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 1.28%. 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 to 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 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.
Year End 2013 Commentary
Auxier Focus Fund returned 7.63% in fourth quarter 2013 and 23.81% for the year. The Standard & Poor’s 500 Stock Index gained 10.51% for the quarter and 32.39% for the year. As of December 31, 2013 the Fund was positioned in 74% U.S. equities, 2% fixed income, 14% foreign stocks and 10% cash. Since the Fund’s founding (July 9, 1999), a hypothetical $10,000 investment would have grown to $28,741 vs. just $17,274 for the S&P 500. That’s a 159% performance advantage over the period. We continue to view the power of compounding as our most important focus. We designed the Fund to have a wide and flexible investment mandate in seeking compelling value for the portfolio.
Profiting From Powerful Tailwinds
The fourth quarter saw continued economic strength in autos, housing, energy production and energy exports. Improved consumer confidence helped fuel the fastest increase in consumer spending in three years. The boom in energy exports is materially adding to the strength of the U.S. economy (1% to GDP). A key to market valuations is the inflation rate, which for the full year still registered less than 2% at both the producer and consumer level. Corporate earnings advanced less than 7% for 2013. But a combination of factors encouraged investors to pay higher multiples of earnings overall in the equity markets. The factors include the Federal Reserve’s accommodative monetary policy, low inflation, lower commodity costs, and moderate capital spending. Reflecting this low inflation environment, the price of gold fell 28% and Treasury Inflation-Protected Securities (TIPS) slipped 8.6%. In peace time we often have had deflation, in part because advances in technology and free markets have helped to keep a lid on prices. On a recent agriculture research trip, I was amazed at new innovation including drones, driverless tractors and GPS. The output is impressive. In a free functioning economy, there is more risk in productivity gluts—not shortages.
We are constantly monitoring the supply and demand, the cause and effect in different markets. The U.S. Federal Reserve purchased some $1 trillion in net assets in 2013. In addition, corporate stock buybacks were close to $500 billion (much with borrowed money). That amount is second only to 2007 when $589 billion was retired. The combined $1.5 trillion in buying power can meaningfully move markets. Unfortunately, there are no guarantees that these actions by the Fed and corporations are necessarily wise moves. After the 2007 record buyback, stocks plummeted over 40%. Remember, everyone looks like a financial genius using leverage in an up market.
|Top Holdings on 12/31/2013||% Assets|
|Molson Coors Brewing||3.8|
|Bank of New York Mellon||2.6|
|BP (British Petroleum)||2.2|
Healthcare stocks in the Fund had a strong fourth quarter and year. CVS’s 26% performance for the quarter is reflective of the fact that 10,000 Americans turn 65 every day and will for the next 15 years. Businesses that are able to serve this growing segment with improving service, innovation, technology, product quality and value should continue to win. Many of the healthcare names that we “planted” a couple of years ago in the height of panic have been returning to favor. Abbott Labs (ABT), Johnson & Johnson (JNJ) and Merck (MRK) are a few examples of the value added by a “shrink to grow” managerial behavior. MasterCard (MA) and Visa (V) are enjoying the trend away from cash and toward digital payments—although they are now looking more fully priced. Split offs and spin offs in the energy sector led to exciting returns as Valero rose 48% for the quarter while spinning off CST Brands. Companies like ConocoPhillips (COP) and British Petroleum (BP) have been breaking up, pruning low returning assets and returning the proceeds to shareholders in the form of higher dividends and buybacks. Such “event driven” investments are very important when prices are high as the returns are less dependent on the overall supply and demand of the market. Fund performance has been negatively impacted by turnarounds like global supermarket operator Tesco PLC (TESO). Retailers in general, even world-class operators, are suffering from a glut of stores fostered by a rapid transformation to online and mobile shopping. While we don’t see much more downside, the execution has been disappointing—slower than expected. Over the long term this approach to buying high-quality assets during distressed times has been a winner. It is often difficult to gauge the timeline.
In this age of exchange traded funds (ETFs) we continue to price each individual portfolio security by hand every day. We start with a deep study of the balance sheet of each holding. Famed physicist Albert Einstein said, “compound interest was not only man’s greatest invention, but it was the most powerful force on earth.” We don’t want to leave our results to chance. Warren Buffett (Trades, Portfolio) has said, risk management is too important to be left to a committee, and risk is not knowing what you are doing. Just as “velocity banking” led to a misunderstanding of risk, I fear the mentality of “velocity investing” through the proliferation of financial products could end badly because the process of price discovery is very difficult. That may be a fair characterization of a great percentage of market participants today. We want to work to maintain high odds of success through dedicated research on each holding over years, not days.
We have been attracted in the past couple of years by stock prices in the UK, as well as the leadership of Prime Minister David Cameron. He has moved toward privatizations (e.g., post office), cutting of taxes and reducing regulations. We see opportunity in the consolidation of the European cable and phone industries. Mexico is embarking on some hugely positive policies, unleashing new competition into industries like energy, education, and telecommunications.
Benefiting From Global Insecurity
The dangers of poor economic leadership are much more visible today in countries like Argentina and Venezuela that have moved away from free markets and toward policies favoring government control. The result: shortages, currency devaluations and surging inflation. Grants Interest Rate Observer (1/24/2014) recently did an excellent job highlighting the problems of a Chinese command economy, where the mandate was rapid growth in Chinese lending.
Writes Grants: “The world has never seen the likes of China’s credit frenzy. From