Polaris Global Value Fund letter to investors for the first quarter ended March 31, 2015.
Dear Fellow Shareholder,
The Polaris Global Value Fund (“the Fund”) outperformed the MSCI World Index, net benchmark in the quarter, up 5.17% while the Index advanced 2.31%. A rebound in the material sector drove performance, with the majority of sector holdings posting double?digit returns. Closely following was healthcare, as U.S. companies Anthem and UnitedHealth Group added new customers on the back of the Affordable Care Act (ACA). In fact, seven of 10 sectors were in absolute positive territory for the quarter.
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Top individual stock contributors included the aforementioned healthcare firms, as well as generics pharmaceuticals company Actavis PLC. Consumer staples stocks MEIJI Holdings, a Japanese dairy products company, and Greencore Group PLC, an Ireland?based producer of convenience foods, also positively impacted results. Energy stock Thai Oil recovered; however, its non?oil refining counterparts did not fare as well, with Maurel et Prom and Tullow Oil among the underperformers. U.S. information technology companies declined as the dollar strengthened and foreign customers shied away from U.S. software/hardware purchases for fear of NSA oversight.
Overall, we were pleased with performance, as nearly two thirds of our portfolio holdings achieved gains. These results reaffirm our commitment to fundamental stock picking, identifying companies across country, sector and market capitalization that prove resilient in volatile markets, and rebound in healthier macro?economic conditions. Our efforts have been noticed, as the Fund is the recent recipient of two 2015 Lipper Fund Awards in the global multi?cap value fund category. The Fund posted the strongest trend of returns for the 3? (out of 75 funds) and 5?year (out of 57 funds) periods as of December 31, 2014. The Fund has been recognized by Lipper many times in the past, including 2014, entering the rankings for 3?, 5? and 10?year periods.
Polaris Global Value Fund: Portfolio Holdings
More than 85% of the material sector stocks had positive returns this quarter, a turnaround from the end of 2014. Although declining oil prices resulted in lower methanol demand for energy applications, Methanex Corp.’s competitive cost structure enabled the company to maintain its leading market position. The stock price of U.K. beverage can maker Rexam rose as it entered talks regarding a possible sale to U.S. competitor Ball Corp. Multiple tailwinds aided Norwegian fertilizer company Yara International. The company maintained good product pricing across its business lines, while benefitting from lower gas prices. Additionally, Yara’s South American expansion is going as planned. Praxair Inc. was one of the few materials sector stock in negative territory, as it reported below consensus earnings and noted softness in order books due to lower oil prices.
Polaris Global Value Fund: Anthem
Anthem, the second largest U.S. health insurer, had strong underlying performance, deploying its capital in the form of share buybacks and quarterly dividends. Similarly, UnitedHealth reported better?than?consensus fourth quarter 2014 earnings, with upside in both Optum and the health care segment. As referenced above, profits at both companies should continue to grow in 2015 on increased customer enrollment due to ACA. Merger and acquisition activity boosted the stock price of Actavis PLC, as the company announced the completion of the $70.5 billion Allergan, Inc. transaction after the 2014 Forest Labs buyout. French pharmaceutical company Transgene declined during the quarter, even though it announced Phase III trials for TG4010 and Pexa?Vec. To support these developments and others immunotherapy products in the pipeline, the company continues to burn through nearly $49 million a year, and has yet to find a partner to help develop TG4010.
Polaris Global Value Fund: MEIJI Holdings
MEIJI Holdings led the consumer staples sector, announcing price hikes for some of its dairy products to help offset higher raw material costs. Investors were most excited not by the dairy/confection business, but by MEIJI’s advances in the drug business. MEIJI entered into a licensing agreement with Roche and Fedora for the development and commercialization of a beta?lactamase inhibitor that fights antibiotic resistant bacteria. Greencore Group PLC continued to execute well on its convenience foods business in the U.S. and England; the company reported good quarterly results and provided upbeat guidance.
Polaris Global Value Fund: Hannover Re and Munich Re
In the financial sector, Germany reinsurers Hannover Re and Munich Re had notable returns, attributable to increased premiums and investment income in combination with fewer claims in a benign storm season. Healthy cash generation resulted, and both companies have dedicated reinvestment strategies that include dividends and share buybacks. A new CEO was announced at Standard Chartered. The bank reported modest positive results and stabilized credit quality across its books. This news offset negative sentiment surrounding the New York Department of Financial Services investigation and potential further credit weakness in its slower growth markets.
Polaris Global Value Fund: Webster Financial
Webster Financial Corp. was up more than 10% after acquiring J.P. Morgan’s health savings account (HSA) business, gaining more than $1.3B in new HSA deposits. Ameris Bancorp’s stock price rose following the January purchase announcement of 18 Bank of America branches in southern Georgia and northern Florida, as well as the acquisition of Merchants & Southern Bank in Florida. By contrast, other U.S. regional banks including Astoria Financial, International Bancshares and Peoples Bancorp declined slightly despite decent earnings results.
Polaris Global Value Fund: Deutsche Telekom
All of the Fund’s telecom holdings posted solid returns, led by Deutsche Telekom. The company announced good earnings and highlighted increased subscribers in its U.S. T?Mobile division, although profitability remained challenging. Consolidation in the German telecom market has moved in favor of incumbent providers like Deutsche Telekom. In mid?February 2015, union members ratified an agreement to end a four?month?long strike by 1,700 workers at FairPoint Communications, a landline telecom provider in New England. Investors were pleased with the development, and the stock price rose more than 20%. Another U.S. telecom, Frontier, reported 2014 free cash flow above guidance on broadband net additions.
Polaris Global Value Fund: Michelin
As referenced in the fourth quarter 2014 report, we purchased French tire manufacturer Michelin. We anticipated greater replacement tire demand, as lower gas prices encouraged more driving. This premise held true, as Michelin reported inventory restocking and higher demand in passenger car, light truck and truck segments in North America and China. U.K. homebuilders, Barratt Developments, Persimmon and Taylor Wimpey, also boosted the consumer discretionary sector. U.K. home prices rose 10% in 2014 on the back of affordable mortgages and a shortage of homes under construction in the country. The ongoing recovery of the U.K. economy, employment and wage growth and reform of the stamp duty on property purchases will continue to provide a supportive backdrop to the homebuilders. Christian Dior benefitted from the Hermes spin?off completed last quarter. As a shareholder of Christian Dior, the Fund received shares of Hermes, which proved to be a richly?valued stock that we subsequently sold. At the other end of the spectrum, Duni AB and GTECH SpA had modest declines. GTECH SpA was in the final stages of a merger with International Game Technology, making it the world’s largest end?to?end lottery and gaming company.
Polaris Global Value Fund: Konecranes Oyj
Konecranes Oyj boosted returns in the industrial sector. In recent publications, the company highlighted growing order books for both the equipment and services businesses. Konecranes Oyj is confident in its 2015 guidance, expecting better revenues and profitability than in prior years. Caverion Corp. is in the early stages of a turnaround, as the new CEO has focused on margin improvement based on disciplined project bids and project management. BBA Aviation was among the few negative performers in the sector. The rough New England winter likely increased BBA’s commercial plane de?icing services; conversely, those same weather conditions grounded or delayed many planes, thereby reducing BBA’s jet fuel sales.
Polaris Global Value Fund: NextEra Energy
Utilities, energy and information technology sectors detracted from better performance. In utilities, NextEra Energy was down shortly after filing an application to acquire Hawaiian Electric for $4.3 billion. As a stipulation to get regulatory approval for the deal, NextEra agreed to a four?year rate freeze. Similarly, Allete, Inc. announced a definitive agreement to purchase U.S. Water Services, Inc., an integrated industrial water management company. In information technology, Infosys’ outsourcing business increased and the company has redoubled its efforts to focus more on profitability and growth. Western Union guided for continued improvement in operating profit margins, mainly driven by restructuring savings, lower compliance expenses and favorable foreign currency hedging. However these gains couldn’t mitigate losses elsewhere in the sector. Microsoft’s shares fell after reporting in?line second quarter results for fiscal year 2015 with an outlook that was lower than expectations. A stronger U.S. dollar, tougher comparisons in the second half due to the Windows XP?related PC refresh cycle, and macroeconomic issues offset robust performance in cloud services. However, Microsoft management said the remaining $31 billion of share repurchase authorizations would be accelerated and executed over the next eight quarters. Hewlett?Packard lowered its fiscal year guidance, blaming the resilient U.S. dollar and high costs related to splitting itself into two separate companies. In addition, the rise of cloud computing is taking share from H?P’s traditional storage equipment.
Polaris Global Value Fund: Investment Environment and Strategy
In recent quarters, lower oil prices have had a marginally positive effect on the U.S. consumer; other countries have not reaped benefits from lower commodity prices, largely due to the rapid devaluation of non?USD currencies including the Euro and Yen. However, at the beginning of 2015, depreciated currencies appear to be having a constructive impact on companies based in those currencies. We are starting to see the beginning of better economic activity. Conversely, the strong USD is having a deteriorating effect on multi?national earnings of U.S. companies, dampening heady projections for the U.S. economy.
We remain attentive to the slowing GDP trends in China, and the conceivable deceleration of the Chinese real estate industry. In Brazil, a possible drought looms over both living conditions and economic growth in the region. Notwithstanding these potential “black swan” events, we remain optimistic about global markets in 2015, but expect slow growth instead of a robust recovery. We will continue to make investments for the Fund based on this outlook and hope to report similarly admirable performance in the quarters ahead.
We would also like to take this opportunity to let our Fund shareholders know that the Fund’s reduced net operating expense ratio has been extended for another year. The Fund’s annual net operating expense ratio will remain at 0.99%, effective through April 30, 2016, due to the Adviser’s contractual agreement to waive its fee and/or reimburse expenses to limit Total Annual Fund Operating Expenses.
Bernard R. Horn, Jr., Shareholder and Portfolio Manager
The Fund invests in securities of foreign issuers, including issuers located in countries with emerging capital markets. Investments in such securities entail certain risks not associated with investments in domestic securities, such as volatility of currency exchange rates, and in some cases, political and economic instability and relatively illiquid markets. Options trading involve risk and are not suitable for all investors. Fund performance includes reinvestment of dividends and capital gains. During the period, some of the Fund’s fees were waived or expenses reimbursed. In the absence of these waivers and reimbursements, performance figures would be lower.
On June 1, 1998, a limited partnership managed by the adviser reorganized into the Fund. The predecessor limited partnership maintained an investment objective and investment policies that were, in all material respects, equivalent to those of the Fund. The Fund’s performance for the periods before June 1, 1998 is that of the limited partnership and includes the expenses of the limited partnership. If the limited partnership’s performance had been readjusted to reflect the second year expenses of the Fund, the Fund’s performance for all the periods would have been lower. The limited partnership was not registered under the Investment Company Act of 1940 and was not subject to certain investment limitations, diversification requirements, and other restrictions imposed by the 1940 Act and the Internal Revenue Code, which, if applicable, may have adversely affected its performance.
Past performance is no guarantee of future results. Lipper Fund Awards are based on Lipper’s Consistent Return calculation. Lipper scores for Consistent Return reflect funds’ historical risk?adjusted returns relative to funds in the same Lipper classification and include each fund’s expenses and reinvested distributions, but exclude sales charges. Consistent Return values are calculated with all eligible share classes for each eligible classification. The highest Lipper Leader for Consistent Return value within each eligible classification determines the fund classification winner over three, five or 10 years. Lipper, a Thomson Reuters company, is a leading global provider of mutual fund information and analysis to fund companies, financial intermediaries and media organizations. Additional information is available at www.lipperweb.com.
The MSCI World Index, net dividends reinvested measures the performance of a diverse range of global stock markets in the United States, Canada, Europe, Australia, New Zealand and the Far East. The MSCI World Index is unmanaged and does include the reinvestment of dividends, net of withholding taxes. One cannot invest directly in an index. The views in this letter were those of the Fund manager as of March 31, 2015 and may not reflect the views of the manager after the publication date. These views are intended to assist shareholders of the Fund in understanding their investment and do not constitute investment advice.
Before investing, you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling (888) 263?5594 or visiting the Fund’s website at www.polarisfunds.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, is the Fund’s Distributor.