Zeke Ashton Q2 2013 letter to shareholders below.

Zeke Ashton on the Painful Decision to Hold Cash Now

We have a rather simplistic investment philosophy: we like to buy assets when the prices of those assets reflect a sizable discount to what we believe them to be worth. We like to sell those assets back to the market when the market is willing to give us what we believe is a full, fair price. The catch is often that in order to buy discounted assets, there usually needs to be some fear and uncertainty reflected in securities prices. As the old saying goes, you can have cheap prices or you can have good news, but you usually can’t have both. When it appears that all is well in the world and the market is driving asset prices higher, we tend to be net sellers. That has been especially true for us over the past year, in large part because there has not been a significant market sell?off during that time that has lasted for more than a few days to allow us to make significant new investments. Our strategy greatly benefits from the occasional market break in order to re?stock our portfolio with new investments that meet our Fund’s risk?averse, income generating mandate. In a way, we need the occasional market volatility that accompanies fear and uncertainty in order to achieve our strategy’s full potential.

It is somewhat unusual for mutual funds to let un?invested cash build up in their portfolios, because it is an invitation to under?perform the markets if the market appreciates in the near term. We suspect that very few mutual funds would be willing to let more than 30% of the assets sit fallow, particularly given the historically low rates on money market funds, but in our view the willingness to do so can be a competitive advantage in the right circumstances. The reason for this is that markets tend to run in cycles driven by fear and hope; when the market is going up, it feels like it will never come back down. The reverse is also true. Our view is that the best way to exploit the occasional bouts of market fear is to have an inventory of ideas that one is ready to buy at the right price, and the cash available to carry out that buying. One without the other is useless. The willingness to radically flex our invested balance up and down with market conditions (buying heavily into fear and uncertainty, selling appropriately into happy, fully?valued market conditions) based on the availability of cheap individual securities or the absence of the same is likely to increase the chances of a good experience over time, and theoretically should reduce risk. The unfortunate reality is that following such a course can lead to uncomfortably long periods of under?performance which can test the patience of both the Fund’s manager and its investors. It is for this reason that we are satisfied with the Fund’s recent returns that essentially matched the market’s strong performance. We are willing to endure a performance drag in the short term in order to achieve our longer?term objectives, but it’s nice when we don’t have to.

On that note, it is important for our investors to understand that there are really only two ways within a mutual fund structure that one can ensure that there will be cash available at the right times to follow this discipline. One way is to have sold assets that have fully appreciated in price and allow cash to build up in the Fund. The other is to have a base of investors that are conditioned to invest more money into the Fund during significant market selloffs. Unfortunately, this latter source of potential cash is rarely available and certainly can’t be counted on. This is because it is the natural impulse for most investors to sell assets when the market is down and assets are cheap, only to buy assets when things are “safe” and prices are higher. As noted above, this is pretty much the opposite of what we try to do. The next best thing is to have a reasonable base of Fund investors that mechanically add to their investments over time, for example via an automated investment plan. This allows the manager the comfort of knowing that at least some new capital will become available to buy assets in a market downturn.

As an investor in our Fund, you can help contribute to our chances of longer term potential success if you can condition yourself to make additional investments when market declines are making front page news – or at least not to sell during such times. Usually we will be net buyers at such times, and the more capital we have available, the better. Alternatively, you can make your investments fully mechanical by establishing programs to automatically invest a certain amount on a monthly or quarterly basis.

Portfolio Update

As of April 30, 2013 the Tilson Dividend Fund was approximately 70% invested in equities spread across 30 holdings, offset by notional covered call liabilities equal to approximately 1.1% of the Fund’s assets. Cash and money market funds represented approximately 30% of the Fund’s assets. The top ten investments represented just over 44% of Fund assets.

As of April 30, 2013, our top 10 positions were as follows:

Position % of Fund Assets
1) First American Financial Corp. (FAF) 7.0%
2) Apple, Inc. (AAPL) 6.5%
3) Coinstar, Inc. (CSTR) 4.8%
4) EMC Corp. (EMC) 4.4%
5) Coach, Inc. (COH) 4.4%
6) Kohl’s Corp. (KSS) 4.1%
7) Blucora, Inc. (BCOR) 4.0%
8) Tetra Tech, Inc. (TTEK) 3.1%
9) OM Group, Inc. (OMG) 3.0%
10) American International Group, Inc. (AIG) 2.8%
TOTAL 44.1%

One area that we believe still offers some value in the market is in high quality, large?cap technology stocks that may be momentarily out?of?favor as they transition from rapid growth to slower growth. In particular, we become interested when that transition is also accompanied by a change in capital allocation policies designed to return more cash to shareholders in the form of dividends and share repurchases. We believe that Apple and EMC are two of the absolute highest quality technology businesses in the world and both have recently announced very material, shareholder? friendly changes to how they will allocate capital.

Apple is a business everyone knows and likely has an opinion about; the stock price reflects an opinion that Apple’s best days are behind the company and that Apple is in for a protracted period of decline. We believe that this negative outlook is unwarranted, and at recent prices net of its cash balance, Apple is priced at a mid?single digit multiple to the cash flow generated by the business. Even better, Apple recently increased its dividend (the stock yields just under 3%) and also announced that it would repurchase roughly $60 billion worth of shares between now and the end of 2015. This would reduce the share count by approximately 15% at current prices. Our view is that Apple likely enjoyed a “peak year” in 2012, and that intensifying competition is likely to reduce Apple’s amazingly high profit margins in the future. However, even accounting for that, we believe the recent stock price discounts too pessimistic a view

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