Dear Fellow Shareholders:
After three consecutive years of generally increasing net asset values for your Funds, a combination of negative factors, including inflation, rising interest rates, and recession fears hampered 2022 equity markets and triggered many periods of downside volatility the past year.
Compounding these factors was the conflict in Ukraine which pushed commodity prices higher (particularly oil and gas prices) creating increasing costs. In addition, shortages of key manufacturing parts added to bad inflation numbers. The Fed, fearing runaway inflation, tightened the money supply and raised interest rates, resulting in increasing recession fears. Against this backdrop, the broad Russell 3000® Index had a negative return of -19.21% and the benchmark S&P 500® Index had a negative return of -18.11%.
MARKET OUTLOOK
A central theme of Olstein’s investment approach is that securities (stocks) represent interests in real companies with sales, earnings, cash flow, etc. Our experience in accounting and looking behind the numbers provides your Fund with an advantage in valuing companies based on their future ability to generate normalized free cash flow. We perform a forensic analysis of financial statements, footnotes, government filings, and shareholder letters when valuing companies. Our investment discipline is focused on valuing companies and waiting for the right discount and a favorable risk/reward ratio, thus increasing the odds of making a profitable investment. Markets have always had downward corrections and the press often uses these times to feature analysts and strategists offering market predictions as if they possess powers to predict the movements of thousands of individual companies with different economic characteristics, as well as being able to predict future government actions, wars, product shortages and how stocks may react to these unpredictable events. The ability to predict stock market fluctuations offers an investor the highest potential return if done with enough regularity to profit therefrom. Markets always fluctuate and create deviations between market price and our estimation of intrinsic value in individual stocks. Rather than engaging in predicting how thousands of stocks that are impacted in different ways are going to fluctuate during difficult times, we use periods of downside market volatility created by emotional investment crowds to identify good companies whose market prices have fallen materially below our calculation of intrinsic value (which is based on a company’s future ability to generate and or grow future free cash flow). The herd creates short-term volatility but company fundamentals and a company’s ability to generate long-term normalized free cash flow determine intrinsic values and influence long-term stock movements and future prices.
THE CURRENT MARKET
We believe a great deal of negative sentiment has already been priced into the market. In fact, during the last quarter of the year equity markets rebounded and posted robust gains with the broad Russell 3000 Index appreciating 7.18% and the S&P 500® Index appreciating 7.56% during the quarter. We also note that both of our Funds achieved double-digit returns during the fourth quarter with Adviser Class shares of the Olstein All Cap Value Fund increasing 10.36% and Adviser Class shares of the Olstein Strategic Opportunity Fund increasing 14.39%.1
Every day in the business media, stock market strategists and analysts predict whether the market has more downside, has bottomed, a recession is coming or is not coming, which creates all kinds of confusion and volatility as if these strategists’ and analysts’ predictions possessed special powers. We believe these daily changing predictions are akin to a bad comedy show. When the predictions on the stock market tend to be mostly bearish (as they are today), individual stocks usually show intermittent large declines. Our job is to utilize our proprietary research to increase the probability that our investors make money over long periods of time. We believe our experience in interpreting accounting disclosure and looking behind the numbers of financial statements when valuing companies gives your Fund an advantage when selecting stocks to buy. We firmly believe that paying the right price for a good company increases the odds of delivering higher long-term returns to shareholders rather than relying on often flawed market predictions and/or economic predictions which change by the minute. As value investors, we believe our main job is to value companies after performing a forensic analysis of their financial statements and wait for market price discounts to develop during periods of investment negativity and to take advantage of these opportunities to purchase good companies with solid balance sheets at discounted prices. We currently see an environment full of opportunities as negative investor sentiment has indiscriminately and unfairly punished the stocks of many good companies with solid balance sheets and significant future free cash flow potential. For us, stock selection is driven by an emphasis on valuing companies that have been unfairly driven to low prices by temporary issues such as the negativity created by higher interest rates, supply chain shortages, recession predictions, and just overall investment negativity. The past year’s market declines have been led by the corrections in the apparently overpriced social media and online retail and information technology sectors which were yesterday’s darlings. We believe these companies are still over-owned and still represent meaningful percentages of the large indexes and are still experiencing daily liquidations from portfolios apparently surprised when their meteoric growth began to slow down.
As we have done for the past 28 years, we often buy during periods of overall investment negativity to take advantage of the discounts that are created by indiscriminate selling of well-established companies which are sold along with the overpriced stocks. The past seven-year upside run in the technology and social media stocks occurred in good companies, but in our opinion these companies eventually reached prices that could not be justified because estimates of future cash flow growth were not realistic. Pessimism and underperformance create frustration for most investors, including value investors. When the previous market leaders who dominated the leading averages stumble, it usually leads to increasing negative market psychology and reductions in the leading market averages, reinforcing the negative market psychology. Finally, indiscriminate selling and rushes to the exits affect the stock prices of even appropriately valued companies and they start falling with the previous market leaders. During these periods in which good companies are being punished unfairly, we seek to take advantage of the indiscriminate sales and take positions in companies that we believe have been driven to prices that represent extreme discounts despite having the possibility of generating materially higher future free cash flow. In addition, we want our holdings to have conservative balance sheets and management who want to deliver increasing returns to shareholders. We love pessimism, especially when the pessimism creates artificially low prices that create the potential for above-average long-term gains.
STRATEGY
We believe our focus on company fundamentals, particularly our emphasis on free cash flow, accounting reality, and returns on invested capital, allows us to identify those companies that not only have focused their priorities in the face of a weaker economic environment but have also identified options that can create a substantial strategic advantage for the inevitable improvement in the economic cycle. We use our experience in accounting and corporate reporting practices to look behind the numbers looking for anomalies indicative that a company’s normalized ability to produce future free cash flow is not being properly reflected by current market prices.
For the portfolios of the Olstein All Cap Value Fund and Olstein Strategic Opportunities Fund, we remain focused on individual companies, their operations, and prospects for maintaining or growing sustainable free cash flow. As long-term value investors, we recognize that companies generating sustainable free cash flow are well-positioned to compete profitably during a challenging economic environment. The Olstein All Cap Value Fund and Olstein Strategic Opportunities Fund portfolios consist of companies that we believe have sustainable competitive advantages, discernible balance sheet strength, management teams that emphasize decisions based on the cost of capital calculations and deploy free cash flow to create value. In 2023, we will continue to focus on companies that demonstrate a commitment to maintaining a strong financial position and have the ability to generate sustainable free cash flow, not currently being valued appropriately by the market. We believe these companies have an ability to deliver long-term value that, in many cases, is not properly recognized by the market and thus are selling at significant discounts to intrinsic value.
We also believe that overall stock selection by professional investors is only in the early stages of focusing on company fundamentals and accounting assumptions that reflect economic reality in valuing companies, while other investors are still relying on market timing calls and determining whether or not quarterly earnings beat or missed quarterly earnings estimates.
THE OLSTEIN ALL CAP VALUE FUND
For the six-month reporting period ended December 31, 2022, Adviser Class shares of the Olstein All Cap Value Fund appreciated 0.35%, Class C shares depreciated - 0.11% and Class A shares appreciated 0.24%.2 During the same six-month period, the Russell 3000® Value Index appreciated 5.95% and the Russell 3000® Index appreciated 2.40%.
PORTFOLIO REVIEW
At December 31, 2022, the Olstein All Cap Value Fund portfolio consisted of 82 holdings with an average weighted market capitalization of $133.29 billion. During the six-month reporting period, the Fund initiated one position and eliminated its holdings in four companies.
During the reporting period, the All Cap Value Fund initiated a position in International Flavors & Fragrances Inc. (IFF, Financial) and sold its holdings in Automatic Data Processing Inc. (ADP, Financial) and Keurig Dr. Pepper (KDP, Financial), as the price of each stock reached our valuation level. The Fund also sold its holding in Paramount Global (PARA, Financial) and Western Digital Corp. (WDC, Financial) and redeployed the proceeds into what we believed are better opportunities with more favorable risk-reward profiles.
Our Leaders
The Olstein All Cap Value Fund’s leading performers for the six-month reporting period ended December 31, 2022, include: Schlumberger Ltd. (SLB, Financial), Universal Health Services (UHS, Financial), Omnicom Group (OMC, Financial), Tapestry Inc. (TPR, Financial) and Cummins Inc. (CMI, Financial). At the close of the year the Fund continued to maintain positions in all five of these companies.
Our Laggards
Laggards during the six-month reporting period include: Generac Holdings (GNRC, Financial), Scotts Miracle-Gro Company (SMG, Financial), Warner Bros Discovery, Inc. (WBD, Financial), Intel Corp. (INTC, Financial), and Stanley Black & Decker, Inc. (SWK, Financial). At the close of the year, the Fund continued to maintain positions in all five of these companies.
THE OLSTEIN STRATEGIC OPPORTUNITIES FUND
For the six-month reporting period ended December 31, 2022, Adviser Class shares of the Strategic Opportunities Fund appreciated 7.21%; Class A shares appreciated 7.01% and Class C shares appreciated 6.64%.3 The Fund’s primary benchmark, the Russell 2500® Value Index, appreciated 4.29% and the Fund’s secondary benchmark, Russell 2500® Index, appreciated 4.40%, during the same time period.
PORTFOLIO REVIEW
As of December 31, 2022, the Olstein Strategic Opportunities Fund portfolio consisted of 38 holdings with an average weighted market capitalization of $4.95 billion. During the reporting period, the Fund initiated one new position and eliminated three holdings. The Fund initiated a position in the Scotts Miracle-Gro Company and eliminated its holdings in Big Lots Inc. (BIG), Federal Signal Corporation (FSS) and Lifetime Brands (LCUT). The Fund sold its holdings in Federal Signal Corporation as the price of the company’s stock reached our valuation. The Fund eliminated its holdings in Big Lots Inc. and Lifetime Brands and redeployed the proceeds into what we believed are better opportunities with more favorable risk-reward profiles.
Our Leaders
Leading performers for the six-month reporting period include: Wabash National (WNC), Federal Signal Corporation, Graham Corporation (GHM), The Timken Company (TKR), and The Shyft Group (SHYF). At the close of the year the Fund continued to maintain positions in each of these companies, except Federal Signal Corporation.
Our Laggards
Laggards during the six-month reporting period include: Generac Holdings, Scotts Miracle-Gro, Lifetime Brands, Big Lots, Warner Bros. Discovery, and Cushman & Wakefield (CWK). At the close of the reporting period the Fund continued to maintain positions in Generac Holdings, Warner Bros Discovery, and Cushman & Wakefield. As previously discussed, the Fund eliminated its holdings in Lifetime Brands during the reporting period.
Long-Term Confidence in the Face of Short-Term Uncertainty
As we look back on 2022, we are reminded of the importance of maintaining a proper perspective when investing in equities. The past year proved to be extremely challenging for investors as most major asset classes experienced negative performance in 2022. U.S. equity markets experienced their worst year since 2008, with the benchmark S&P 500® Index falling -18.11%. Likewise, investors found little refuge in bonds or U.S. Treasuries with the S&P U.S. Aggregate Bond Index falling -12.03% and the S&P U.S. Treasury Bond Index falling -10.98% in 2022.
The upheaval throughout the past year created uncertainty that caused many investors to react to day-to-day gyrations of the market either by reducing or selling their equity holdings or by avoiding equities completely due to fears of steep short-term market declines. From our experience, a challenging investment landscape, marked by short-term uncertainty such as we experienced in 2022, often results in emotional decision-making where investors forego logic and reason and unfairly punish companies with strong fundamentals due to investors’ heightened fears. Such investor behavior, exacerbated by the constant drumbeat of negative news, can create indiscriminate selling in good companies. Our investment discipline seeks to capitalize on these short-term deviations and often sets the stage for us to deliver superior long-term investment returns in the periods following these downturns. Indeed, our performance pattern suggests that our portfolios’ best years often follow periods of overwhelming negative sentiment that result in broad equity market downturns similar to what investors experienced this past year. In the past, after the Fund experienced disappointing periods of short-term underperformance caused by indiscriminate selling of good companies, we used these periods of market negativity as an opportunity to take advantage of the discount being offered (the deviation between intrinsic value and market prices) and look to purchase companies with sound financials, realistic accounting, and market prices that did not recognize the company’s normalized ability to produce future free cash flow.
WE ADVISE YOU TO REVIEW THE TABLE ON PAGE 14 SHOWING THE FIRM’S QUARTERLY LONG-TERM PERFORMANCE SINCE INCEPTION and reach your own conclusions about the price appreciation that occurred after periods of short-term underperformance. Paying the right price was and is our method of market timing, our attempt to limit risk, and setting up the Fund for possible long-term above-average appreciation. As repeated throughout the letter, paying the right price is our method of taking advantage of the prices offered during overly negative market periods and is the strategy we use in our attempt to limit downside risk in our portfolio holdings. We never know exactly when (the timing) the public may begin buying these undervalued securities in our portfolio in bulk which usually leads to rapid price appreciation, but patience is needed to be a value investor. We added to many of our current portfolio holdings during the recent period of market negativity at what we believe are the right discounted prices. We believe the shift by the public to focus on stocks which are analyzed and valued based on the analysis of company fundamentals has already started. Rather than relying on market timing, quarterly earnings beats and misses or predicting individual short-term stock fluctuations, we continue to focus on company fundamentals and valuing companies, and we believe losses generated are bringing back the investing public to valuing companies by looking at their fundamentals.
Our confidence in the long-term prospects of our holdings is rooted in our investment process and analysis of individual companies (knowing what we own) and does not rely on overall short-term market movements (which we believe nobody knows). As negative economic news and events overwhelm equity markets, we believe it is extremely important to remain focused on company fundamentals and tune out the daily noise and the doomsday predictions. We believe investors are in the early stages of again paying attention to the lost art of valuing companies based on fundamentals. Market volatility, driven by an onslaught of negative news, continues to fuel short-term panic and overreactions to predictions of ultimate doom. Unfortunately, these apparently random predictions drive too many investment decisions. In our view, the extreme upside and downside volatility that has characterized equity markets over the past twelve months has created ample opportunities for the Funds to purchase undervalued securities at the right prices, which we believe increases the Funds’ probability of achieving their long-term capital gains objectives.
We do not focus on whether or not a recent purchase is currently underperforming the market or may continue to underperform for the next quarter or year. Our estimation of a company’s ability to generate sustainable long-term free cash flow not being valued by the market buoys our confidence to ride out short-term periods of uncertainty and negative sentiment. Pessimism is our friend because it produces the prices which we believe set up our ability to perform over time rather than all of the time. As we stated throughout this report, we do not rely on conventional market timing or individual stock timing, we time when to buy by paying what we believe is the right price and we believe conventional timing is an exercise in futility. Our process sticks to valuing companies and looking for discounts to that value. We allow the soothsayers to predict recessions, interest rates, and other factors that may affect stock prices in the short run. However, at all times it is our job to determine whether or not the current market price of a good company is not yet valuing the future normalized free cash flow the company is capable of producing.
When managing our Funds’ portfolios, we are concerned with the probability of loss over three to five-year periods. We manage overall risk on a stock-by-stock basis as we build each portfolio. First and foremost, we seek to mitigate risk by buying stocks at prices which, in our opinion, have a low probability of selling for a price that is significantly lower than the price we are currently paying after a couple of years. Thus, we attempt to reduce such downside risk by purchasing companies at prices that we believe already incorporate too much short-term negativity. Additionally, since our process seeks to accurately estimate sustainable future free cash flows, we are always concerned that our estimates are too optimistic and thus our valuations three to five years hence could become unrealistic. To mitigate the impact of incorrect valuations or investing in a classic “value trap” (which we do from time to time), we seek to buy companies selling at a significant discount to our determination of their intrinsic value. By buying companies at a 30% or greater discount to our determination of their intrinsic value, we seek to mitigate the effects of additional stock market price deterioration when our estimates are off or when we are just plain wrong.
We believe that our analytical process becomes even more important during periods of excessive downside market volatility. During these periods, we concentrate on factors likely to affect a company’s future such as whether or not its financial strength (as reflected in its balance sheet) is strong enough to weather the current difficult times if the difficult times last longer than we expect. At all times, especially during turbulent economic environments, we also focus on how current economic and financial events are likely to affect a company’s future prosperity (the company’s normalized ability to generate long-term future free cash flow). During periods of negativity, we have to filter out a lot of noise, mainly the onslaught of negative market news and economic forecasts. We emphasize long-term value and pay close attention to the resiliency of a company’s core business, the quality of its management, the nature of its operating challenges and, lastly and most importantly, its financial strength.
We continually assess a company’s core business and sources of its competitive advantage that allow the company to overcome any temporary setbacks presented by economic contraction. Since companies that maintain or improve their performance during troubling economic times may still find their stocks held back by overall negative market sentiment, it is extremely important that the core business has the ability to generate sustainable free cash flow over our anticipated holding period of three years to five years or longer. Our analysis focuses on how the company’s operations generate sustainable free cash flow and the level of investment required to improve company performance and eventually grow the business, particularly as economic headwinds recede.
From our experience as value investors, we continually keep an eye out for company-specific factors that may signal a potential impairment to future company operations and free cash flow. We seek to avoid situations or sell our positions where a company’s core business has failed to keep pace with changes in the economic, competitive or technological landscape. We also seek to avoid companies with products and services that have become less relevant to the future, but not companies that are merely experiencing temporary problems.
While we are concerned with the overall economic environment and outlook and recognize that macroeconomic factors can exert extreme short-term influence over equity prices from time to time, we are more concerned with how individual companies operate under all types of economic conditions and cycles. We believe that the analysis of specific companies, their potential prospects and private market value, and not overall market sentiment, are the keys to making decisions that increase the chances for successful investment outcomes. In our opinion, patience is the most important attribute needed to be a successful value investor. TO REPEAT, WE BELIEVE THE MOST IMPORTANT FACTOR AFFECTING FUTURE RETURNS ON ANY STOCK IS THE PRICE YOU PAY TO PURCHASE THE SECURITY.
While bouts of market volatility are unsettling, we must point out that such periods are a normal feature of long-term value investing. Since effectively timing the market’s ups and downs with enough regularity to profit therefrom is nearly impossible, we stay focused on the long-term by identifying opportunities for meaningful capital appreciation presented by individual companies and by exploiting market drops and dips to strategically add to existing positions in the portfolio or initiate positions in companies that possess our essential value characteristics. We remind you that, as past experience shows, patience has rewarded the Funds with their long-term records despite periods of underperformance along the way. SEE FUND LONG-TERM PERFORMANCE CHART ON PAGE 14. We intend to stay the course since we believe we are invested in high-quality companies that have the financial strength to ride out current market jitters while at the same time offering favorable long-term business prospects.
We value your trust and remind you that our money is invested alongside yours as we work hard to accomplish the Funds’ objective of long-term capital appreciation.
Sincerely,
Robert A. Olstein, Chairman and Chief Investment Officer
Eric R. Heyman, Co-Lead Portfolio Manager
1 The performance data quoted represents past performance and does not guarantee future results. The Olstein All Cap Value Fund’s Adviser Class average annual return for the one-year, five-year, and ten-year periods ended 12/31/22, assuming reinvestment of dividends and capital gain distributions, was -18.32%, 5.77%, and 9.66%, respectively. Per the Fund’s prospectus dated 10/28/22, the expense ratio for the Olstein All Cap Value Fund Adviser Class was 1.16%. The Olstein Strategic Opportunities Fund Adviser Class return as of 12/31/22 for the one-year, five-year, and since inception (05/11/2015) periods, assuming reinvestment of dividends and capital gain distributions, was -21.15%, 4.40% and 3.51%, respectively. Per the Fund’s 10/28/22 prospectus, the gross expense ratio for the Adviser Class share was 1.36% and the net expense ratio was 1.35%. The Adviser has contractually agreed to waive certain fees/expenses until October 28, 2023. Performance would have been lower without waivers in effect. Expense ratios for the Funds’ other share classes will vary. Performance for the Funds’ 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 visit our website at olsteinfunds.com.
2 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 12/31/22, 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 -19.86%, 4.72%, and 8.59%, respectively. Per the Fund’s prospectus dated 10/28/22, the expense ratio for the Olstein All Cap Value Fund Class A and Class C shares were 1.42% and 2.15% respectively. 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 olsteinfunds.com.
3 The performance data quoted represents past performance and does not guarantee future results. The Olstein Strategic Opportunities Fund Class C return as of 12/31/22 for the one-year, five-year, and ten-year periods, assuming deduction of the maximum Class C contingent deferred sales charge of 1% during the one-year period, was -22.70%, 3.35% and 7.11%, respectively. Per the Fund’s 10/28/22 prospectus, the gross expense ratio for the Class A and Class C shares were 1.62% and 2.35%, respectively, and the net expense ratio was 1.60% and 2.35%, respectively. The Adviser has contractually agreed to waive certain fees/expenses until October 28, 2023. Performance would have been lower without waivers in effect. Expense ratios for other share classes will vary. Performance 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 visit our website at olsteinfunds.com.
The above represents the opinion of the Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. The references to securities are not buy or sell recommendations but are intended to be descriptive examples of the Funds’ investment philosophy and are subject to change. Do not make
