Dear Fellow Shareholder,
The Polaris Global Value Fund (the "Fund") outperformed the benchmark, MSCI World Index (the "Index"), for the six- month period ended June 30, 2014. The Fund returned 6.73% versus the Index, which was up 6.18%. We believe that the outperformance year-to-date and over longer annualized periods is attributable to Polaris’ value philosophy, global investment universe and fundamental stock analysis conducted by an experienced investment research team.
Recent accolades have included a four-star Morningstar Overall Rating™ for risk-adjusted performance among 825 World Stock funds for the period ended June 30, 2014. Additionally, the Fund received two 2014 Lipper Fund Awards in the global multi-cap value fund category, as the Fund posted strong returns for the 3- and 5-year periods through December 31, 2013. In the Lipper Universe, a total of 60 funds over a three-year period, and 47 funds over a five-year period, were eligible for this category distinction. The Fund has been recognized by Lipper many times in the past for its performance during 3-, 5- and 10-year periods.
*Inception-to-date (Inception 7/31/1989)
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Returns for more than one year are annualized. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost.
For the most recent month end performance, please call (888) 263-5594. As stated in the current prospectus, the Fund’s total annual operating expense ratio is 1.32%. However, the Adviser has agreed to waive its fee and/or reimburse expenses to limit Total Annual Fund Operating Expenses (excluding all taxes, interest, portfolio transaction expenses, dividend and interest expense on short sales, acquired fund fees and expenses, proxy expenses and extraordinary expenses) to 0.99% through April 30, 2015. Shares redeemed or exchanged within 180 days of purchase will be charged a 1.00% fee. Fund performance returns shown do not reflect this fee; if reflected, the returns would have been lower. Past performance is no guarantee of the Fund's future performance, and an investment should not be made based solely on returns.
SIX MONTH PERFORMANCE ANALYSIS:
The Fund’s continued success against the benchmark was attributed to positive absolute performance in all sectors, led by health care, consumer discretionary and materials. More than 30% of the Fund’s holdings posted double-digit returns with notable contributions from Forest Laboratories (FRX), Greencore Group (LSE:GNC), Duni AB (OSTO:DUNI) and Teva Pharmaceutical (MIL:TFI). Smallest sector contributors included information technology and industrials, with companies GTECH (MIL:GTK), Wincor Nixdorf (XTER:WIN) and Marathon Petroleum Corp. (MPC) detracting.
Nearly one third of Fund performance was due to holdings in the health care sector, with all seven companies in positive territory. Pharmaceutical maker Forest Laboratories (FRX) had double digit returns on news of its acquisition by Actavis PLC, the world’s second largest generic drug maker. Prior to this transaction, Forest Labs conducted a company restructuring, increased its product pipeline and initiated a stock buyback, all of which helped boost the stock valuation at the time of Actavis’ $25 billion acquisition bid. The aggressive bid by Actavis also boosted the stock price of Teva Pharmaceutical (MIL:TFI), another large generic drug maker in the Fund’s portfolio.
Performance in consumer staples holdings was spearheaded by Irish convenience food producer Greencore Group (LSE:GNC). Greencore made a strategic acquisition of Lettieri’s, a U.S. manufacturer of food-to-go products for convenience stores like 7-Eleven. The company also announced plans to build a greenfield sandwich manufacturing facility in Rhode Island, which is expected to service New England and New York. Japan’s Asahi Group Holdings (TSE:2502) and Meiji Holdings (TSE:2269) also added to sector gains. Asahi Group is capturing market share for beer in Japan and its soft drink margins continue to improve.
Strong results in the materials sector included German flavors and fragrance maker, Symrise, and specialty crop fertilizer company, Yara International. Symrise (XTER:SY1) was up after announcing stable results from each of its divisions worldwide, with notable sales in emerging countries. Subsequently, the company completed a capital raise to finance its acquisition of French food ingredient maker Diana Group. An early 2014 purchase, Norway-based Yara International (OSL:YAR) reported strong earnings, with better operating margins, while announcing record deliveries and an impressive order book through 2014. LANXESS AG (XTER:LXS), a specialty chemical company engaged in synthetic rubber and tire durability products, was another material purchase during the first quarter of 2014.
The share price for Duni AB (OSTO:DUNI), a Swedish table napkin maker, rose admirably during the six-month period, which helped offset subpar performance among other consumer discretionary holdings. In an earnings release, Duni highlighted improved operating profitability and European market share gains. The company also announced the acquisition of Paper+Design Group, a German company with a dominant position in designer napkins sold in consumer markets throughout Europe. British homebuilders added to sector performance, benefiting from rising home prices and volumes, as well as the extension of the U.K. government home buying scheme. The main consumer discretionary detractor was Italian lottery/gaming operator GTECH (MIL:GTK), which dropped after rumors emerged of a potentially expensive acquisition of a casino machine equipment manufacturer. Investors were concerned that the proposed transaction would add more debt to GTECH’s balance sheet.
Only one consumer discretionary stock was sold during the six-month period. Valassis Communications (VCI), a U.S. direct mail/geography targeted advertising company, was originally added to the Fund in October 2013. By mid-February 2014, the company was acquired by Harland Clarke Holdings Corp. at a 20% premium over Valassis’ closing price as of December 17, 2013.
Financials were led by Swedish investment holding company Investor AB (OSTO:INVE B), as its net asset value increased by 11% during the six-month period on the back of good core investment returns from SEB, Atlas Copco, AstraZeneca and others. German reinsurers Munich Re: and Hannover Re: also contributed. U.S. bank Southwest Bancorp (OKSB) reported positive fourth quarter and annual 2013 earnings and reinstated quarterly common stock dividends. The company’s optimism extended to the hiring of professionals tasked with building Southwest’s loan portfolio. Texas-based International Bancshares (IBOC) reported healthy first quarter 2014 results. The banking institution pointed to rising net interest margins, attributable to higher net interest income from its investment portfolio, an increase in outstanding high quality loans, and a decrease in interest expense on securities sold under repurchase agreements. The main sector detractor was Standard Chartered (LSE:STAN), which announced slower growth in emerging markets and a write-down on its South Korean business. During the six-month period, we purchased Norwegian savings bank Sparebank 1 SR (OSL:SRBANK), which has low loan losses and improving net interest margins, and N.Y.-based Dime Community Bancshares.
The Fund’s utility holdings were led by double-digit returns in Hong Kong water utility Guangdong Investment and U.S. clean energy company NextEra (NEE). Guangdong (HKSE:00270) instituted quarterly reporting, signaling greater transparency for investors, and announced wastewater expansion initiatives. Water tariff increases are also anticipated during upcoming contract renegotiations.
Strong performance within the telecommunications sector was due to U.S.-based Frontier Communications, and Germany-based Freenet AG and Deutsche Telekom (XTER:DTE). Frontier (FTR) reported stable fourth quarter 2013 earnings that beat analyst estimates, benefiting from customer retention, increased revenue per customer and new broadband subscribers. The company expects that the AT&T Connecticut wireline purchase may help increase Frontier’s free cash flow and dividend payouts. Freenet (XTER:FNTN) exceeded its own guidance for 2013, led by mobile communications and digital lifestyle services.
High energy prices in combination with merger & acquisition activity in oil exploration and production helped boost energy sector returns. The Fund’s holdings in Sasol (SSL), Marathon Oil (MRO), Tullow Oil and Maurel et Prom (XPAR:MAU) contributed. We purchased Tullow Oil (LSE:TLW) in late 2013 on the expectation that political turbulence in oil producing nations will continue and the resulting supply disruptions will sustain higher oil prices; this theory held merit, as oil prices remained firm in the first half of 2014. Tullow’s reserves have nearly tripled in the past seven years and the company has a large position in Ghana, Uganda and Kenya, where it helped discover vast oil and gas resources.
Industrial sector returns were mixed, with positive performance by Loomis AB, General Dynamics, Trevi Finanziaria (MIL:TFI) and BBA Aviation (LSE:BBA) offset by negative returns in four Finnish companies, many of which have previously capitalized on emerging country growth. Loomis AB (OSTO:LOOM B) was up on good earnings, increasing margins and a new contract with Bank of America. The agreement states that Loomis will manage cash processing and check imaging services for 30 locations in the U.S., which is expected to generate more than $20 million in annual revenue for Loomis, while lowering costs for Bank of America. General Dynamics (GD) announced strong earnings, with growth in the aerospace sector and a hefty backlog in combat and marine systems. Among the underperformers were KONE (OHEL:KNEBV), the elevator and escalator maker, which declined on slowing residential construction in China; Konecranes (OHEL:KCR1V), which dropped on slower product sales in emerging markets; building systems Caverion (OHEL:CAV1V) that declined on general restructuring; and YIT Oyj (OHEL:YTY1V), which was down due to slower Russian construction activity.
Many of the Fund’s U.S. information technology companies posted healthy results, including Xerox Corp. (XRX), Hewlett- Packard (HPQ), Western Union (WU) and Microsoft Corp (MSFT). These returns couldn’t mitigate declines at Wincor Nixdorf (XTER:WIN), as the company announced lower revenues due to slowing emerging European market (Turkey, Russia) sales. Nevertheless, the CEO reassured investors that 2014 growth targets were still attainable.
INVESTMENT ENVIRONMENT AND STRATEGY:
Although we appreciate the global market gains over the past few quarters, we are concerned that such upward mobility may be partially due to greater liquidity and loose central bank monetary policy. The Bank for International Settlements noted that such fiscal policy could create asset bubbles and increase debt harmful to long-term economic prosperity. We concur with this assessment, and are careful to identify signs of economic weakness, including the recently contracting U.S. gross domestic product and slowing development in select Asian markets.
We also see pockets of growth throughout the world, with marginal improvements in some European countries, India, China and select emerging markets. Even the U.S. has positive indicators (rising home sales and better U.S. manufacturing activity) that we believe may indicate sustainable momentum. However, these macro-economic conditions do not drive our investment approach. Our focus remains on fundamental analysis – seeking to identify the most undervalued stocks that may be capable of growing stronger in difficult economic environments, while performing admirably in growth cycles too.
As always, we welcome your questions and comments.
Sincerely,
Bernard R. Horn, Jr.
Portfolio Manager
