Zeke Ashton’s Centaur Total Return Fund H1 Letter

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Zeke Ashton‘s Centaur Total Return Fund semi-annual report for the year ending April 30, 2015.

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Dear Centaur Total Return Fund Investors:

The Fund produced a return of 3.70% for the year ending April 30, 2015. Our primary benchmark, the Dow Jones U.S. Select Dividend Total Return Index, experienced a gain of 8.42% for the same period, while the S&P 500® Total Return Index returned 12.98%.

For the trailing 5?year period ending April 30, 2015, the Fund has produced an annualized return of 9.42% versus the primary benchmark’s return of 14.85% annualized over the same period. The S&P 500® Total Return Index has returned 14.33% annualized for the five years.

For the trailing 10?year period ending April 30, 2015, the Fund has produced an annualized return of 9.70% versus the primary benchmark’s return of 7.26% annualized over the same period. The S&P 500® Total Return Index has returned 8.32% annualized for the ten years.

The inception?to?date return figures for the Fund and comparisons to the benchmarks are similar to the 10?year figures given the Fund’s launch date of March 2005.

(For the Fund’s most up?to?date performance information, please see our web site at www.centaurmutualfunds.com.)


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Centaur Total Return Fund - Ten Year Anniversary and Thoughts on Recent Performance

The Centaur Total Return Fund achieved its 10?year anniversary in March 2015. This milestone provides a good opportunity to discuss how the Fund has performed over time across various market environments. Mutual fund performance is usually presented on a trailing basis (for example, 1 year, 3 years, 5 years, etc) as compared to a benchmark index, and in fact just such a table for our Fund appears on the previous page. While this convention is useful, it can sometimes also fail to capture important context.

Below is a slightly different presentation of the Fund’s performance by calendar year with comparisons to the S&P 500® Total Return Index (under the column “S&P500”) and to our primary benchmark, the Dow Jones U.S. Select Dividend Total Return Index (under the column “DJ US DIV”). Please note that the figures for 2005 represent the performance from the Fund’s launch date in March through year?end; the 2015 figures represent the performance for the first four months of 2015. As the table shows, from inception to end the April 2015, the Fund has out?performed our primary benchmark with a total return of 151.2% versus 99.5%.

The table above also much better illustrates the arc of the Fund’s performance over time. Namely, one can see that the Fund performed quite well for the first eight of the roughly ten years of its existence. In our view, the Fund navigated the 2008?2009 crisis and recovery far better than most equity investment vehicles. Beginning in 2013, however, the Fund’s performance began to diverge unfavorably when compared to the benchmarks.

As we look back on 2013, if we were to take a snapshot of where the Fund stood through the first nine months of that year, we would see that as of September 30, 2013, the Fund had returned 13.43% year?to?date while the benchmarks had returned between 19.0% and 19.8%. At that point, the Fund’s returns relative to the benchmarks for various historical periods looked like this:

Centaur Total Return Fund

From that point on, our two benchmark indices blasted off to finish 2013 with an amazing fourth quarter (with the S&P500 up more than 13% in the final three months) and then continued to perform well in 2014. Meanwhile, the Fund has captured a rather small percentage of these market gains.

In this letter, we will attempt to address this recent stretch of lackluster Fund performance as candidly as possible.

Centaur Total Return Fund - Three Factors

While explaining the underwhelming performance of the Fund over the last nineteen months is neither pleasant nor easy, we think it boils down to three simple factors. To rip off the band?aid quickly, since early 2013 the Fund has generally been 1) under?invested relative to the fully invested benchmarks; 2) has not been able to fully exploit the covered call component of the Fund’s strategy due to unacceptably low option premiums; and 3) has not enjoyed any really big “home run” winners from our portfolio investments over the past couple of years relative to various other periods in the Fund’s performance record.

That’s the “Cliff Notes” version. In the more lengthy discussion below, we will delve a little deeper into the three factor explanation provided above. However, the purpose of this letter is not for us to make excuses for the Fund’s inability to keep pace with a rising market in what appears to us to be the late hours of a bull market party. Rather, we simply want to make our case for why we have invested your capital in the manner that we have, and why we believe that doing so was and still remains a prudent course of action despite its recent (and we hope temporary) negative impact on the Fund’s performance.

Let’s start with valuations. From our perspective, roughly since mid?2013 we have perceived that U.S. stocks in general have been priced somewhere within a range of fully valued to significantly over?valued, at least relative to the type of valuations that we have historically been able to fully invest the Fund’s capital. We should point out that rich overall market valuation by itself hasn’t always prevented us from buying securities. After all, even in a fully valued market there can still be a lot of cheap stocks. Indeed, there have been past market periods in which prices for the general market seemed broadly unappealing to us, and yet we managed to keep the Fund heavily invested. Given the Fund’s concentrated nature and the Fund’s relatively small size we have in the past usually been able to root out enough bargains, often amongst small-cap companies, to keep the Fund well invested.

The problem with the recent market environment hasn’t been so much the overall valuations as much as the fact that there is very little price variation between securities. This is quite unusual in our experience as investors. Those readers old enough to remember the late 1990’s may also recall that even in the midst of the biggest stock market bubble of all time, one could buy “old economy” stocks for a song because the market was fully enamored with the “new economy.” Unfortunately, such a bifurcated market does not exist today. As a result of the correlation amongst securities prices, we are seeing fewer opportunities to buy discounted securities, and it takes more research time for us to find new investments because we may have to look at many ideas before finding one we like. At the same time, we have continued to trim or sell securities owned by the Fund as they reach our estimate of full value, and a certain number of positions are sold as a natural course as events or new information changes our conviction in either our valuation work or the risk factors underlying each investment. This dynamic has meant that we have struggled to replace sold ideas with new investments. The Fund’s cash level has continued to hover in a range of roughly 25?30% of the portfolio’s asset value since late 2012. In 2012 we were fortunate and managed to capture the full market return despite being only about 80% invested during the year on average, but since early 2013 even the invested portion of our portfolio has struggled to keep up with the strong stock market performance and the cash has only served to slow us down further.

Centaur Total Return Fund

Centaur Total Return Fund

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