David Winters Wintergreen Fund Semi-Annual Report

Review of holdings and fund performance

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Sep 21, 2016
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Dear Fellow

Wintergreen Fund (Trades, Portfolio) Shareholder,

These continue to be challenging times for individual investors. After years of market momentum rather than corporate fundamentals driving the market, some of the most popular market driven stocks are beginning to lose their luster, causing popular index-investment products to begin to falter. If this continues, we believe popular index-investment products, touted by their big financial sponsors as safe and liquid, will prove to be less safe and less liquid than originally advertised.

Through our research, we have recently found that index funds and exchange traded funds (“ETF”) simply are not as cheap as they may appear, often due to hidden Look Through Expenses. These expenses are embedded in stock prices that are paid by all investors in those companies and they arise from two main sources: executive compensation and share buybacks. Executive compensation in the form of equity awards dilutes current shareholders and often share repurchases are conducted to offset this dilutive impact. These share repurchases are not typically seen by investors because they are not boldly displayed. Many investors are only aware of the cost of executive compensation when viewed from the perspective of the executive who is granted an award. Wintergreen Advisers believes that share buybacks, often presented as beneficial to a company’s shareholders, are better described as primarily being beneficial to executives, as our research shows that 53% of the average corporate buyback program is used to offset dilution from executive compensation plans. It is only the remaining 47% of corporate buybacks that are used for reinvestment in the company. The dilutive impact of these executive stock bonus plans tends to snowball over time, particularly when left largely unchecked by index funds, which vote in favor of management proxy proposals 95% of the timei.

Things alter for the worse spontaneously, if they be not altered for the better designedly. - Francis Bacon

Look Through Expenses include shares that are issued for executive bonus plans and the company’s use of shareholder money to buy back shares, often at a high price. When stocks come wrapped in an ETF or index fund advertising low fees, we believe investors do not have the full picture of how much they are truly paying. Investors may think they are paying an expense ratio of 0.06%, the average expense ratio disclosed by index funds sponsors, but when considered in light of Look Through Expenses of the underlying companies, expenses can jump to an average total of 4.1% and potentially as high as 18%, based on our analysis of Look Through Expenses of companies that make up the S&P 500 Index.

Companies are not required to disclose these Look Through Expenses, which makes it more difficult for shareholders to identify and vote against these types of expenses. In addition, we think the surge in the popularity of ETF and index fund products advertising extremely low fees further serves to prevent investors from fully understanding the total expenses included in the price of an underlying company’s shares. More information about Wintergreen Advisers’ analysis of these hidden expenses is available at www.wintergreenadvisers.com.


Wintergreen Fund (Trades, Portfolio), Inc. (“Wintergreen”, or the “Fund”), we deliberately attempt to avoid these hazards and hidden expenses. Our focus remains on active, value-oriented investing based on fundamental analysis and an unwavering commitment to serve the interests of our shareholders. Although we are not opposed to rewarding executives and others who have produced value for their company’s shareholders, Wintergreen Advisers stands up for shareholder rights and if we perceive a problem, especially in the area of excessive executive compensation or shareholder dilution, we will do something, while other investment managers may not take action. While index funds vote “yes” to management compensation proxy items over 95% of the time, at Wintergreen we are active value investors who thoroughly read each company proxy and as fiduciaries cast our votes carefully with our shareholders’ interests in mind. We focus on investing in what we believe are high quality companies. Wintergreen prefers to invest in companies with what we view as pristine balance sheets and management teams that are working for all shareholders. We are strong advocates for our shareholders, and we believe in what we own. Our capital is invested alongside our shareholders in the Fund.

Let me tell you the secret that has led me to my goal. My strength lies solely in my tenacity. - Louis Pasteur

Wintergreen Advisers believes the mark of good management in the commodity sector is a steady hand to steer the company through cycles. In Birchcliff Energy Ltd.’s (“Birchcliff”) (

BIR, Financial) management, we think you have exactly that. Whereas other oil and gas drillers in North America have become unprofitable or even bankrupt due to excessive debt in the recent global downturn in the oil and gas market, Birchcliff has sustained operations in the black on a cash basis, with controlled levels of debt. Credit goes to the leaders of the company who have reduced operating costs per boe (barrel of oil equivalent) to record lows this year. This combination of profitability and balance sheet strength enabled Birchcliff to take advantage of a competitor’s need to sell assets in order to decrease its own dangerous debt burden. At the end of July, Birchcliff acquired a large tract of petroleum and natural gas properties in the Gordondale area of Alberta, Canada. The strategic rationale of the investment in these fields seems readily apparent, as the properties lie between two contiguous drilling areas already owned by Birchcliff. Additional production at a positive netback margin, a profitability measure in the industry, should pump up cash flows for Birchcliff shareholders through any part of the market cycle. The Fund has been a shareholder in Birchcliff since 2009 and with a secondary equity offering in conjunction with the Gordondale transaction, we increased our holdings of the company at what we believe was an attractive price.

Strength does not come from physical capacity. It comes from an indomitable will. - Mahatma Gandhi

British American Tobacco plc (“BAT”) (

BTI, Financial) was one of the Fund’s first investments in 2005. The position has grown to become the Fund’s second largest stock holding, behind Reynolds American Inc. All along the way, BAT’s very capable management team has driven the operating margin up from the high 20s to mid-30s, doubled free cash flows to well over GBPii 3 billion per year, and raised the dividend by a 12% compounded annual growth rate. Shareholders of BAT have been rewarded nicely with an 18% average annual return since October 2005. BAT remains an important core holding for the Fund because it has historically been a dependable cash generator, particularly during times of uncertainty, the most prominent of which is presently unfolding in its home country. “Brexit” was a surprise to many and it is likely that in the U.K. business world there will be many winners and losers as a result of it. An immediate visible impact was the fall in the value of the pound sterling in June 2016, which could be net beneficial to BAT’s bottom line, as the company sells its products in dozens of overseas markets. Enhanced international consumer consumption power that comes with stronger local currencies versus the pound sterling could help promote overall sales growth. Another reason we remain investors in BAT is that it has an extremely modest equity compensation plan for executives, which contributes to extremely low Look Through Expenses.

Many of the Fund’s investments are long-term holdings, which we have maintained based on our adherence to our investment principles:

First, a business that has good or improving economics, and often generates sales and profits in multiple jurisdictions and currencies;

Second, a management team that is working for the benefit of all long-term shareholders and not just for its own short-term compensation; and

Third, the security is available at a compelling price.

We continue to be long-term shareholders in attractive companies. These companies frequently have multiple streams of cash flows from different currencies which work to compound the Fund’s shareholders’ capital over time. Based on our work and observations over the years, we continue to believe that it is sensible to invest long-term with companies who do not borrow much money.

At Wintergreen, it is our opinion that investors who are careful with their money, invest long-term, and don’t borrow or invest on margin, greatly increase their chances of success. By being sensible in their investment approach, we believe investors have the potential to stack the deck for their long-term advantage. Thank you for your continued investment in the Fund.


David J. Winters, CFA

Portfolio Manager

  1. Source: Proxy Insight
  1. British Pounds


The Fund is subject to several risks, any of which could cause an investor to lose money. Please review the prospectus for a complete discussion of the Fund’s risks which include, but are not limited to, the following: possible loss of principal amount invested, stock market risk, interest rate risk, income risk, credit risk, currency risk, and foreign/emerging market risk. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Short sale risk is the risk that the Fund will incur an unlimited loss if the price of a security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security. In light of these risks, the Fund may not be suitable for all investors.

The views contained in this report are those of the Fund’s portfolio manager as of June 30, 2016, and may not reflect his views on the date this report is first published or anytime thereafter. The preceding examples of specific investments are included to illustrate the Fund’s investment process and strategy. There can be no assurance that such investments will remain represented in the Fund’s portfolio. Holdings and allocations are subject to risks and to change. The views described herein do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security.

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