Small Cap Value Fund Fourth Quarter 2017

The Tax Cuts & Jobs Act was the big event in the fourth quarter. Newly competitive global tax rates should remove the disincentive to invest in the U.S. and repatriate $2 trillion of trapped cash. However, the earnings benefit is likely vastly overstated as most analysts assume all the tax savings drop to the bottom line. Excluding some tech monopolies, virtually all public companies are in fiercely competitive industries. Like any large cost, tax savings eventually will be partially reinvested or competed away in the form of lower prices or higher wages.

We continue to be optimistic on U.S. economic growth in 2018 as the removal of unnecessary regulation, tight credit spreads, and recent passage of tax cuts maintain recently energized small business confidence. This should most notably lead to accelerating capital investment. Additionally, consumer confidence is at a 13- year high. 81 percent of Households will get a tax cut going forward.

Small Cap Value Fund Third Quarter 2017

U.S. economic growth continues to be solid as financial conditions have eased this year. Further evidence of wage acceleration at the lower end of the pay scales emerged. The Bureau of Labor Statistics showed the 10th decile wages up 3.6%, which is three times the rate of just 2 years ago. Median wages are up 3.2%, which is double 2014. Heavy baby boomer retirements at the upper end of the pay scale may be disguising the overall wage picture. This should put upward pressure on Fed Funds rates.

Small Cap Value Fund Second Quarter 2017

We underperformed our index as a 9% decline in oil prices drove down prices of the Fund’s energy holdings. The energy impact was almost all due to our overweighting as our stock selection was benign. We trimmed our technology holdings in the quarter as they approached our price targets. Our style was not in favor versus small cap growth in the quarter as cheap valuation characteristics were a headwind. Bond surrogates outperformed as long term interest rates fell despite solid economic growth. This underweighted cohort sells at an 800 basis point Price to Earnings premium to non bond surrogate stocks despite lower earnings growth rates.

Small Cap Value Fund First Quarter 2017

The S&P 500 continued to rise and is now up 11% since the election. Meanwhile, the bond market stabilized in the quarter following a rough fourth quarter. After the strong tailwinds we received in the second half of 2016, a more nuanced environment in the quarter was not unexpected. Oil prices dropped 6 percent in the quarter causing energy to be the weakest sector in our index. Given our overweight this was a drag on performance. Our energy stock selection was a non factor.

Bond proxies slightly outperformed in the quarter after their underperformance late last year. This dramatically underweighted group still sells at a relative price to earnings ratio (p/e) premium over non bond proxies that is 36% above the long term relationship and is extremely expensive in our view. On the positive side, our stock selection in technology was strong, leading to our outperformance versus our benchmark.

Small Cap Value Fund Fourth Quarter 2016

US treasury yields ripped higher in the quarter after the election, finally moving to positive real yields. The dollar rallied to multiyear highs in response to the widest bond yield differentials versus German and Japanese yields in 30 years. Thus the reflationary sector rotation that began in the 3rd quarter accelerated in the fourth quarter, reversing years of low volatility, bond proxy leadership. This created a long lost tailwind for our deep value style. Low volatility and bond proxy stocks are still expensive, however, given the massive overvaluation that existed at midyear. Our outperformance for the year was primarily produced by energy, as energy outperformed the index for the first time in 6 years.

2Q17 Quarterly Commentary

Our style was not in favor in the quarter as cheap valuation characteristics were a headwind. Bond surrogates outperformed as long term interest rates fell despite solid economic growth. This underweighted cohort sells at an 800 basis point price per earnings premium to non bond surrogate stocks despite lower earnings growth rates.

1Q16 Quarterly Commentary

The dollar weakened slightly as expectations of future Fed hikes were reduced in the wake of weak International economic growth and turmoil in capital markets thus reversing a long period of dollar strengthening. Oil prices soared in March, but ended the period roughly the same. U.S economic growth remained decent at a low level, benefiting from solid consumer balance sheets. Net worth has rebounded to 2008 highs. High Yield spreads ended the period flat after January widening. U.S.  Treasury yields followed other developed markets downward. U.S. yields are now very wide versus Germany. Defensive stocks, particularly utilities, which our style rarely finds attractive, led the way. High quality (B+ or better) led low quality (B or worse) stocks.  Momentum, low volatility and defensive stocks continue to be very expensive. These factors led to macro headwinds to our deep value philosophy.

4Q16 Quarterly Commentary

US treasury yields ripped higher in the quarter after the election, finally moving to positive real yields. The dollar rallied to multiyear highs in response to the widest bond yield differentials versus German and Japanese yields in 30 years. Thus the reflationary sector rotation that began in the 3rd quarter accelerated in the fourth quarter, reversing years of low volatility, bond proxy leadership. This created a long lost tailwind for our deep value style. Low volatility and bond proxy stocks are still expensive, however, given the massive overvaluation that existed at midyear.

4Q15 Quarterly Commentary

Equity indexes rose in the fourth quarter off of a low 3Q ending level, but concerns over slow Emerging Market economic growth and high yield bonds intensified. Growth stocks continued their 5 year record setting string of outperformance versus value stocks as performance continued to narrow into a handful of mega cap momentum technology stocks. Valuation spreads between value and its opposites of momentum, low volatility, and quality are at historic extremes according to JP Morgan research. This is similar to 1999/2000, with Amazon, Facebook, Netflix and Google replacing Cisco, Microsoft and Nortel.