Olstein All Cap Value Fund’s shareholder letter for the third quarter 2014.
Dear Fellow Shareholders:
For the nine months ended September 30, 2014, Class C shares of the Olstein All Cap Value Fund appreciated 5.18%, compared to total returns of 8.34% and 6.95% for the S&P 500® Index and the Russell 3000® Index, respectively. For the quarter ended September 30, 2014, Class C shares of the Olstein All Cap Value Fund appreciated 0.40%., compared to total returns of 1.13% and 0.01% for the for the S&P 500 Index and the Russell 3000 Index, respectively.
Olstein All Cap Value Fund: Market Outlook
The calm which had prevailed in U.S. equity markets for most of the past three years was disrupted during the third quarter, as the benchmark S&P 500 Index fell during the months of July and September. While there are always forecasters predicting the next market downturn, downturns have always been part of the investment landscape. Although downturns tend to make investors nervous as prices decline, we believe the future returns of the Fund are determined by our strategy during these declines.
Of course everybody’s investment fantasy is to sell before market declines and buy before upward moves. However, we have yet to identify any individual or organization that has a proven track record of correct market calls whereby one could profit therefrom. The ability to time markets is the only skill one needs to have to be a very successful investor and thus is an enticing goal. However, we view overall market timing as an attempt to predict the psychology of the crowds, which has a very low probability of being achieved on a repetitive basis. Market timers must make two calls, when to sell and when to get back in. In our opinion, one market call has a low probability of being correct and with two market calls required, the chances of being correct is extremely low. We viewed the recent market decline as an opportunity to buy free cash flow companies at what we believe to be very attractive prices.
While many investors are nervous about equity markets or remain sidelined waiting for accelerated economic growth, we believe there is still a strong case for investing in the equity securities of companies whose real economic value is, in our opinion, unrecognized by the market, obscured by periods of market uncertainty or overshadowed by temporary problems. Although the valuation discounts are not at the levels reached in 2009, we are able to identify companies selling at 15-20% discounts from our calculation of their intrinsic value. We are locating undervaluation in mundane businesses generating free cash flows with sound balance sheets that are far removed from the headline exciting stocks in social media, biotech, internet shopping etc., currently being purchased by the investment masses ( who we believe are paying little attention to realistic valuations based on a company’s normalized ability to generate future free cash flow). We remain confident that the current environment is favorable to a longterm value investing discipline.
Olstein All Cap Value Fund’s Investment Strategy
With respect to our strategy for the remainder of 2014, we 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. 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; and (3) management that intelligently deploys cash balances and free cash flow from operations to increase returns to shareholders. We further believe that by prioritizing these factors, we will continue to invest in companies that are positioned to compete more advantageously as economic growth accelerates.
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