Dear Fellow Shareholders:
For the fiscal year ended June 30, 2017, Class C and Adviser Class shares of the Olstein All Cap Value Fund appreciated 19.42% and 20.56%, respective-ly. During the same twelve month period the Russell 3000® Value Index appreciated 16.21% and the Russell 3000® Index appreciated 18.51%. For the three-year period ended June 30, 2017, Class C and Adviser Class shares of the Olstein All Cap Value Fund had average annual returns of 5.95% and 7.02%, respectively. During the same three-year period the Russell 3000® Value Index and Russell 3000® Index had average annual returns of 7.32% and 9.10%, respectively1.
Market Outlook
Over the course of the Fund’s fiscal year, U.S. equity markets continued to climb with the S&P 500® Index gaining 17.90% during the twelve months ended June 30, 2017. While the first half of the fiscal year saw spikes in volatility following the Brexit vote and immediately preceding the U.S. Presidential election, the second half yielded calmer markets. Shaking off the difficulties of implementing health care reform and the challenges facing other policy priorities of the new administration, markets continued to rise during the first six months of 2017 (the latter half of the Fund’s fiscal year) lead by high price-earnings ratio social media stocks. Although enthusiastic expectations for accelerated economic growth through tax reform, regulatory relief and promised infrastructure spending have given way to the reality of politics as usual, we are finding what we believe are undervalued investments that are underneath the social media radar selling at material discounts to our calculation of intrinsic value. We believe that by paying the correct price for these investments, we should be rewarded for our patience when the investing public sees visible signs that these stocks can produce normalized excess cash flow that, in our opinion, is not being properly valued by current market prices.
As value investors, we believe that the narrow range of companies responsible for a significant portion of S&P 500® Index performance during the first half of calendar 2017, characterized by the so-called FANG stocks (Facebook, Amazon, Netflix and Google), provides us with an ample supply of compelling investment opportunities. The continued investor focus on a limited number of mega-capitalization technology companies has created many favorable opportunities for the Fund to buy good companies at what we believe to be bargain prices in broad segments of the equity markets. While many investors chase the momentum of specific companies or sectors, we continue to invest in the equity securities of companies generating free cash flow whose real economic value we believe is unrecognized by the mar-ket, obscured by recent market momentum in new age growth stocks or over-shadowed by temporary problems.
Our Strategy
We believe it is important to weather market conditions, specific events and shifts in investor-driven momentum by favoring the equities of financially strong companies with stable or growing free cash flow that are run by man-agements that have a demonstrated history of deploying cash to the benefit of shareholders. Periodic spikes in market volatility during the course of the Fund’s fiscal year created many individual opportunities that offered the potential for above-average capital appreciation. Our quest for value is guid-ed by two prerequisites: (1) valuing a company’s ability to generate sustain-able future free cash flow and (2) securities prices that allow us to buy good companies, with solid balance sheets, and profitable business models, at very advantageous prices. We believe that paying the right price is the most important factor which determines long-term performance. We believe that the size and quantity of future errors determine long-term performance, and therefore not overpaying for a stock is critical to mitigating the impact of future errors on portfolio performance. These principles guide our invest-ment process and force us to focus on a company’s future prospects and value, while capitalizing on favorable prices as a result of what we believe are short-term factors.
The All Cap Fund’s current portfolio consists of companies that we believe have a sustainable competitive advantage, discernible balance sheet strength, a management team that emphasizes decisions based on cost of capital calcu-lations and deploys free cash flow to create shareholder value. We remain focused on individual companies, their operations and prospects for maintain-ing or growing sustainable free cash flow since, from our perspective as long-term value investors, we recognize that such companies are, in our opinion, well positioned to compete more profitably as economic growth improves.
Portfolio Review
At June 30, 2017, the Olstein All Cap Value Fund portfolio consisted of 98 holdings with an average weighted market capitalization of $95.73 billion. During the fiscal year, the Fund initiated positions in thirty-five companies and strategically added to positions in six companies. Over the same time period, the Fund eliminated its holdings in twenty-four companies and strategically decreased its holdings in another twenty three companies.
Positions initiated during the last twelve months include: AGCO Corporation, Alphabet Inc., Axalta Coating Systems, Baxter Inc., BorgWarner Inc., Caterpillar Inc., Conduent Inc., Convergys Corporation, Coty Inc., The Danaher Corporation, Exxon Mobil Corporation, The Goodyear Tire & Rubber Company, Harley-Davidson, Inc., Hill-Rom Holdings, Inc., Hormel Foods Corporation, IBM Corporation, The J.M. Smucker Company, Mattel, Inc., Moody’s Investors Service, Inc., Newell Brands, Nike, Inc., Prosperity Bancshares, Inc., Prudential Financial, Inc., S&P Global Inc., Sensata Technologies, Inc., ServiceMaster Global Holdings, Inc., Skechers USA, Inc., Snap-on Incorporated, Stericycle Inc., Texas Instruments Inc., Thermo Fisher Scientific, VF Corporation, VWR Corporation, Western Digital Corporation and Winnebago Industries Inc.
Positions eliminated during the past twelve months include: AT&T Inc., Baker Hughes Incorporated, Brady Corporation, Dillard’s, Inc., DSW Inc., Express Scripts Holding Company, Harman International, Ingersoll-Rand plc, Johnson & Johnson, Kennametal Inc., The Kohl’s Corporation, Macy’s, Inc., Michael Kors Holdings Limited, Oshkosh Corporation, Packaging Corporation of America, Parker-Hannifin Corporation, Pentair plc, Sensient Technologies Corporation, Stryker Corporation, Verizon Communications, Inc., Vishay Intertechnology, Inc., The Vitamin Shoppe, The Wendy’s Company and Xylem Inc.
Our Leaders
The holdings which contributed positively to performance for the twelve-month reporting period include: Zebra Technologies, Citizens Financial Group, Harman International, Invesco Ltd., and Greenbrier Companies Inc. At the close of the fiscal year the Fund continued to maintain positions in Zebra Technologies, Citizens Financial Group, Invesco Ltd., and Greenbrier Companies Inc. The Fund sold its position in Harman International follow-ing the announcement of its acquisition by Samsung Electronics. From the announcement of the acquisition on November 14, 2016 through the com-pletion of the acquisition transaction in March 2017, the Fund exited its position in Harman at an average sale price of approximately $111 per share which represented a 54% increase over the $71.82 per share price of the stock at the beginning of the Fund’s fiscal year.
Our Laggards
Laggards during the twelve-month reporting period include: Vitamin Shoppe Inc., Vista Outdoor Inc., Michael Kors Holdings Limited, Bed Bath & Beyond Inc. and CVS Healthcare. At the close of the fiscal year the Fund maintained positions in Bed Bath & Beyond and CVS Healthcare. During the fiscal year the Fund liquidated its positions in Vitamin Shoppe Inc., Vista Outdoor Inc. and Michael Kors Holdings Limited.
Although Vitamin Shoppe has a solid vitamin business with recurring rev-enues, the Fund liquidated its holdings in that entity because the company was unable to successfully offset the pricing pressures in other parts of its busi-ness, particularly in the highly competitive sports nutrition segment of the market. The Fund liquidated its position in Vista Outdoor due to the ineffec-tiveness of the company’s turnaround strategy to build significant positive sales momentum and relieve ongoing pressure on profit margins. Similarly, the Fund liquidated its position in Michael Kors as we lost confidence in the company’s ability to stabilize same store sales, drive positive momentum in its wholesale distribution business, and relieve competitive pressure on its acces-sories business, the largest contributor to company revenues.
Final Thoughts
Instead of making investment decisions on the basis of momentum or current market sentiment, we focus on opportunities for above average appreciation presented by companies whose future free cash flow is, in our opinion, not being properly valued in the stock market as a result of short-term problems, overall market negativity or just plain misperception. Our strategy emphasizes the analysis of specific companies and our assessment of their long-term ability to generate and/or grow normalized free cash flow based on unique business fundamentals, rather than focusing on short-term stock market moves or the current fad of the day. It is important to note that we do not automatically eliminate investing in high price-earnings companies or stocks whose prices have risen meteorically over a long period of time. The big question is whether or not the current market prices are still not properly dis-counting our assessment of their continued ability to grow and/or generate future normalized free cash flow regardless of the price-earnings ratio. For example, at the present time Apple, Google and Oracle are our three largest positions. Properly predicting the future value of any company requires us to be reasonably close when estimating a company’s ability to generate normal-ized free cash flow. We regard not being reasonably close (when predicting a company’s normalized ability to generate and/or grow future free cash flow) as our main risk when investing in any equity security. Specifically, the most important question we ask ourselves is whether or not the cash return we expect from owning a share of the business over the next 3 to 5 years com-pensates us sufficiently in excess of the risk-free rate of return for the risk of investing in equities. Correctly answering the previous question (after calcu-lating whether the price we are paying is providing a discount to our estimate of future intrinsic value) can position the Fund to generate future above average investment returns. The ability to identify stocks selling at prices that fail to discount their future ability to generate future normalized free cash flow is the key to the Fund’s long term success, whether that be with high price earnings ratio stocks or low price earnings ratio stocks.
We continue to focus on understanding a business, its potential to generate sustainable free cash flow and thus ultimately its value. After identifying companies that meet well-defined investment criteria, we then take advan-tage of what we believe to be short-term factors affecting a specific company or temporary stock market negativity (which create downward price move-ments) to buy such companies at advantageous prices that increase the chance for a successful investment outcome.
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 cap-ital appreciation. We look forward to writing to you again at the close of the year.
Sincerely,
Robert A. Olstein Eric Heyman
Chairman and Chief Investment Officer Co-Portfolio Manager
The above represents opinion, 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 Fund’s investment philosophy and are subject to change. Do not make investments based on the securities referenced. A full schedule of Fund holdings as of 6/30/17 is contained in this report, and is subject to change. This information should be preceded or accompa-nied by a current prospectus, which contains more complete information, including investment objectives, risks, charges and expenses of the Olstein Funds and should be read carefully before investing. A current prospectus may be obtained by calling (800) 799-2113 or visiting the Olstein Funds’ website at www.olsteinfunds.com.
The Olstein Funds follow a value-oriented investment approach. However, a par-ticular value stock may not increase in price as the Investment Manager anticipates and may actually decline in price if other investors fail to recognize the stock’s value or if a catalyst that the Investment Manager believes will increase the price of the stock does not occur or does not affect the price of the stock in the manner or to the degree that the Investment Manager anticipated. Also, the Investment Manager’s calculation of a stock’s private market value involves estimates of future cash flow which may prove to be incorrect and, therefore, could result in sales of the stock at prices lower than the Fund’s original purchase price. There is no assurance that the Fund will achieve its investment objective.
