quarter. Bond yields have dropped over 85% since their peak some 32 years ago. Historically, the bond market has run in 30-35 year cycles, and we may be embarking on a new cycle of rising rates. Investors often forget that a normally functioning bond market (i.e., not manipulated by the Federal Reserve’s current policies) can be just as volatile as the stock market. If the yield on 10-year Treasury notes rose to the median yield since 2000, 4.27%, investors could suffer losses in bond principal of greater than 20%. In June, investors pulled over $79 billion from bond funds. Given the historic high prices and the dearth of yield, many bonds, like commodities, can now be classified as “speculative.” Risk tends to be correlated with the degree of overvaluation of an asset class. The Fed’s easy-money mandates have led investors to “underprice risk.” For retirees who typically invest for income, it is critical that they are overcompensated for the risk taken. One example: many so-called leveraged bond funds (closed-end funds that borrow to enhance returns) suffered 10-15% price declines over just a four-week period.
Where We Find Value Today
We aim to deploy capital at compelling prices created when a stock appears “hopelessly out of favor,” and then harvest fully valued shares in times of “euphoria.” Many of the positive contributors in the quarter were in healthcare names (WellPoint, Hospira, UnitedHealth, Health Management Associates) that were purchased over eighteen months ago at the height of panic and uncertainty surrounding ObamaCare. Extremely depressed price points allowed us to enjoy meaningful upside just to a mean valuation. Another example is H&R Block, which had dropped to an historic low price as the company lost its way through “diworsification.” Then management intensely refocused the business on taxes, and the stock has more than doubled from a very low base.
When investing in new positions, we are often buying at progressively weaker prices, thereby hurting our short-term performance. We are now finding bargains in quality businesses temporarily weighed down by financial woes in Europe and the UK. Some of the finest grocers in the world can be found in Europe. We have been investing in solid but struggling franchises like Tesco, the leading grocer in the UK. Similar to H&R Block, Tesco lost its way and over-expanded. But now the company is working hard to refocus on their customer. The European telecom industry seems poised for widespread consolidation. Among global players well-positioned in Europe, we have found enticing recessionary valuations in Telefonica (TEF) (based in Spain) and America Movil (AMX) (Mexico). We are probably early but after 30 years of weathering recessions and financial panics, we prefer investments subject to time risk, rather than price risk, as we patiently await the upside of pent-up demand being released from the grip of austerity.
Trends That Are Investors’ Friends
There’s lots of potential fire power to fuel meaningful mergers and acquisitions. U.S. corporations are sitting on close to $1 trillion in cash at a time when revenue growth is sluggish. Banks have over $1.6 trillion in reserves. The price of crude oil, one major commodity that’s bucking the global correction, is vulnerable. Worldwide drilling rates are nearing 30-year highs, according to Schlumberger. And technology is in place for oil to tank as well. Additionally, capital spending on fixed investments in the U.S. stands at a 50-year low versus GDP. Rising interest rates could present problems. But they ironically could help strengthen the economy and lending levels because banks would be better compensated for the risk. An increase in net interest margins could expand credit, especially to cash-strapped small businesses. Conventional wisdom holds that higher rates are bad for stocks. But in 1987 long term bond yields spiked from 7% to 10% in just eight months, and yet the stock market gained over 40% before correcting big time on October 19 (aka Black Monday). This untapped lending potential could act as a huge stimulant when that money enters the real economy.
Opportunity abounds today for the dedicated business analyst armed with the right temperament. Great management teams can find ways to build customer value through innovation and execution. Human nature, together with the emotions of fear and greed, will always conspire to create tremendous bargains in the auction markets. Globally, there are more democracies than ever before in history, setting the stage for more market-based reform. Mexico is privatizing its energy industry (the world’s fourth largest in proven reserves) and encouraging competition in telecom and real estate. Even Cuba is introducing more market solutions to boost stagnant standards of living. Communications transparency is educating the masses about the inherent fallacy of centrally planned capital allocation. Look no further than China’s state-directed investment policies, which have contributed to a loss in excess of $700 billion in market value in the past few years. Contrast China’s business bureaucrats with history’s outstanding corporate capital allocators such as Henry