Dear Fellow Shareholder,
For the year ended December 31, 2015, the total return for the Polaris Global Value Fund (the “Fund”) was 1.55%, outperforming the MSCI World Index benchmark at -0.87%. Consumer staples, consumer discretionary and financials were the strongest sector contributors. Allergan was the top individual stock performer, benefitting from a spate of M&A transactions. British homebuilders and financials dominated the top 10 individual stock contributions, with Taylor Wimpey, Bellway and Barratt Developments posting double-digit gains. Ameris Bancorp and insurers, The Chubb Corp. and Hannover Re, added materially to returns. Detractors were relegated mainly to the energy sector, with declines at WorleyParsons, Marathon Oil Corp. and Maurel et Prom.
We are pleased with the annual outperformance in this volatile year, as well as our benchmark-beating performance over all longer time periods as reflected below.
2015 PERFORMANCE ANALYSIS:
In consumer staples, the Irish convenience food producer Greencore Group (LSE:GNC, Financial) was up more than 15% before calendar year end. The company rebounded strongly from the third quarter, when it faced cost pressures and one-off start-up facility charges. In the U.K. market, Greencore noted sales growth amongst grocery retailers, including players such as Sainsbury’s and Marks & Spencer. In the U.S., Greencore expanded capacity to service Starbucks and 7-Eleven. Japanese dairy, confectionery and pharmaceutical manufacturer Meiji Holdings’ stock rose markedly following news of a drug licensing agreement. Optimistic market sentiment drove the stock price to the upper end of our valuation target, and we sold Meiji at a profit earlier in the year.
The consumer discretionary sector was led by the aforementioned U.K. homebuilders, which rose as a result of more liberalized land availability. The British government instituted a five-year plan to make more municipal land available for additional housing in an effort to prevent housing prices from accelerating too fast due to supply-demand constraints.
Previously owned government and industrial sites have opened for sale, allowing homebuilders to purchase those sites that are more difficult to remediate and develop. Duni AB, a Swedish supplier of paper goods and tableware, was up on earnings news, growth in its core table top disposables, efficient operation of its paper mill and favorable exchange rates. Chinese lottery company REXLot Holdings, Ltd. diminished sector returns, as the trading suspension continued due to accusations of accounting irregularities. REXLot Holdings also faces bond repayment demands due to the suspension in its stock trading and reported limited ability to withdraw cash recently invested to expand its China operations.
The Fund’s U.S. holdings led financial sector performance, with many banks anticipating that a December 2015 Federal Reserve rate hike would improve net interest margins. However, we believe the impact on bank earnings will likely be muted in the near term. Merger & acquisition activity was the true impetus for stock performance over the past year, with double-digit gains from Ameris, BNC Bancorp and Webster Financial. During the year, Ameris (ABCB, Financial) announced a buyout of Jacksonville Bancorp Inc., and the successful integration of 18 Bank of America branches, as well as branches of Merchants & Southern Bank of Florida. BNC continued an accelerated pace of acquisitions, with more than a half dozen announced takeovers during the year. Webster Financial Corp. completed its acquisition of the health savings account business of JPMorgan Chase Bank, thereby acquired approximately 785,000 accounts, including $1.3 billion in deposits and $185 million in other assets. The Chubb Corporation, a property and casualty insurer in the U.S., appreciated rapidly after Zurich-based ACE offered a 30% premium to buy Chubb and form a global property/casualty insurance leader. Standard Chartered, with its heavy Asian emerging markets exposure, was a sector detractor. The stock dropped after the company announced a $ 4.8 billion rights offering following an earlier dividend cut, both of which were intended to shore up capital in advance of loan and regulatory issues. Increasing impairment reserves impinged on performance of Norwegian banks, DNB Bank and SpareBank 1 SR.
In healthcare, pharmaceutical maker Allergan PLC (AGN, Financial) was expected to achieve 80% of an estimated $1.8 billion in synergies stemming from recent acquisitions by the end of the first quarter of 2016. With valuable drugs like Botox and a rich R&D pipeline, Allergan was approached by Pfizer. Pfizer held preliminary and friendly discussions to acquire Allergan, which will offer Pfizer a low tax domicile in Dublin. M&A activity was also heating up in the health insurer industry, with the CFO of Anthem Inc. (ANTM, Financial) suggesting the company could make a “meaningful” acquisition. Thereafter, Anthem entered negotiations to buy Cigna. In addition to this strategy, Anthem also announced strong earnings, deploying capital in the form of share buybacks and dividends. Similarly, UnitedHealth reported better -than-consensus earnings with upside in their Optum and health care segments. Profits at both companies may continue to grow on increased customer enrollments due to the Affordable Care Act. Teva Pharmaceutical (TEVA, Financial) achieved strong profits, noting better-than-expected Copaxone sales. The company’s strategic initiatives, including the takeover of Allergan’s Actavis generic drug business and the joint venture with Takeda in Japan, were well received. This will further cement Teva’s position as the global leader in generics and help the company negotiate with its customers.
German telecom provider, Freenet AG, had double-digit gains after publishing strong revenues, attributable to high customer ownership and demand for mobile digital lifestyle services. Japan’s KDDI Corp. had similarly solid results throughout the year, announcing increased operating revenues due to a steady rise in mobile communications sales. Frontier Communications Corp. conducted a secondary offering to finance its acquisition of Verizon’s wireline assets in California, Florida and Texas. The stock apparently declined due to the dilutive effect of this additional equity coming into the market. We believe this to be a short-term concern, as the acquisition is expected to bolster Frontier Communications Corp.’s scale of business over the next few years.
The year was marked by volatility in commodity prices, which had a negative effect on some materials and energy companies. Better performance was noted amongst materials companies whose products ultimately sell into more defensive end markets, like German flavors and fragrance producer Symrise and beverage can supplier Rexam. The stock price of Rexam also rose as it entered talks regarding a possible sale to U.S. competitor Ball Corp. On the other end of the spectrum, Canada’s Methanex Corp. saw methanol prices drop more than 30% due to lower commodity prices. Lower prices of coal used to produce methanol in China also impacted the stock. BHP Billiton was down toward year end, as the company faced concerns about lower prices for its products due to reduced global demand. Additionally, an iron ore joint venture between BHP and Brazil’s Vale experienced a failure of multiple tailing dams.
Energy and oil services stocks dropped in tandem with oil prices over the past year. At the portfolio level, we sought to diversify holdings amongst both oil exploration/production (E&P) and the more impervious refining businesses. By year end, oil E&P companies Tullow Oil, Marathon Oil and Maurel et Prom were sold. Refining companies were retained, based on the premise that lower crude oil input prices will help refining margins. This proved true during the year, with refiners Thai Oil and Marathon Petroleum each achieving double-digit returns. Australia’s WorleyParsons was the main sector detractor.
The following table shows the Fund’s asset allocation at December 31, 2015.
INVESTMENT ENVIRONMENT AND STRATEGY:
The first two quarters of 2015 were in positive territory, offering optimism to a skittish market. By the third quarter, the MSCI World Index was down more than 8%. The fourth quarter recovery was a welcome respite from the previous quarter’s stock market volatility. However, we expect to continue to see cross winds amongst the companies in which we invest. Industrial and materials companies may see further weakness, likely offset by gains in consumer discretionary and consumer staples stocks. Lower commodity and energy prices will eventually flow through to the end prices of consumer goods. As costs go down consumption may rise, boding well for the U.S. economy as evidenced by record U.S. car sales and solid housing demand. Other developed markets will likely follow the stronger U.S. economy, although the time lag is usually two to three years. However, the same can’t be said for emerging markets, which have suffered credit risks, and in some cases currency collapse, related to U.S. dollar borrowing. We are also watching the corporate credit and high yield markets. Credit markets are often first to identify economic problems, which are then later reflected in equity markets.
In the meantime, our research team continues to pinpoint potential investments, many of which are small- and mid -cap companies. Market volatility has increased the number of companies passing our year-end screens, and we believe many of the new companies to be good quality businesses.
As always, we welcome your questions and comments.
Sincerely,
Bernard R. Horn, Jr., Portfolio Manager
