Bernard Horn's 1st Quarter 2016 Polaris Global Value Fund

Review of holdings

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Apr 22, 2016
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Dear Fellow Shareholder,

April 8, 2016

The Polaris Global Value Fund (“the Fund”) outperformed the MSCI World Index (net of dividends), in the quarter, gaining 0.71%, while the Index was down -0.35%. In a volatile quarter, when market averages dipped almost 10% at one point, we were pleased to have achieved positive results. Foreign exchange gains boosted the Fund’s returns, with most developed world currencies except the British Pound, appreciating against the U.S. dollar.

Greater market volatility created buying opportunities, as the Fund purchased five companies parsed out in information technology and financial sectors. Six sales were executed, with Guangdong Investment Ltd., Northern Star Resources, Ltd. and Rexam PLC reaching our valuation limits, the latter of which was due a takeover by Ball Corporation. As a result, the composition of the portfolio shifted, with the majority of cash from sales of non-U.S. companies reallocated to buy U.S.-based companies, J.P. Morgan Chase & Co., Franklin Resources Inc., Web.com Group Inc. and Avnet, Inc.

Overall, we were pleased with the Fund’s performance, as more than half of portfolio holdings achieved gains in a very tumultuous quarter. The Fund won two 2016 Lipper Fund Awards, which recognize individual mutual funds that have outperformed their peers based on risk adjusted, consistent return of investment results through November 30, 2015. The Fund posted the strongest trend of returns in the global multi-cap value fund category for the 3- and 5-year periods through the reporting timeframe. In the Lipper Universe, a total of 74 funds over a three-year period, and 63 funds over a five-year period, were eligible for this category distinction. This marks the third consecutive year that the Fund has received Lipper Awards for the 3- and 5-year periods, following on its earlier award recognition dating back to 2006 and 2007.

Outperformance against the benchmark can be attributed to defensive sectors, including telecom and utilities, as well as solid results from industrials and information technology. Financials and healthcare were the main detractors in a negative global market; however, the Fund actually outperformed the sector benchmarks at -3.1% vs. -6.1% for financials and -5.9% vs. -6.6% for healthcare. On an individual stock basis, performance contribution was widespread with 18 stocks each posting gains in excess of 10% for the quarter. Most notable was Wesco International Inc., a late 2015 portfolio addition in industrials, which rebounded on the back of better than consensus earnings and the proposed acquisition of Atlanta Electrical Distributors. Another industrial holding, elevator/escalator manufacturer Kone Oyj, generated impressive sales in a rebounding Chinese housing market. Frontier Communications Corp. and Verizon Communications both had double-digit gains, following the completion of a deal whereby Frontier bought Verizon’s wireline assets in Texas, Florida and California. Children’s clothing manufacturer Carter’s Inc. noted good quarterly results with swelling revenues driven by e-commerce. The company announced encouraging 2016 guidance, increased their dividend by 50% and committed to further share buybacks.

Marathon Petroleum Corp. (MPC, Financial) was a significant detractor to Fund performance, as the company lowered the 2016 distribution expectations of its master limited partnership (MPLX) and cut capital expenditures as commodity prices declined. The company is expected to provide further financial support to MPLX by injecting its inland marine business in exchange for units, along with a potential private placement of up to $1 billion. Allergan PLC and Teva Pharmaceutical Industries Ltd. were down, as the companies signaled a delay in Teva’s $40.5 billion acquisition of Allergan’s Actavis generics unit. The majority of U.S. banks were in negative territory due to a prevailing low interest rate environment.

In the information technology sector, Wincor Nixdorf AG and Infosys Ltd both had double-digit gains for the quarter. Wincor Nixdorf was up, as its slated acquirer U.S.-based Diebold, Inc. received 68.9% of Wincor Nixdorf shares for purposes of satisfying the minimum tender condition. Infosys, the Indian outsourced technology consultant, rallied after raising 2016 revenue forecasts to 9%. Business momentum is back on track after a less than stellar December 2015 quarter, which was impacted by sluggish year-end corporate technology planning and weaker currency. Semiconductor equipment manufacturer Brooks Automation, Inc. was sold in favor of two new companies with more attractive fundamentals, Web.com Group Inc. and Avnet, Inc. Web.com is a domain registration/web hosting service geared to small businesses, with a loyal subscription base. With the recent acquisition of Yodle, Web.com is positioned to not only host and design websites, but also to participate in digital marketing. Avnet is an electronics distributor, with a global footprint and customers across the value chain. Avnet consistently delivers over various business cycles, generates significant free cash flow and operates efficiently.

Not only did the Frontier-Verizon wireline acquisition boost the stock prices of both companies, but each provider referenced other promising developments, which resulted in double-digit gains. Frontier delivered the 12th consecutive quarter (ending December 31, 2015) of broadband momentum by adding 28,500 broadband connections. The company subsequently launched “Frontier Vantage”, a new suite of higher value-add products including multichannel TV packages, faster broadband and phone service. Verizon reported a solid fourth quarter of 2015, as the company regained momentum in wireless subscribers, while reducing customer attrition. German telecom Freenet AG reduced sector results, as the company’s acquisition of a 23.8% stake in Swiss telecom, Sunrise, was a departure from the previously-stated focus on the German market.

Utility company, NextEra (NEE, Financial), delivered strong annual results, with earnings up 8% for the 2015 year. Their Florida Power & Light unit and renewable energy portfolio, Energy Resources, had healthy growth. ALLETE, Inc. reported strong 2015 earnings on the back of healthy net income and operating revenue. The company went on to announce another dividend increase; impressively, the company has paid dividends since 1948.

In addition to Carter’s Inc., other notable contributors in the consumer discretionary sector included International Game Technology PLC (IGT) and Regal Entertainment Group. IGT’s Italy-based Lottomatica subsidiary is leading a consortium bid on an Italian lottery concession, after which a joint venture will be arranged. The announcement came just ahead of IGT’s positive fourth quarter earnings report. Regal reported a record 2015 across most financial metrics, partially due to a strong fourth quarter of blockbuster film releases, investment in premium amenities and consistent focus on operational execution. The company also got a tangential boost from the AMC-Carmike Cinemas acquisition. A consolidating market is good for the movie theater industry and opens up the possibility of a similar merger & acquisition (M&A) transaction for Regal. British homebuilders, Barratt Developments, Bellway Plc and Taylor Wimpey hampered sector performance, as most were weaker on profit taking. In London, transaction volumes and prices were dropping in wealthier locales, where homebuilders had minor exposure.

In the fourth quarter of 2015, U.S. banks Ameris Bancorp (ABCB, Financial) and BNC Bancorp were among the top contributors to Fund results, buoyed by M&A activity and the prospect of rising interest rates. Banks were heartened by the December 2015 Federal Reserve decision to nudge the federal funds target up. However, in the subsequent two meetings the Fed resolved to leave the range unchanged at 0.25% to 0.50%. This quarter, U.S. banks were impacted by the revised outlook, as higher interest rates can boost banks’ net interest margins and income. British multinational banking and financial services company Standard Chartered was under pressure due to emerging market and commodity exposure. The company’s new CEO embarked on an aggressive capital and cost savings plan to position the bank through these challenging conditions.

In the past two years, the Fund’s valuation screens have identified a preponderance of value opportunities amongst financials and information technology sectors. Much of our bottom-up research has revolved around these sectors, and we have sought entry points when companies reached value pricing levels. For example, U.S. banking institution J.P. Morgan (JPM, Financial) shares lost approximately 20% of their value from the end of December 2015 to mid-February 2016; we took this precipitous drop as a purchase opening. The stock rebounded more than 10% by quarter end. Shares of asset management companies often trade down aggressively in market turmoil; we bought Franklin Resources when it was out of favor, suffering from outflows and foreign earnings kept abroad due to U.S. tax rules. The Fund also invested in Siam Commercial Bank, one of the largest banks in Thailand.

The Valeant Pharmaceuticals (VRX, Financial) debacle has unfairly cast a shadow on the entire big pharma industry, as concerns surge about drug access and costs. This has impeded shares of Allergan and Teva, although fundamentals of both companies remain healthy. Teva is still intending to acquire Allergan’s generic division on a postponed timeline, due to the U.S. Federal Trade Commission’s lengthy review. Novartis was down more than 10%, on news of its cancer drug Gleevec going off-patent as of July 2016. The lost revenue streams were supposed to be replaced by heart failure drug Entresto, but the drug has yet to gain wide-scale adoption. Additionally, Novartis’ Alcon division underperformed for the past year.

Investment Environment and Strategy

We capitalized on market volatility, purchasing companies at attractive valuations. Many of the newly-added companies had been on our research screens for years, backed by carefully crafted fundamental analysis. These “richly valued” stocks came off prior highs allowing us entry, as evidenced by various financial and IT sector purchases. Portfolio turnover is likely to increase in the coming months, as we intend to capitalize on ongoing market turmoil. We believe that volatility will persist, as even modestly-growing economies might still experience some downside risks. Developed countries with substantial financial leverage and the majority of emerging markets will likely be susceptible.

Other economies, namely the U.S., will continue to see slow progress as lower oil prices have contributed to healthier consumer pocketbooks. Discussions with a number of our portfolio companies proved fruitful, as they identified three consumer spending patterns including: 1) spending on automobiles, home purchases and some discretionary goods; 2) investing more for both short - and long-term retirement goals; and 3) saving money via bank deposits/accounts, thereby repairing personal balance sheets. All of these initiatives bode well for a moderate but longer and more sustained economic recovery. We expect that many of the European countries will follow the lead of the U.S., within a two- to three-year time lag. We will keep these themes in mind as we continue to manage the Fund with a goal toward continued long-term outperformance.

We would also like to take this opportunity to let our Fund shareholders know that the Fund’s reduced net operating expense ratio has been extended for another year. The Fund’s annual net operating expense ratio will remain at 0.99%, effective through April 30, 2017, due to the Adviser’s contractual agreement to waive its fee and/or reimburse expenses to limit Total Annual Fund Operating Expenses.

Sincerely,

Bernard R. Horn, Jr., Shareholder and Portfolio Manager

The Fund invests in securities of foreign issuers, including issuers located in countries with emerging capital markets. Investments in such securities entail certain risks not associated with investments in domestic securities, such as volatility of currency exchange rates, and in some cases, political and economic instability and relatively illiquid markets. Options trading involve risk and are not suitable for

all investors. Fund performance includes reinvestment of dividends and capital gains. During the period, some of the Fund’s fees were waived or expenses reimbursed. In the absence of these waivers and reimbursements, performance figures would be lower.

On June 1, 1998, a limited partnership managed by the adviser reorganized into the Fund. The predecessor limited partnership maintained an investment objective and investment policies that were, in all material respects, equivalent to those of the Fund. The Fund’s performance for the periods before June 1, 1998 is that of the limited partnership and includes the expenses of the limited partnership. If the limited partnership’s performance had been readjusted to reflect the second year expenses of the Fund, the Fund’s performance for all the periods would have been lower. The limited partnership was not registered under the Investment Company Act of 1940 and was not subject to certain investment limitations, diversification requirements, and other restrictions imposed by the 1940 Act and the Internal Revenue Code, which, if applicable, may have adversely affected its performance.

Past performance is no guarantee of future results. Lipper Fund Awards are based on Lipper's Consistent Return calculation. Lipper scores for Consistent Return reflect funds' historical risk-adjusted returns relative to funds in the same Lipper classification and include each fund's expenses and reinvested distributions, but exclude sales charges. Consistent Return values are calculated with all eligible share classes for each eligible classification. The highest Lipper Leader for Consistent Return value within each eligible classification determines the fund classification winner over three, five or 10 years. Lipper, a Thomson Reuters company, is a leading global provider of mutual fund information and analysis to fund companies, financial intermediaries and media organizations. Additional information is available at www.lipperweb.com.