Value Investing

GoodHaven Fund 2014 Letter To Shareholders

GoodHaven Fund summary prospectus and annual shareholder letter.

GoodHaven Fund: Investment Objective

The GoodHaven Fund (the “Fund”) seeks to achieve long-term growth of capital.

GoodHaven Fund: Fees and Expenses of the Fund

The following table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.

GoodHaven Fund

Example

This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

GoodHaven Fund

GoodHaven Fund: Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the above example, affect the Fund’s performance. During the most recent fiscal year ended November 30, 2013, the Fund’s portfolio turnover rate was 12% of the average value of its portfolio.

GoodHaven Fund: Principal Investment Strategies

Under normal market conditions, the Fund’s investment advisor, GoodHaven Capital Management, LLC (“GoodHaven” or the “Advisor”) attempts to achieve the Fund’s investment objective by investing primarily in a focused portfolio of equity securities. When selecting such equity investments, the Advisor looks for certain attractive corporate characteristics, such as, relatively high free cash flow yields, strong balance sheets, products or services that satisfy basic human needs, potential for long-term growth, and managers that have demonstrated skill in capital allocation and who have a significant ownership interest, although no particular characteristic is required for any specific investment. From time to time, the Fund may also hold significant fixed-income investments or cash holdings. The amount of such holdings will depend on the Advisor’s assessment of the quantity and quality of investment opportunities that exist at any given time.

To help identify appropriate fixed income investments, the Advisor generally looks for security issuers that are the subject of adverse publicity or stressed industry conditions; whose securities have declined in price despite reasonable future financial prospects; as well as issuers undergoing reorganization or bankruptcy where outstanding fixed-income securities may ultimately receive cash, new fixed income securities, or an equity interest in a reorganized company. In addition, the Advisor may purchase short-dated fixed income investments whose issuers are not stressed in lieu of holding large amounts of cash.

The proportion of the Fund’s assets invested in each type of asset class will vary from time to time based upon the Advisor’s assessment of the merits of specific security investments as well as general market and economic conditions. Although the Fund’s focus is long-term, the Fund expects to shift from time to time among various asset classes and market sectors. The Fund may also invest in companies of any size market capitalization. At any given time, the Fund may invest up to 100% of its assets in foreign securities and up to 50% of its net assets in emerging market securities. The Fund is non-diversified, meaning that the Fund will invest a greater percentage of its assets in significantly fewer securities than a diversified fund.

The equity securities in which the Fund primarily invests include common and preferred stock (including convertible preferred stock). However, the Fund may also invest in equity securities such as partnership interests, business trust shares, interests in real estate investment trusts (“REITs”), rights and warrants to subscribe for the purchase of equity securities and American Depositary Receipts (“ADRs”) or similar securities. The fixed-income securities in which the Fund may invest, include U.S. corporate debt securities, non- U.S. corporate debt securities, bank debt (including bank loans and participations), municipal debt securities, U.S. government and agency debt securities, short-term debt obligations of foreign governments and foreign money-market instruments. The Fund typically invests in fixed-income securities to benefit from prevailing yields that the Advisor’s fundamental research indicates are higher than warranted, without focusing on the coupon, duration or maturity of a particular issue or credit rating of that issuer.

The Fund may also invest in “special situations.” Special situations occur when the securities of a company or other entity are expected to appreciate within a reasonable time due to entity-specific developments rather than general business conditions or movements of the market as a whole. Such developments and situations include, but are not limited to:

  • liquidations
  • mergers
  • reorganizations
  • management changes
  • recapitalizations
  • technological developments

The Advisor may sell a security for a variety of reasons, including without limitation: (1) a security subsequently fails to meet the Advisor’s initial investment criteria; (2) an issuer-specific event, such as a proposed or completed acquisition or recapitalization changes the fundamental appeal of the company; (3) upon analysis, a new security is judged more attractive than a current holding; (4) a change in view with respect to company, industry or general market conditions; or (5) the need to meet investor redemptions of Fund shares.

GoodHaven Fund: Principal Investment Risks

There is the risk that you could lose all or a portion of your investment in the Fund. The following risks could affect the value of your
investment in the Fund:

  • General Market Risk. The market price of a security may fluctuate, sometimes rapidly and unpredictably. These fluctuations may cause a security to be worth less than its cost when originally purchased or less than it was worth at an earlier time.
  • Equity Market Risk. Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in price.
  • Interest Rate Risk. The risk that fixed income securities will decline in value because of changes in interest rates. It is likely there will be less governmental action in the near future to maintain low interest rates. The negative impact on fixed income securities from the resulting rate increases for that and other reasons could be swift and significant.
  • Credit Risk. If issuers of fixed income securities in which the Fund invests experience unanticipated financial problems, their securities are likely to decline in value.
  • High Yield Securities/Junk Bond Risk. The value of fixed income securities held by the Fund that are rated below investment grade are subject to additional risk factors such as increased possibility of default, decreased liquidity of the security, and changes in value based on public perception of the issuer.
  • Municipal Securities Risk. Securities issued by governmental entities on behalf of political subdivisions, agencies, other municipal entities, or private parties may decline as a result of a weakened capacity to make principal and interest payments under certain economic conditions or other circumstances. Moreover, a change to the tax treatment of municipal securities under Federal law could have an adverse impact on prices of these securities.
  • REIT Risk. REITs may be subject to certain risks associated with the direct ownership of real property, including declines in the value of real estate, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses and variations in rental income.
  • Small- and Medium-Sized Companies Risk. Investing in securities of smaller companies including micro-cap, small-cap, medium-cap and less seasoned companies often involve greater volatility than investing in larger, more established companies and these securities may be less liquid than other securities.
  • Foreign Securities and Emerging Markets Risk. Foreign securities involve increased risks due to political, social and economic developments abroad, as well as due to differences between U.S. and foreign regulatory practices. These risks are enhanced in emerging markets.
  • Currency Risk. Fluctuations in currency exchange rates and currency transfer restitution may adversely affect the value of the Fund’s investments in foreign securities, which are denominated or quoted in currencies other than the U.S. dollar.
  • Bank Debt Risk. Investments in bank debt involve credit risk, interest rate risk, liquidity risk and other risks, including the risk that any loan collateral may become impaired or that the Fund may obtain less than the full value for the loan interests when sold.
  • Special Situations Risk. Investments in special situations may involve greater risks when compared to the Fund’s other strategies due to a variety of factors. Mergers, reorganizations, liquidations or recapitalizations may not be completed on the terms originally contemplated, or may fail. Expected developments may not occur in a timely manner, or at all.
  • Non-Diversification Risk. The Fund is non-diversified for purposes of the Investment Company Act of 1940, as amended (the “1940 Act”). To the extent that the Fund invests its assets in fewer securities, the Fund is subject to greater risk of loss if any of those securities become permanently impaired.
  • Management Risk. The Advisor may fail to implement the Fund’s investment strategies and meet its investment objective.

GoodHaven Fund: Performance

The following performance information provides some indication of the risks of investing in the GoodHaven Fund. The bar chart below illustrates the variability of the Fund’s returns by showing changes in the Fund’s performance from year to year. The table on the next page illustrates how the Fund’s average annual total returns for the 1-year and since inception periods compare with that of a broad-based securities index. This comparison is provided to offer a broader market perspective. The Fund’s past performance,  before and after taxes, is not necessarily an indication of how the Fund will perform in the future and does not guarantee future results.

Updated performance information is available on the Fund’s website at www.goodhavenfunds.com.

GoodHaven Fund

GoodHaven Fund

The “Return After Taxes on Distributions” shows the effect of taxable distributions (dividends and capital gains distributions), but assumes that you still hold Fund shares at the end of the period. The “Return After Taxes on Distributions and Sale of Fund Shares” shows the effect of both taxable distributions and any taxable gain or loss that would be realized if a Fund’s shares were sold at the end of the specified period.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and does not reflect the impact of state and local taxes. Actual after-tax returns depend on the individual investor’s situation and may differ from those shown. Furthermore, the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or Individual Retirement Accounts (“IRAs”).

See full PDF below.

GoodHaven Fund annual letter to shareholders

Since we began managing the GoodHaven Fund, we have always promised to communicate with our fellow shareholders as we would wish to be treated in turn. Accordingly, here’s an unvarnished statement: after a solid first two-and-a-half years, our performance over the last year or so has been lousy, particularly when compared to the S&P 500 Index, and particularly over the last several months.1 Since inception and compared to other equity indexes like the Russell 2000 or more cautious investors (such as hedge funds) that we internally follow, relative returns appear somewhat better – though still below our personal expectations and what we hope to achieve over time. Accordingly, this letter is more detailed than usual.

GoodHaven Fund

Despite a rocky six months, we note that since inception and through May 31st of last year, and despite significant liquidity during a period of rising index prices, we had nearly matched the S&P 500 (13.43% vs 14.95% annualized), exceeded the performance of the Russell 2000 (13.43% vs. 11.52% annualized), and trounced the Hedge Fund Research, Inc. Fundamental Growth Index, the Hedge Fund Research, Inc. Fundamental Value Index, and the CS Hedge Fund Index. However, the six months from May to November was a brutal relative period where indexes gained and we experienced unrealized losses. Moreover, in the last two years we have had to deal with large cash inflows and then large shareholder liquidations (which have almost certainly had a negative effect on overall returns).2 Despite these difficult to manage cash flows, we have still compounded our capital at approximately a 9% annualized return since inception during a period of near-zero yields on lower-risk alternatives such as bank deposits and U.S. Treasury Bills.

Although chagrined that several sizeable shareholders (most constantly professing a long-term view) have taken recent performance as a justification to seek greener pastures, let us be clear: we have not lost confidence in our philosophy, our strategy, or our significant portfolio holdings. The GoodHaven Fund is not an index fund but a relatively concentrated fund that, by definition, does not look like an index. We expect variance from index returns and recognize that sometimes these variances – both positive and negative – will be significant.

In the short-term, it is not important whether we outperform or underperform an index. What counts over time is whether we have correctly evaluated the businesses we own and whether or not we have properly judged the risk of permanent loss. If we have, shareholders should expect that bouts of weak performance have the potential to reverse and improve as time passes. Although we cannot always be correct in our judgment, we believe our current portfolio is, in the aggregate, inexpensive with significant potential for gain, and this letter discusses why.

For both long-established and newer shareholders, it’s worth restating our goals: The GoodHaven Fund’s primary goals are 1) to safeguard the capital entrusted to us against permanent loss, and 2) to earn the highest rates of return we can consistent with objective #1. One characteristic that we think is not often appreciated by many is that our returns since inception have been earned while maintaining significant liquidity (earning nearly nothing in today’s zero-rate environment) as well as some modestly sized hedges (unprofitable to date) that we believe may, over time, serve to attenuate some of the risk of outlier market events, or “fat-tails”.

Nevertheless, we understand that some of our shareholders are disappointed and feeling envious of higher-return alternatives, especially those that entrusted us with money over the last eighteen months. Over that period, performance has been poor when compared to large-cap stock market indexes that are always fully invested and which sell at valuations that are high by historic measures, not to mention bonds, which appreciated further after long-dated yields around the world dropped closer to zero. No investment manager is going to be in sync with markets all the time and no manager is ever going to avoid all mistakes. That said, we recognize that nothing in the universe is quite so disturbing as seeing your next-door neighbor become wealthier than you, even if you feel you are pursuing sensible strategies while your neighbor is not.

We continue to focus on appraising values and trying to ignore short-term price squiggles. In part, our prior successes have come from having a longer horizon than most and a willingness to invest under stressful conditions where prices are depressed, headlines are negative, and others are selling under emotional conditions. Contrary to popular belief and especially after a period of large and steady equity index returns, this is not easy nor does it offer quick results. Even though a company may sell at a sizeable discount to intrinsic value, we sometimes must tolerate volatility and weaker prices before conditions improve. Occasionally, we will get something wrong. And despite some clearly profitable past investments, we rarely enjoy the instant gratification that accompanies a rising share price immediately after purchase.

As one example, Hewlett-Packard’s (HP) shares declined sharply after our initial purchases until the price bottomed out many months later – and we were buyers all the way down. On our average cost, we have more than doubled our investment in about two years – something that seems obvious in hindsight. However, at the time, Wall Street analysts were nearly universally negative, most seemed to think that nobody would ever buy another personal computer, network switch, storage device, or printer. Moreover, despite large free cash flows, many thought the company was likely to go bankrupt.

See full PDF below.