Letter from Cobleskill

 by Tom Putnam

I love autumn in Upstate New York. The air is crisp, the colors dazzle and the views are spectacular! Over the years I have enjoyed an occasional climb in the nearby mountain ranges, but I am not an avid hiker like the Adirondack Forty-Sixers. This organization recognizes those who have climbed the 46 High Peaks in the Adirondack Mountains. It is a group that reminds me of investors and our journey. I believe there are several similarities between us including one essential – having the right gear so that we are prepared for climate changes and rough terrain.

We have faced various obstacles since the financial crisis, but despite these challenges stocks have performed well. Today, we have new weather patterns. They include: certain trend reversals in economic data; currency exchange rates; a deceleration in China; and slowing corporate profit growth compared to last year’s record levels.

Over the past few years, we observed that most parts of the American economy were slowly improving except for residential housing which was feeble. In recent months, we have seen the opposite. The overall U.S. economy grew at a 2% rate in the first quarter and then retreated to a sluggish 1.5% annual pace in the second quarter. Interestingly, residential housing showed a clear improvement. From April to May, sales of both new and existing homes increased and national prices rose 2.2%. The upward trend in home prices continued with the July 2012 numbers marking the fifth consecutive increase both month-over-month and year-over-year. Builder sentiment has also improved.

Additionally, as trepidation over Europe has continued, the U.S. dollar has strengthened. Due to this, the second quarter saw large domestic companies that conduct substantial European business incur a drag on revenue because of currency exchange rates.

China is experiencing a drop-off as well. Although its economy grew 7.6% in the second quarter, it is China’s slowest pace since 2009. On the company level, we have noted a reduction in orders from China placed with the industrial businesses we follow.

In the near term, it is likely that fears and economic factors may continue to manifest themselves as market fluctuations – regardless of a company’s success. We also expect our economy to continue at its slow-growth pace.

Confidence in Our Holdings

Despite these hindrances, we are still enthusiastic about investing in equities. We believe we have the right gear – adept Research Analysts, a time-tested investment process, and quality holdings. And we are prepared for climate changes and rough terrain. Our seasoned team is analyzing more companies and more industry sectors than ever before. This allows us to invest in what we think are our very best ideas for the long term. We like financially solid enterprises with strong free cash flows, high returns on invested capital, sustainable competitive advantages, and astute leadership that can create shareholder value and potentially grow in virtually any environment.

Remember, downward price volatility provides us with the opportunity to invest in sound businesses at a discount to our estimate of their intrinsic value. At times when “the crowd” sells stocks indiscriminately – including those of high-quality, well-managed companies – we are prepared to take advantage of the opportunities that arise and strengthen our mutual funds for the long haul. We expect the majority of our holdings to continue to grow their economic value over time and believe that this will eventually be reflected in their stock prices.

FAM Funds Independent Trustees

After many years of service on behalf of FAM Funds’ shareholders, C. Richard (Dick) Pogue has retired from the board of Independent Trustees. As a mutual fund industry veteran, Dick’s insights, integrity, and intelligence were invaluable and he always kept you, the shareholder, at the forefront of his mind. He is a consummate gentleman and we will miss him. Thank you Dick!

Simultaneously, we are fortunate to have Donald J. Boteler, retired Vice President, Operations and Continuing Education, of the Investment Company Institute, join the rest of the highly-qualified FAM Funds Independent Trustees. Don is a mutual fund industry expert and we look forward to his keen observations and recommendations during what we expect to be a long-term relationship. Welcome Don!

Updated FAM Funds Logo

Fenimore Asset Management is the investment advisor to the Fenimore Private Client Group and FAM Funds. In order to demonstrate our unity of purpose and the vision that guides us, we have updated our logos and combined the colors meshing the Fenimore burgundy and FAM blue. Over time, you will see the new logo appear on communications materials. Our hope is that people will recognize that Fenimore and FAM Funds are a part of the same family and feel the same comfort and confidence whenever they see one of the logos.

New FAM Funds logo

If you have any questions or simply want to chat with a reassuring professional, please call one of our in-house FAM Shareholder Services representatives at 800-932-3271. Thank you for your enduring trust.

Please see Fenimore disclosure.