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Investment Approach
The Fund emphasizes value investing, meaning it seeks
to buy securities for less than their true, or intrinsic value. This
approach was pioneered by the late Benjamin Graham, who believed that,
although markets are efficient much of the time, they are not always
efficient, and investment results can be improved through careful research
and patience. The Fund’s Adviser believes value investing both lowers risk
and increases potential returns.
The Fund blends value and growth investing to the extent that it prefers to
buy great companies at fair prices, rather than fair companies at great
prices. By “great companies”, we mean ones which earn above average returns
on invested capital, without excessive leverage or accounting tricks, and
seem likely to continue doing so in the future. However, tradeoffs are
usually required, and a low purchase price can compensate for some
shortcomings.
The Fund often looks for opportunities where there is bad news or
uncertainty surrounding a company from events such as earnings shortfalls,
management problems, product recalls, lawsuits, corporate reorganizations,
liquidations, or other major or negative events. The Adviser believes that
short-term investors often misjudge or avoid these situations, causing
market prices to decline, and creating buying opportunities for longer term
investors. If the Adviser believes damage and risk are limited, then the
affected company’s securities may be considered for purchase by the Fund.
The Fund tends to use broader diversification when greater compromise or
uncertainty is involved. When the Adviser believes an exceptional
opportunity has been identified, the Fund has the freedom to invest up to
25% of its total assets in that company’s stock. The Adviser believes
focusing on the best investments improves chances of above average results.
The Fund’s research and investments are normally focused on small companies,
especially micro-cap (under $200 million market capitalization) companies.
Some research indicates that small companies provide better investment
opportunities because they receive less attention. And, having a small asset
base should be an advantage for a fund investing in small companies because
it tends to be easier to trade without affecting market prices. For this
reason, if management believes the Fund’s growth has become a drag on
performance, the Fund may close to new investments.
In addition to small companies, the Fund is open to a broad range of
investment types to increase its chances of finding good values, and allow
it to adapt as market opportunities change. (Small companies don’t always
provide the best values.) The Fund may invest in:
• Companies of any size.
• Bonds and preferred stocks, including those convertible into common stock.
(Bonds may be of any maturity or duration.)
• Foreign securities, up to 50% of Fund assets.
• Real estate investment trusts (REITs), up to 25% of Fund assets.
• High-yield bonds of any ratings, up to 25% of Fund assets. (High-yield
bonds rated below “Baa” and below “BBB” are commonly referred to as “junk
bonds”.)
The focus of the Fund’s research and its mix of investments at any time
depend on which securities the Adviser believes hold the most value.
The Fund favors long holding periods to reduce its brokerage costs and the
taxes paid by its shareholders. Although not planned as part of normal
operations, the Fund may engage in active and frequent trading to achieve
its principal investment strategies, and that could increase the trading
costs of the Fund and the taxes paid by its shareholders. The Fund may also,
from time to time, take temporary defensive positions that are inconsistent
with the Fund’s principal investment strategies in response to adverse
market, economic, political, or other conditions. When taking such a
temporary defensive position, the Fund may not achieve its investment
objective.
The Fund has the freedom to hold cash when attractively priced investments
are scarce. The Adviser believes this helps protect the Fund from the losses
that often follow inflated prices, and is an important part of the Fund’s
value investing discipline. As a result, the Adviser is willing to hold up
to 100% of assets in cash for extended periods while seeking good investment
values. The Fund will also tend to hold some cash as a matter of course --
to fund redemptions, and to be ready for new investment opportunities.
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