DEAR FELLOW SHAREHOLDERS:
For the six-month reporting period ended December 31, 2019, Adviser Class shares of the Olstein All Cap Value Fund appreciated 9.26%, Class C shares of the Fund appreciated 8.64% and Class A shares of the Fund appreciated 9.06%. During the same six-month period, the Russell 3000® Value Index appreciated 8.80% and the Russell 3000® Index appreciated 10.37%. For the calendar year ended December 31, 2019, Adviser Class shares of the Fund appreciated 28.46%; Class C shares appreciated 27.15% and Class A shares appreciated 28.09%. The Fund’s primary benchmark, the Russell 3000® Value Index, appreciated 26.26% during calendar year 2019.1
MARKET OUTLOOK
On July 2, 2019. the start of the Fund’s current fiscal year, the U.S. economy established a new record for the longest expansion in history, breaking the record of 120 months of GDP growth from March 1991 to March 2001, according to the National Bureau of Economic Research. This growth cycle, which started in June 2009, continued through the end of the calendar year and fueled all-time highs in U.S. equity markets. On December 17, 2019, both the Dow Jones Industrial Average and S&P 500 indices reached all-time closing highs, while a day later the NASDAQ Composite Index reached an all-time high. In fact, all of these major stock market indices continued to establish further highs into early 2020. Reaching these milestones has increased the underlying chatter by the press and public fearing an equity market pullback. However, the market gains over the past five years have been led by the high growth social media and Internet companies now dominating the large cap averages (e.g. S&P 500 Index). Although more mature free cash flow generating companies finally appreciated meaningfully in 2019 (resulting in outstanding returns for funds that focus on undervalued free cash flow companies), we are still finding many free cash flow generating securities that we believe are undervalued. In our opinion, the public’s focus on the high sales growth new age companies, with little attention being paid to free cash flow multiples to value companies, has resulted in values being severely depressed in the less exciting value segment of the market. Although we expect continuing worldwide trade conflicts, political uncertainty, and increased nervousness about a possible economic slowdown to cause spikes in short-term overall market volatility, we will continue to focus on identifying individual company undervaluation by looking behind the numbers of financial statements. The emphasis of our valuation process centers on estimating a company’s ability to generate future normalized free cash flow after performing a forensic analysis of a company’s financial statements. We look for signs that indicate potential changes in future free cash flow that we believe may not be properly valued by the market. Since we approach equity markets as an ongoing re-evaluation of individual businesses, we continually search for investment opportunities that offer significant appreciation potential and compelling risk/reward tradeoffs. Remaining true to our investment discipline, we seek to buy such companies at a significant discount to our determination of their intrinsic values, and intend to seize on market dips as buying opportunities to either strategically add to existing positions in the portfolio that still remain undervalued, or initiate positions in companies with these essential characteristics. Risk assessment is always a component of our valuation process. Our major emphasis in seeking to manage risk is paying what we believe is the right price, after performing an exhaustive analysis of a company’s financial statements and reporting practices to value the company.
OUR STRATEGY
Our current portfolio consists of companies that we believe have sustainable competitive advantages, discernible balance sheet strength, outstanding disclosure and reporting practices (accounting) which are in accord with economic reality, and finally, management teams that emphasize decisions based on cost of capital calculations and deploy free cash flow to create shareholder value. We will remain focused on individual companies, their operations, and prospects for maintaining or growing sustainable free cash flow. From our perspective as long-term value investors, we recognize that companies generating sustainable free cash flow are well positioned to compete profitably during both favorable and challenging economic environments. In addition, we believe companies possessing the aforementioned characteristics have a higher probability of delivering long-term value to their shareholders. As always, we will continue to focus on companies which we believe are not properly valued by the market because of short-term problems or over all market negativity, and demonstrate a commitment to maintaining a strong financial position; have realistic accounting, generate sustainable free cash flow and are led by management teams that intelligently deploy cash to increase returns to shareholders. Our quest for value will be guided by two requirements: (1) a company’s ability to generate sustainable future free cash flow and have realistic accounting (2) securities prices that allow us to buy good companies, with solid balance sheets, and profitable business models, at what we believe to be very advantageous prices. These two requirements have always guided our investment process and have resulted in allowing the fund to achieve its investment objective of long-term capital appreciation.
PORTFOLIO REVIEW
At December 31, 2019, the Olstein All Cap Value Fund portfolio consisted of 92 holdings with an average weighted market capitalization of $105.82 billion. During the six-month reporting period, the Fund initiated positions in four companies and strategically added to positions in four companies. Over the same time period, the Fund eliminated its holdings in six companies and strategically decreased its holdings in another eight companies.
Positions initiated during the last six months include: Booking Holdings (BKNG, Financial), Dine Brands Global (DIN, Financial), Middleby Corp. (MIDD, Financial), and Spirit Airlines (SAVE, Financial). Positions eliminated during the reporting period include: AGCO Corporation (AGCO, Financial), Hologic (HOLX, Financial), IBM (IBM, Financial), Lam Research Corporation (LRCX, Financial), Skechers USA (SKX, Financial), and Starbucks Corporation (SBUX, Financial).
During the reporting period, the Fund sold its holdings in Hologic, Lam Research Corporation, Skechers USA, and Starbucks Corporation as the stock price of each of these companies reached our valuation. As the company’s stock price moved closer to our valuation, the Fund liquidated its position in AGCO Corporation to reduce the portfolio’s overall exposure to the Industrials sector. The Fund also eliminated its position in IBM Corporation as we lost confidence in the effectiveness of the company’s turnaround strategy.
Our Leaders
Leading performers for the six-month reporting period ended December 31, 2019, included: Lam Research Corporation, Apple Inc. (AAPL), Generac Holdings (GNRC), CVS Health (CVS), and Western Digital Corporation. At the close of the calendar year the Fund continued to maintain positions Apple Inc., Generac Holdings, CVS Health, and Western Digital Corporation (WDC). During the reporting period, the Fund liquidated its positions in Lam Research as the price of the company’s stock reached our valuation. We continue to hold positions in all the remaining companies, although our positions may have been pruned as the discounts (deviation between market value and our calculation of intrinsic value) were reduced.
Our Laggards
Laggards during the six-month reporting period included: Franklin Resources Inc. (BEN), Viacom Inc. (VIA), DuPont de Nemours, Inc. (DD), Tapestry Inc. (TPR) and Dollar Tree, Inc. (DLTR). At the close of the reporting the Fund maintained positions in all five of these companies, and we have added to our positions as the discounts increased.
FINAL THOUGHTS
For the past 25 years the Fund’s investment discipline centered on understanding a business, its potential to generate sustainable free cash flow, and ultimately its value. It is our opinion that more and more investment advisors are abandoning long-term fundamental value investing, creating opportunities for us to buy unloved, unexciting and undervalued companies being ignored by the investment public at what we believe are significant discounts. For the past five years, the above average stock performers have been dominated by Internet and social media companies with high sales growth, but with little attention paid to free cash flow generation when valuing companies. However, we are starting to see early signs (see performance chart in back of report) of a movement back to value investing, based on what we believe is severe undervaluation created by market dynamics in the recent past in which above average sales growth has been the dominant metric to value companies, rather than future free cash flow generation. We believe that paying the right price is the most important metric to consider when seeking long-term returns while attempting to manage risk. Despite large upward price appreciation in some of our value stocks during 2019, we believe there are still ample opportunities in free cash flow companies. We don’t deviate from our looking behind the numbers, well defined investment and valuation criteria. We do not expect to perform all of the time, as we believe that goal creates a major impediment to our long-term objective of performing over time. Patience is the most valued characteristic of a value investor. We wait for the right conditions and downward price movements to buy such companies at what we believe are advantageous prices that increase the chance for a successful investment outcome. Paying the right price, (price, price, price) is our way of seeking to limit risk without sacrificing upside potential.
We value your trust and remind you that our money is invested alongside yours as we work hard to accomplish the Fund’s objective of long-term capital appreciation.
Sincerely,
Robert A. Olstein
Chairman and Chief Investment Officer
Eric Heyman
Co-Portfolo Manager
The performance data quoted represents past performance and does not guarantee future results. The Olstein All Cap Value Fund’s Class C average annual return for the one-year, five-year, and ten-year periods ended 12/31/19, assuming reinvestment of dividends and capital gain distributions and deduction of the Olstein All Cap Value Fund’s maximum CDSC of 1% during the one-year period, was 26.15%, 5.47%, and 10.13%, respectively. Per the Fund’s prospectus dated 10/28/19, the expense ratio for the Olstein All Cap Value Fund Class C was 2.19%. Performance and expense ratios for other share classes will vary due to differences in sales charge structure and class expenses. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance quoted. To obtain performance data current to the most recent month end, please go to our website at www.olsteinfunds.com.
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