By Tom Putnam
Despite the fact that we just observed the second birthday of the current Bull Market, anxiety remains prevalent. People are nervous about things such as rising oil and gas prices, the tragedy in Japan, Middle East conflicts, government deficits both home and abroad, and the unemployment rate. This angst is understandable, yet Fenimore Asset Management, the investment advisor to FAM Funds, has successfully navigated other challenging times over the past four decades. While these adversities may seem unique, similar times have occurred repeatedly throughout history. We do not know what the future holds, but based upon our research we do know that the businesses we invest in are optimistic about the present economic environment and, perhaps more importantly, their own economic prospects.
Since Fenimore was founded in 1974, we have focused on preserving our investors’ assets and maximizing total return on capital. We believe downside protection is as important as upside potential. Preventing or mitigating a problem beforehand is less costly than trying to fix it later – this is also true with investing. Although FAM Funds may lag more aggressive mutual funds at times, our Funds typically hold up better in downturns.(1) Over time, FAM Funds’ results have been competitive and with more stability than most.
Our regular company visits are at the heart of our risk-conscious research and investment process. Fenimore defines risk as permanent loss of capital. We feel that the close relationships we develop with the management teams of the enterprises we invest in through the Funds, along with our in-depth knowledge of their operations, help us create a safer environment for our shareholders long term. This year is the same as the previous 36 years; our Research Team has already been on the road visiting with the leadership of many corporations and looking under the hood. It is this company-level, grass-roots research that gives us conviction about investing in a business – especially during declines.
Across different industries we are hearing a consistent theme from both the Funds’ holdings and prospective investments we are analyzing. As we visit with them, the voice of corporate America is reinforcing our thesis that we outlined in our winter newsletter about entrenched, positive trends. These are the main messages:
Economic Improvement: The economy continues to rebound, including: GDP (gross domestic product) growth for six straight quarters; rising industrial production; improved retail sales and consumer confidence; a reduction in unemployment rates; and increased automobile sales. Sales for all companies at the retail, wholesale, and manufacturing levels increased two percent in January for the seventh consecutive monthly gain. It’s also reassuring to know that enterprises are hiring once again, albeit slowly. The latest government jobs report showed the unemployment rate below nine percent for the first time in two years.
Corporate Profitability: American businesses are in very good shape financially. In fact, 2010 was the second best year of profits for S&P 500 firms since 1988 and earnings for most publicly-traded, U.S. corporations have risen consecutively for multiple quarters. Plus, they maintain record levels of cash on their balance sheets. This cash is being used to do things like pay dividends, reduce debt, expand operations, and buy back stock. Likewise, FAM Funds’ holdings are financially healthy and are deploying their capital wisely for the benefit of shareholders.
Mergers & Acquisitions (M&A): Management teams have been very active making acquisitions with their abundant cash resources. We are observing a rise in merger activity and several of our holdings have been involved in buying other companies to increase growth and shareholder value.
International Growth: Many U.S. corporations are growing overseas which has also boosted profits. Several foreign economies are growing considerably faster than ours and about half of the enterprises represented in FAM Funds conduct business abroad. As a result, FAM Funds’ shareholders are benefiting from this overseas growth with the security of American accounting and legal standards.
FAM Funds Milestones!
Did you know that April 2011 is the 15th Anniversary of the FAM Equity-Income Fund? It is one of 251 equity income funds and one of just three in the mid-cap space.(2) Also, 2012 will mark the FAM Value Fund’s 25th Anniversary! When we launched the Value Fund in 1987, we were one of 386 equity mutual fund choices and one of only 63 value funds.(3) Today, there are almost 10,500 equity funds worldwide!
The mutual fund landscape has certainly changed over the years and we have witnessed many monumental events along the way, but our investment philosophy remains steadfast. We have been faithful to our promise of trying to build a foundation of trust with you, our shareholders, while investing in quality, durable companies at reasonable prices with the goal of creating wealth over the long term.
Although it may not always be smooth sailing, the destination will be reached. The businesses invested in through FAM Funds are profitable, prudently financed, and well-managed. These attributes should help stimulate growth at the company level, increase a stock’s value, and grow assets for shareholders over the long term.
1 Morningstar Analyst Report, FAM Value Fund, 2-28-11, “Bank on it to crank out decent gains while lagging racier rivals in big market rallies, while also holding up better in downdrafts.”
Morningstar Analyst Report, FAM Equity-Income Fund, 2-28-11, “This fund proves avoiding losses is a big part of generating long-term gains.”
2 Morningstar Principia.
3 Morningstar Principia.