Letter from Cobleskill – Spring 2019

“The university’s storied history centers around coaching legend John Wooden who won 10 championships, including a remarkable seven in a row. Mr. Wooden has a library of timeless quotes. One quote epitomizes the extensive research we conduct on your behalf, ‘You can’t have confidence unless you are prepared. Failure to prepare is preparing to fail.’ Our fieldwork equips us to make purchases even during times of adversity.” Letter from Cobleskill Spring 2019

Please see Fenimore disclosure.

Consumer Perspective from CAGNY Conference

FAM Funds Research Analyst Kevin Gioia, CFA

FAM recently attended the CAGNY (Consumer Analyst Group of New York) 2019 Conference where some noteworthy trends in the consumer-packaged goods space were identified:

  • Competitive Landscape: More educated consumers are demanding higher nutrition and more natural food products, along with increased convenience. Smaller companies, as well as private label (store brands), have been able to innovate much faster to meet these demands.
  • Industry Response: Legacy competitors have sought to reposition products with innovations in health & wellness and packaging, while also looking to acquire smaller, faster-growing companies.
  • Cost Management: Packaged good manufacturers are evaluating every step of the supply chain to identify waste with a goal of investing savings into growth initiatives.
  • Marketing Innovation: There are innovations in packaged goods marketing including tying products to a social cause (e.g., environmental sustainability or public health). In addition, companies are shifting spending to digital channels with many now allocating more than half of their marketing budget to e-commerce.
  • FAM Perspective: Trends aside, people want good tasting food. Our holdings in the space include a spice manufacturer that is innovating in sustainable production practices, supply chain transparency, and recyclable packaging. Another position is in a snack food provider that has deployed an asset-light approach to free up capital for innovation.

4Q18 earnings for both companies reflected the success of these innovation efforts, which should support attainment of our longer-term performance objectives for growth in market share and/or same-store  sales.

Please see Fenimore disclosure.

Bank Insights from KBW

FAM Funds CIO John Fox & FAM Small-Cap Fund Co-Manager Andrew Boord

FAM recently attended KBW’s Winter Financial Services Conference. Here are some key trends from the meeting that reinforce our investment thesis within our small regional bank positions.

  • Geographic Shift: The movement of people from high tax states to low tax states appears to be accelerating, benefiting places like Nashville, Dallas, Charlotte, and Florida, while making it harder to grow banks in other areas.
  • Industry Consolidation: The merger of SunTrust and BB&T may benefit a number of our bank holdings as impacted bankers and customers migrate to other institutions. More broadly, “merger of equals” may become a trend as there are few smaller banks in attractive urban markets left to acquire on a “bolt-on” basis.
  • Loan Growth & Quality: The outlook is for moderate loan growth in 2019. There are no systemic concerns around credit quality. Banks are being a little more careful given how long the upcycle has continued and shrinking exposure in certain areas such as hotel construction.
  • Net Interest Margins: Pressure from competition for deposits is easing and margins should be roughly flat or only slightly lower relative to 2018. Stable margins plus high loan quality support our favorable outlook for banks.
  • Culture is Key: Spending time with bank CEOs reinforces our view that leadership and culture are paramount because every bank has essentially the same opportunity set.

Please see Fenimore disclosure.

Seeking Quality at Bargain Prices

As someone once said, “The stock market is the only store in America where, when everything goes on sale, people run out the door!” However, the FAM Funds team gets excited and runs into the store seeking to invest in high-quality companies at bargain prices.

We do this with confidence because history demonstrates that stock markets tend to be fairly rational over the long term with prices typically correlating to the true economic value of the enterprises.

Discover what stocks our fund managers purchased in 2018 as well as their thoughts for 2019.
FAM Funds 2018 Annual Letters

Please see Fenimore disclosure.

Headwinds, Fundamental Analysis, & Opportunities

We are studying the economic and political concerns of the day. So far, our conclusion is that while these issues are quite real – we see many companies reporting slower growth and thinner profit margins – it remains unclear if they are severe enough to trigger a recession as some may fear.

Meanwhile, there are reasons to be optimistic. Many of the problems facing us will likely be resolved. For instance:

  • No matter your political leanings, we can all probably agree that politicians around the world tend to focus on self-preservation – while posturing is sure to be involved, we expect resolutions to both the U.S./China trade conflict and government shutdown
  • The Federal Reserve may decide that current conditions no longer warrant further interest rate increases

At the company level, challenges are usually met and overcome through a combination of ingenuity, hard work, and adaptation. With our holdings, this includes:

  • Finding suppliers outside of China to avoid tariffs, cutting costs, and raising prices to offset higher costs to the extent possible
  • Continuing efforts such as growing through product additions, entering new geographies, and acquiring smaller competitors

The economic and political backdrop in which we invest is always shifting. As a result, Fenimore tries to take advantage of opportunities when people sell due to fear and invest in enterprises that we estimate can do well, and grow, in a wide variety of scenarios.

Please see Fenimore disclosure.

FAM Equity-Income Fund Receives 5 Stars

The FAM Equity-Income Fund received a 5-Star Overall Morningstar RatingTM, as of December 31, 2018, due to performance and risk-adjusted returns.

The Fund focuses on mid-cap companies that pay dividends and seeks dividend growth, not simply high current dividends.

Listen to FAM Equity-Income Fund Co-Manager Paul Hogan Describe Their Distinct Approach

 

FAM Equity-Income Fund Performance & Expense Information Click Here

Morningstar, an independent investment research firm, currently follows 382 mutual funds in its Mid-Cap Blend Category. The Morningstar RatingTM is a quantitative assessment of a fund’s past performance — both return and risk — as measured from 1 to 5 stars. It uses focused comparison groups to better measure fund manager skill. As always, the Morningstar RatingTM is intended for use as the first step in the fund evaluation process. A high rating alone is not a sufficient basis for investment decisions.

The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

The FAM Equity-Income Fund received a 5-Star Overall Morningstar RatingTM for the 3-Year, 5-Star Overall Morningstar RatingTM for the 5-Year, and 4-Star Overall Morningstar RatingTM for the 10-Year periods ending 12/31/2018 among 382, 335, and 235 Mid-Cap Blend funds, respectively. 

©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Please consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The FAM Funds prospectus or summary prospectus contains this and other important information about the FAM Equity-Income Fund and should be read carefully before you invest or send money. To obtain a prospectus or summary prospectus and performance data that is current to the most recent month-end for each fund as well as other information on the FAM Equity-Income Fund, please go to famfunds.com or call (800) 932-3271.

Please see Fenimore disclosure.

Short-Termism: When Volatility Leads to Performance-Chasing

By Drew P. Wilson, CFA
This is the final in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

Human nature leads investors to strive for maximum returns and our industry may further condition them to always seek more, often in comparison to others. Investors feel compelled to chase performance – to sell funds (fire managers) that are underperforming and buy those funds (hire managers) that are outperforming. After all, how can one be maximizing returns if someone else is doing better? For financial advisors the temptation to chase performance may be amplified when a client asks the seemingly fair question, “Why are we keeping this underperforming fund?”

 

In a July 2014 Vanguard research study titled “Quantifying the Impact of Chasing Fund Performance,” the mutual fund firm found that performance-chasing strategies often diminish returns. The study used actively-managed, U.S. equity mutual funds available in Morningstar’s database that had been in existence for at least three of the 10 years ending 12/31/2013 (3,568 funds). With respect to this universe of funds, Vanguard took Morningstar’s nine style categories based on blend, growth, and value subsets of large-, mid-, and small-cap funds, and looked at hypothetical results for each based on buy-and-hold and performance-chasing approaches.

 

The buy-and-hold strategy was simple: invest in any fund, sell only if the fund was discontinued, and replace a discontinued fund with one of the median-performing equity funds within the style box.

 

The performance-chasing strategy invested in any fund that had above median 3-year returns for the period 2004 to 2013. Funds that achieved below median returns for a rolling 3-year period were sold and replaced with a fund that achieved an average annual return within the top 20 performing funds over the prior 3-year period. The results, detailed in the chart below, were conclusive: a performance-chasing approach may, in practice, be a hindrance to building wealth. *

* Source: Vanguard, “Quantifying the Impact of Chasing Fund Performance.” July 2014

We know the symptoms, but what’s the cure for short-termism? How should investors steel themselves against behavioral and external factors that may lead them to attempt to time the market or chase performance?

As advisors well know, the key is to have a comprehensive, understandable, long-term investment plan that can serve as a foundation. It is hard to stay the course if you do not know the course. In my view, performance against that plan should be the primary yardstick – not what others’ returns are or whether all your money managers are number one across multiple time periods.

When investors adopt long-term perspectives, the businesses in which they invest may very well do the same over time with their internal investments. I believe this prescription could be healthy for our economy and, by association, for investors’ long-term returns.

Please see Fenimore disclosure.