Richard Olstein’s letter to shareholders on dealing with uncertainty, dated May 19, 2014.
Richard Olstein: Dealing with Uncertainty
Dear Fellow Shareholders:
For the quarter ended March 31, 2014, Class C shares of the Olstein All Cap Value Fund had a return of 1.32% compared to total returns of 1.81% and 1.97% for theS&P 500 (INDEXSP:.INX) Index and the Russell 3000® Index, respectively. The first quarter also marked an important milestone – it was five years ago that equity markets began their strong recovery from the market low of March 9, 2009. For the five years ended March 31, 2014, the Class C share of All Cap Value Fund had an average annual return of 21.97%. Over the same time period, the S&P 500 Index and the Russell 3000 (INDEXRUSSELL:RUA) Index had average annual returns of 21.16% and 21.93%, respectively.
Richard Olstein: Market Outlook
With the strong market run now five years old, many market forecasters continue to speculate on a market correction or pullback in 2014. Yet despite a somewhat rocky and volatile start to the year, the market run has persevered to post another positive quarter and record a new closing high in early March. In light of the resilience of the market and improving economic picture, we believe our portfolio is correctly constructed to take advantage of the positive market economic environment we envision for the remainder of the year.
While there are always some forecasters predicting the next downturn, we believe it is important for investors to weather such market events, if and when they occur, by focusing on the equities of financially strong companies with stable or growing free cash flow. While many investors are nervous about equity markets or remain sidelined waiting for accelerated economic growth, we believe there is a strong case for investing in the equity securities of companies whose real economic value is unrecognized by the market, obscured by market uncertainty or overshadowed by temporary problems.
Richard Olstein: Our Strategy
Despite differences of opinion about markets, we will continue to seek and invest in companies that we believe have an ability to deliver long-term value to shareholders that, in many cases, is not currently recognized by the market. In 2014, we remain focused on three primary, company-specific factors: (1) a commitment to maintain a strong financial position as evidenced by a solid balance sheet; (2) an ability to generate sustainable free cash flow that we believe is not properly valued by the stock market; and (3) management that intelligently deploys cash balances and free cash flow from operations to increase returns to shareholders. We further believe that by emphasizing investing in companies possessing the aforementioned factors, our portfolio should consist of companies that are positioned to compete more advantageously as economic growth accelerates.
As always, we will continue to emphasize the quality of a company’s earnings in 2014. We measure and assess the quality of earnings by analyzing the economic realism of the company’s financial statements and the conservatism of its balance sheet. By highlighting the quality of a company’s earnings, we seek to accomplish two objectives: (1) to assess the financial risk inherent in each investment opportunity before considering the potential for capital appreciation; and (2) to determine whether or not the company has laid the groundwork to operate with a strategic competitive advantage in any economic environment resulting in a high probability of generating future normalized free cash flow not properly valued by the market. While many investors are obsessed with short-term market moves, our primary concern is to avoid or mitigate permanent impairment of capital. The centerpiece of our investment process is the belief that there is a high correlation between the number and severity of investment errors and long-term above average performance.
See full Richard Olstein On Dealing With Uncertainty in PDF format here.
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