Bernard Horn’s Polaris Global Value Fund 4th-Quarter Letter

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Sydnee Gatewood

Discussion of markets and holdings

January 18, 2021

Dear Fellow Shareholder,

During the fourth quarter of 2020, the MSCI World Index gained 13.96%; the Polaris Global Value Fund (“the Fund”) substantially outperformed, up 26.18%. This is the third consecutive quarter of absolute positive performance following poor first quarter results, in a year marked by a global pandemic, ensuing country lockdowns and political tumult. By the end of the year, stock markets were fueled by a number of positive developments: two highly-effective COVID- 19 vaccines, continued aggressive government stimulus, record low interest rates and the conclusion of the U.S. Presidential race.

In a quarter when all portfolio sectors posted positive gains, cyclicals including financials, consumer discretionary and materials were the top contributors to performance. Utilities and energy added the least, due to underweight positions in these defensive sectors. At the country level, U.S. gains were driven by a recovery in financials, health care diagnostic testing companies and upbeat earnings from resilient consumer discretionary companies. The portfolio maintained a modest 36% U.S. weighting compared to the MSCI World Index, which is dominated by U.S. stocks (66%), many of which are strong momentum and tech laden companies that do not meet our value discipline. The MSCI World Index relegates the rest of developed equity markets to weightings of less than 5% (with the exception of Japan at 7.8%). Polaris is steadfastly benchmark agnostic, ensuring that the Fund is more diversified than the benchmark. As such, the Fund was overweight and outperformed in almost all non-U.S. countries during the quarter; Italy was the only notable decliner due to losses at Trevi Finanziaria. Emerging market countries also played a part in quarterly results, as portfolio exposure in South Korea, Chile and Colombia boosted performance.

Many Fund holdings rebounded in the fourth quarter, validating our belief that short-term macroeconomic conditions rarely overwrite good company fundamentals. Companies with strong cash flows, resilient, flexible business models and proactive management teams withstood the extraordinary pandemic headwinds. In fact, more than half of portfolio companies had gains in excess of 20% during the quarter and included a broad mix of long-term holdings and new stocks added during the year. Among the top performers were: Methanex Corp., Tapestry Inc., Magna International, Publicis Groupe, Samsung Electronics, Webster Financial, Antofagasta and Crocs Inc. Decliners included the aforementioned Trevi and U.S.-based technology and semiconductor company, Intel Corp.

FOURTH QUARTER 2020 PERFORMANCE ANALYSIS

U.S. banks gained on news of vaccine approvals and renewed government stimulus, staving off concerns about loan losses and bankruptcies. Several banks reduced loan loss provisions and reported fewer loan deferral balances and non-performing loans, propping up Webster Financial, Ameris Bancorp and Puerto Rico-based Popular Inc. The Federal Reserve also completed its 2020 bank stress testing, indicating banks were sufficiently capitalized; this may signal the resumption of capital return policies and buybacks for larger U.S. institutions like Capital One Financial (NYSE:COF) and JPMorgan Chase (NYSE:JPM). Nordic banks, including DNB ASA (OSL:DNB) and Svenska Handelsbanken (OSTO:SHBA), performed well as local regulators decided to soften their dividend payouts stance. Both institutions also noted solid earnings without evidence of large losses or loan deferment requests. Bancolombia (NYSE:CIB) recovered most of 2020’s lost ground with a sharp gain in December on the back of a Moody’s rating affirmation and a stronger Colombian peso.

It was gratifying to see the recovery in financials, where the Fund has been overweight in recent years. Following detailed financial modeling and analysis, we held steadfast to our bank holdings even as the banks tumbled earlier in the year amid emotional investor selling. With the industry recovery in the fourth quarter, the Fund’s financial sector holdings collectively gained 34% compared to 24% for the MSCI World Index financials benchmark, further validating our strategy.

In a COVID-19 operating environment, many retail companies reduced promotional activity that typically drove in-store sales. Less competitive behavior, along with streamlined brick-and-mortar stores, allowed many companies to strengthen margins in an otherwise difficult economy. Tapestry Inc. (NYSE:TPR) (the parent company for Coach, Kate Spade and Stuart Weitzman brands) increased revenue, expanded gross margins, and accelerated e-commerce sales. Footwear manufacturer, Crocs (NASDAQ:CROX), had record revenues on U.S. sales, especially in the direct-to- consumer marketplace. Improving margins were on trend throughout the consumer discretionary industry. Honda Motors (TSE:7267), a new addition to the portfolio, maintained high operational margins as it began to refocus on core auto and motorcycle models and introduced shared platform manufacturing across models, leading to closure of less efficient plants. Canadian car parts supplier, Magna International (TSX:MG), had robust quarterly results on stronger sales, volumes, and cost cutting. The company also formed two electric vehicle joint ventures: one with electric automotive design/engineering firm, Fisker Automotive, and one with LG Electronics.

As the COVID-19 pandemic unfolded, demand for housing in many countries strengthened as people fled cities for the suburbs, further lured by low interest rates. Yet, lockdown measures reduced the ability to construct houses in a timely fashion. Homebuilders like Taylor Wimpey (LSE:TW.) and Bellway (LSE:BWY) made progress, working efficiently under the new socially-distanced construction conditions. Reservation rates were higher, cancellation rates dropped and balance sheets were solid; both companies reported 35%+ gains during the quarter with upbeat guidance for 2021. However, the mid-December U.K. lockdown might dampen house completions in the short term.

The Fund’s substantial overweight in the materials sector contributed to outperformance. Methanex Corp. (TSX:MX) built momentum, as methanol spot prices jumped due to 1) end demand recovery, largely in China and other Asian economies, 2) oil price recovery, and 3) continued supply outages as competitors faced unanticipated plant shutdowns. Methanex’s management also took steps to improve the liquidity profile by refinancing; this news met with investor approval. Favorable supply-demand metrics boosted Antofagasta (LSE:ANTO), a leading Chilean copper and gold miner. The fundamentals (resumption of building in China, increased industrial demand) underscoring the rise in commodity prices may translate into strong performance in other material sector companies in a post COVID-19 world; therefore, the Fund maintains an overweight position in materials. In fact, sector holdings were increased with the purchase of U.S.-based plastic packaging manufacturer, Berry Global (BERY).

In information technology, Samsung Electronics (XKRX:005930) and SK Hynix (XKRX:000660) both logged 50%+ returns as DRAM chip prices trended higher. A replacement cycle in data servers, Chinese inventory rebuilding and a recent Micron fab disruption were the primary drivers for this chip price projection. Additionally, SK Hynix’s purchase of Intel’s NAND business may bring better supply discipline, taking one competitor out of the industry. In other news, Samsung cited its television division as a strong revenue generator due to stay-at-home mandates. Plans to scrap its QLED/LCD televisions have been backburnered while Samsung capitalizes on demand. One of the few portfolio detractors, Intel Corp. (INTC) dropped 3% as investors worried about competitors cutting into Intel’s data center chip market share, and the potential for lower margins if Intel employs a third-party foundry for its next generation of chips. Nevertheless, business remained solid as Intel exceeded its quarterly revenue expectations and sold non-core product lines. Hewlett Packard Enterprise (HPE) was sold at a profit, as we proactively exited the stock before structural challenges take hold in the commercial printing market. Indian IT outsourcing company, Infosys Ltd. (INFY), was also sold to make way for more undervalued investment opportunities.

French advertising firm, Publicis Groupe (XPAR:PUB), was the top contributor in communication services. The company beat market expectations with relatively-decent organic growth and lower expenses, while announcing major client wins like Kraft Foods and TikTok. Retailers tapped Publicis, which is known for its digital marketing assets, to organize advertising/marketing campaigns focused on direct-to-consumer sales. The undercurrent was simple: steer buyers away from massive distributors like Amazon in favor of the retailer’s own branded websites, distribution channels and e- commerce platforms. It is a message that is resonating with consumers in a post COVID spending environment. At the same time, retailers have been keen to reformat their print, TV and internet advertising to align with current affairs – from COVID-19 masking to social equity to travel planning. The creative teams at Publicis have been busy.

Few industries were more impacted by COVID -19 than travel and leisure, from airlines and hotels to restaurants and entertainment venues. Cineworld Group was down 30% in October as it shuttered all of its theaters in the U.S. and U.K. By December, Cineworld’s (LSE:CINE) stock partially recouped declines, gaining 68%, as the company refinanced debt with 10% dilution to shareholders. While streaming platforms are now popular by default, we believe consumers will embrace the theatrical experience when lockdowns are lifted as has been the case in countries like China and Japan. We initiated a position in Cinemark Holdings (CNK) on this premise. Shortly thereafter, Disney (DIS) (the company that provided nearly 40% of the 2019 U.S. box office) announced its intention to release its biggest titles to the theater, while also focusing on its Disney+ streaming platform. Both theater stocks jumped on the news.

In a typical year, nearly a half dozen Fund companies are subject to takeover bids; in 2020, there was a dry spell until the fourth quarter. Signature Aviation (LSE:SIG) jumped more than 70% during the quarter, after disclosing two competing premium buyout offers. A 2020 portfolio addition, Alexion Pharmaceuticals (ALXN), rose more than 35% after receiving a $175 per share takeover bid from AstraZeneca (AZN). Alexion’s current ultra-rare disorder therapies and future drug pipeline are very attractive; we do not believe the bid reflects full value.

Trevi Finanziaria (MIL:TFI) was among the few detractors to performance. The Italian construction engineering firm basically marked time, as it had been a strong performer early in the year but drifted back on postponed infrastructure projects. Otherwise, Trevi has made slow but steady progress in its order book and project pipeline.

2020 YEAR IN REVIEW

No one could have expected 2020 to be the year of a pandemic, replete with country lockdowns, rising unemployment, trade wars, political turmoil and volatile oil prices. Yet, each of these developments rippled through the global economy, with investor optimism souring as the first effects of COVID- 19 took hold. Governments and central banks initiated unprecedented monetary and fiscal policies, hoping to boost industries hardest hit. Still, most companies cratered in the first quarter of 2020, falling into bear market territory (MSCI World Index down -21.05%), only to begin their slow climb out of the trough in the second quarter. The third and fourth quarters heated up. For the year ending 2020, the Index rose 15.90%, while the Fund was up 6.65%. Underperformance was attributable to lackluster results in the overweight financial sector, as well as notable losses in energy, consumer staples and industrials. At the country level, the portfolio outperformed in Canada, France, Finland, Belgium, Norway and Austria; yet these modest weightings did little to absorb the underperformance and underweight in a robust U.S. market. While full year performance was underwhelming, we are pleased to have markedly outperformed in the fourth quarter; we believe that the Fund is well positioned for the fits and spurts of a 2021 recovery.

We would be remiss in not mentioning that 2020 was one of the worst years in history for value stocks, as world markets were driven by high flyer stocks and FAANGs (Facebook, Amazon, Apple, Netflix and Google), shunning the fundamentally strong but less glamorous sectors like materials, industrials and financials. In this context, the Fund outperformed the MSCI World Value Index, which was down -1.16%.

Part of our success stems from our work to restructure the Fund, selling fairly-priced companies in favor of new ideas that may have more upside potential. We sold Wesco International (WCC), Infosys, Hewlett Packard, L Brands (LB), JM Smucker (SJM), Kone OYJ (KNYJF) and a number of other companies on valuation, making space for more than two dozen buys including Crocs, Tapestry Inc, Antofagasta, Bunzl PLC (LSE:BNZL), Cinemark, CVS Health Corp. (CVS), Honda Motor Co., Berry Global and Williams Companies (WMB). We invested in some COVID-19 sensitive sectors, such as travel and leisure, early in the year only to subsequently sell some of them on rich valuations following a rebound. Examples include: airlines, Delta (DAL) (+10%) and Ryanair Holdings (LSE:RYA) (+43%), U.S. restaurant group Darden (DRI) (+60%) and Swedish RV solutions supplier, Dometic Group (OSTO:DOM) (+88%). We will continue to research such opportunities in 2021, hoping to pinpoint more undervalued stocks that may boost Fund performance.

INVESTMENT ENVIRONMENT AND STRATEGY

We recognize that we are not “out of the woods” yet with the COVID-19 pandemic, as the next waves and strains of the virus cause country lockdowns. So far in 2021, we have already seen a moratorium on social activities in the U.K. until mid-February; Canada is hinting at stronger enforcement measures; France instituted a 12-hour curfew; and Germany posted harder restrictions across all 16 federal states. The U.S. isn’t far behind, with many states mandating stay-at- home orders. Yet, we don’t believe that any lockdown scenario will have the same gravity as it did in the first quarter of last year. Vaccines are in distribution, global citizens have dealt with the virus for nearly a year and most public companies learned to adapt to the new working condition, focusing on e-commerce and operational restructuring. When economies turn the corner, many highly-efficient businesses will be positioned for impressive growth. We are making every effort to build a Fund portfolio of these types of companies; we expect admirable performance (like that of the fourth quarter 2020) to follow.

Sincerely,

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

Before investing, you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information are in the prospectus, a copy of which may be obtained by calling (888) 263-5594 or visiting the Fund’s website at www.polarisfunds.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, is the Fund’s Distributor.

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About the author:

Sydnee Gatewood

I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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