Steven Scruggs' FPA Queens Road Small Cap Value Fund 1st-Quarter Commentary

Discussion of markets and holdings

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May 24, 2021
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Dear Shareholders:

FPA Queens Road Small Cap Value Fund ("Fund") returned 13.26% in the first quarter of 2021. This compares to a 21.17% return for the Russell 2000 Value Index in the same period. The first quarter was a strong one for global markets, particularly for domestic small-cap equities, and the Fund's portfolio participated. Equities held by the Fund returned 16.65% in the first quarter.1 The Fund's top five performing positions added 4.92% to our return while the bottom five detracted 0.38%.

Developments in the Fund's holdings explain, in part, their stock price movements.

  • MasTec (MTZ, Financial) continues to benefit from the accelerating growth in 5G wireless and fiber broadband buildout, as well as clean energy initiatives. The company expects to significantly benefit from the major infrastructure programs currently being discussed in Washington.
  • Synaptics' (SYNA, Financial) strategic shift to higher-margin business is bearing fruit as operating margins continue to rise. The company's new product releases and accelerating growth in its primary markets bodes well for the long-term outlook.
  • ServisFirst Bancshares (SFBS, Financial) is benefiting from a steepening yield curve and an expected bounce back in loan demand as the economy continues to recover from the COVID crisis.
  • Concentrix (CNXC, Financial), which was recently spun off from portfolio holding Synnex, continues its track record of strong growth in spite of COVID headwinds. Although the stock price has appreciated considerably this year, we believe the valuation remains reasonable.
  • Oshkosh (OSK, Financial) recently won a contract to deliver the next generation of postal vehicles, an award covering between 50,000 and 165,000 units over the next 10 years. Additionally, the company's largest segment, Access Equipment, is expected to have a healthy recovery this year, following a sharp COVID-related slowdown last year.
  • Science Applications International (SAIC, Financial) shares declined during the quarter as the company announced a decrease in bookings and a larger-than-anticipated COVID impact.
  • Livent (LTHM, Financial) shares reversed course during the quarter after a strong 2020. The stock has been weighed down by concerns over increased competition in the production of battery-grade lithium, the company's primary product.
  • Equity Commonwealth (EQC, Financial) a new holding we began purchasing during the quarter fell on no significant news.
  • Graco (GGG, Financial), a position held since 2002, was down fractionally in spite of a strong earnings report.
  • Graham Corporation's (GHM, Financial) stock price slipped despite management's optimist expectations of a strong post-COVID recovery in revenue growth and margin expansion.

As the COVID vaccination rate increases rapidly in the United States, there is hope that the worst of the pandemic will soon be behind us. Listening to first quarter earning calls, there was a great deal of optimism from company executives with expectations that pent-up demand will provide strong economic growth in 2021. The biggest concerns we've heard from management teams relate to inflation, supply chain logistics, and finding enough skilled workers to meet demand. Continued monetary stimulus and easy money policies from the Fed are also helping the outlook. However, we believe a strong economic recovery is already largely priced into the market. Potential headwinds could arise from a change in trajectory of COVID infections, corporate tax changes, or regulatory decrees coming out of Washington.

As we look at the Fund's portfolio holdings, we feel comfortable with how we've positioned the portfolio. Although broad measures of valuations currently appear inflated, we are confident in the valuations of the Fund's portfolio holdings. Based on what we are hearing from management teams, we think economic growth in 2021 will be robust and that inflation concerns, although real, will be short-lived as pandemicrelated bottlenecks fade and supply chains get back to normal.

We plan more extensive shareholder letters about the Fund and our broader market views at mid-year and at year-end. In the interim, we will continue to scout for attractively priced small-cap companies that are in sound financial condition, led by strong management teams, and operating in growing industries.

Respectfully,

Steve Scruggs

Portfolio Manager

April 19, 2021

1 The long equity performance of the Fund is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Long equity holdings include common and preferred securities. The long equity performance information shown herein is for illustrative purposes only and may not reflect the impact of material economic or market factors. No representation is being made that any account, product or strategy will or is likely to achieve profits, losses, or results similar to those shown. Long equity performance does not represent the return an investor in the Fund can or should expect to receive. Fund shareholders may only invest or redeem their shares at net asset value.

2 Reflects the top five contributors and detractors to the Fund's performance based on contribution to return for the quarter. Contribution is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. The information provided does not reflect all positions purchased, sold or recommended by FPA during the quarter. A copy of the methodology used and a list of every holding's contribution to the overall Fund's performance during the quarter is available by contacting FPA Client Service at [email protected] It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities listed. GICS is Global Industry Classification Standard.

Important Disclosures

This Commentary is for informational and discussion purposes only and does not constitute, and should not be construed as, an offer or solicitation for the purchase or sale of any securities, products or services discussed, and neither does it provide investment advice. Any such offer or solicitation shall only be made pursuant to the Fund's Prospectus, which supersedes the information contained herein in its entirety. This Commentary does not constitute an investment management agreement or offering circular.

The statements contained herein reflect the opinions and views of the portfolio managers as of the date written, is subject to change without notice, and may be forward-looking and/or based on current expectations, projections, and/or information currently available. Such information may not be accurate over the long-term. These views may differ from other portfolio managers and analysts of the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice.

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