Performance data quoted represents past performance and does not guarantee future results.
Investment returns and principal value will fluctuate, and when sold, may be worth more or less their original cost. Performance current to the most recent month-end may be lower or higher than the performance quoted and can be obtained by calling 866-996-FUND. The Funds impose a 2% redemption fee on shares held for 30 days or less. Performance data does not reflect the redemption fee. If it had, returns would be reduced.
^Since Inception returns are as of the Fund’s Investor Class inception date. Since the inception date of the Institutional Class, the annualized return of the S&P 500 Index is 12.05%, Russell 2000 Index is 9.49%, BAML High Yield Master II Index is 6.66%, and 60% S&P 500/40% BAML HY Master II is 9.97%.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Investor Shares is 1.42% and for the Institutional Class is 1.17%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 1.40% and 1.15% through 1/31/17, respectively.
^Since Inception returns are as of the Fund’s Investor Class inception date. Since the inception date of the Institutional Class, the annualized return of the Russell 2000 Index is 12.67%.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Investor Shares is 1.42% and for the Institutional Share class is 1.17%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 1.40% and 1.15% through 1/31/17, respectively.
*Effective 6/26/2015, the Intrepid Small Cap Fund was renamed to the Intrepid Endurance Fund.
^Institutional Class shares of the Intrepid Income Fund commenced operations on August 16, 2010. Performance shown prior to August 16, 2010 (2008-2010) reflects the performance of Investor Class shares, which commenced operations on July 2, 2007, and includes expenses that are not applicable to and are higher than those of Institutional Class shares.
Effective January 31, 2014 the Investor Class shares of the Fund were closed, and any outstanding Investor Class shares were converted into Institutional Class shares.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Institutional Shares is 0.96%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 0.90% through 1/31/17.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Investor Shares is 1.31%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 1.30% through 1/31/17.
*Effective April 1, 2013, the Intrepid All Cap Fund was renamed to the Intrepid Disciplined Value Fund.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Investor Shares is 2.84%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 1.40% through 1/31/17.
Per the Prospectus, the Fund’s annual operating expense (gross) for the Investor Shares is 5.75%. The Fund’s Advisor has contractually agreed to waive a portion of its fees and/or reimburse expenses such that the total operating expense (net) is 1.40% through 1/31/17.
Short term performance, in particular, is not a good indication of the fund’s future performance and an investment should not be made solely on returns. Performance data quoted represents past performance and does not guarantee future results.
Good morning everyone. This is Mark Travis, president of the Intrepid Capital Funds. Sorry for the slight technical delay on our end. Welcome to the semi-annual Intrepid Capital Funds webinar. Joining me today are Jayme Wiggins, chief investment officer, Intrepid Capital lead portfolio manager, of the Intrepid Endurance Fund; Ben Franklin, lead portfolio manager of the Intrepid Capital International Fund; and Jason Lazarus, lead portfolio manager of the Intrepid Income Fund.
For those of you new to the call, I just want to kind of give you an overlay what we’re trying to do at Intrepid Capital Funds. For those of you who have watched this for some time, you know that we’re not doing what everyone else is. We think of ourselves as absolute return investors, and by that: if we cannot find a suitable investment we’ll default to cash. And in an environment where prices have largely marched upward over the last five years with hardly drawing a breath it’s become particularly difficult.
In light of that, and as many of you are aware, we’ve started an international product over the last two years, and that’s broadened the depths of our search for value across the globe. But it’s still not made it any easier.
So what’s driving that, in my view, is the high rates that we now see in the sovereign debt across the globe. But before I talk about that I want to talk about the ETFs for just a moment, and this is just kind of the inflows over the course of 2016. And you can see the amount of money that’s gone into ETFs, which, you know, I think indexing is a part of a strategy; I don’t think it’s an entire strategy. I think the biggest problem for investors is they buy high and they sell low.
And what I like to think of us at Intrepid Capital are doing is trying to encourage behavior modification in our approach to capital markets by trying to take no more risks than possible and give people as smooth a ride as possible so they can meet their objectives, whatever that may be.
So I think that index flows tend to go up toward the peak, and they come out just as rapidly if a volatility appears. The interesting thing to me about ETFs is even though they’re cheap in terms of management fee I think they tend to be traded without the long term in mind. And so you have a high turnover and the capital gains taxes that go with that, most likely short term ones. Again, a negative outcome from my perspective for investors.
So let me just move to the next slide. It’s kind of a grid of sovereign debt across the globe. You can see the green is the positive rates which U.S. at the moment has – not particularly attractive. When this was printed they were actually higher than they are today, I believe. I think the five-year of the U.S. is somewhere around 100 basis points; ten-year is around 150 basis points.
So not particularly exciting, but certainly better than what you could garner in Japan, which is probably the biggest offender in trying to actually entice people with negative rates. Which I’m perplexed as how anyone thinks a rational person would actually go to the bank, deposit capital and get less back in return when they return for their deposit. So it’s not a surprise to me that there’s a bit under the gold price.
What this is doing, in my view, is making it extremely difficult not only for retirees to draw a stable, more secure income, but also banks with a spread between their cost of funds and their loans, insurance companies, and funding the liabilities they may have on their books in terms of ensuring lives or any other thing they’re ensuring.
So it’s bid up prices, as I like to say. When money’s free everything looks like a deal. And we’re now in the unusual situation where the S&P dividend of roughly two is north of, again, the ten-year treasury at 150. So we’re in an environment where the trailing S&P P multiple is somewhere around 20, again elevated. I think Jamie’s going to show you some data on that point here in a moment. And it’s a challenging time for us.
With that I’m going to turn the floor to Jayme Wiggins and Ben and Jason and we’re going to talk about some unique ideas we’ve found in this global hunt for value that we’re going through. Thank you.
Thanks Mark. The graph here shows a 26-year time series for high yield bonds and ten-year U.S. treasuries. Yields were even higher if we went back to the 1980s but we could only easily retrieve data on the high yield index beginning in 1990. As you can see junk bond yields hit all-time lows a couple of years ago. And today those yields sit well-below average.
If you exclude higher-yielding energy bonds, many of which are near default, that index is very close to all-time lows. Similarly, on the so-called risk-free side treasury yields are as low as they’ve ever been.
As you all know by now, low interest rates have also pushed up stock prices. Today the median stock in the S&P500 is trading at a higher multiple than 99 percent of all other historical time periods. And keep in mind that corporate profits for large caps, while down from recent historical peaks, are still far above average. So investors are layering high multiples on top of abnormally high earnings.
While the chart here pertains to big caps we believe the situation is just as extreme and in fact more so for smaller U.S. securities. Today the Russell 2000 index is trading at a higher multiple of EBITDA than it has ever traded before, and it’s about 50 percent above the multiple it received at prior market tops.
So we see a lot of risk out there. Due to that our goal is to look as different from the indexes as we can, since we think there’s a lot of pain in store for popular benchmarks, and likewise those investors who have tied themselves to such benchmarks through passive strategies.
There are several ways we structure our funds to attempt to find value in an over-picked market and to reduce our correlation to stock and bond indexes. First, we hold cash. We also own precious metals. We seek out under-followed equities that have catalysts or special situations. We consider more oddball securities like convertible bonds and preferred stock that are absent from most portfolios and benchmarks.
On the fixed income side, we’ll buy smaller bond issues that are avoided by larger asset managers. We emphasize companies with limited operating leverage, which may sound counterintuitive to most but can work out well in challenged economic environments. And lastly we have flexibility with allocation in several of our funds.
Let’s start out with cash. It gets a lot of attention in our funds, and our stance here is simple. Number one: don’t own stocks that we think are overvalued; number two: hold cash instead until we can find a bargain. A lot of investment managers would say their policy is no different, but we think it’s easy to talk the talk, much harder to walk the walk. For us, having high cash in our funds is not a permanent condition. It can, and has in the past, changed very quickly, and we point to examples in 2011 and 2008 when market declines created a lot of opportunities very quickly.
Many managers feel they must justify their fees by staying fully invested; that’s not the way we think. We believe our clients have given us capital with the expectation that we will defend and grow it. If there are not good options for doing so we wait it out until conditions change. While it can feel like you’re paying something for nothing, we think it’s quite the opposite: our shareholders are giving us discretion to determine when it’s smart to buy and when it’s wise to sell.
We’d also note that it can be much tougher to part with a stock that a portfolio manager held 30% over its fair value if it then fell by half and now is selling 35% below fair value, even if there are far better opportunities available elsewhere. The blank canvas of cash can allow for more optimal decision making, at least in our experience.
Besides cash we’ve had exposure to precious metals in the past couple of years that has helped to reduce our correlation to indexes. Last year our metals exposure hurt us, while this year it’s been a huge boon. We reached our maximum weight in precious metals last year in the midst of falling gold and silver prices and unprecedented desperation by central banks. And the latter of those has continued.
Gold fell precipitously from its 2012 peak to a trough late last year, while the S&P and other equity benchmarks all appreciated significantly. Although we’ve owned miners and streaming companies, we favor the business model of the latter. Streamers provide capital up front to mine owners in exchange for a perpetual claim on a portion of the mine’s output.
The charts here show the free cash flow of Silver Wheaton, our largest precious metal holding, versus those of Newmont, a major miner. You can see that Silver Wheaton’s cash flow held up much better throughout the challenged part of the cycle. Owning this type of company gave us an extra degree of conviction that it could survive an extended lull in gold and silver prices. I’m going to transfer the microphone to Ben.
Thank you, Jayme.
Across the company, we have invested in a wide range of securities we feel are different than what you would find at a traditional investment firm. We have grouped these securities into several different buckets and have examples of each. Most of these come from our International Fund but these types of securities can be held in any of our products, and many of them are. We feel that these investments allow our products to perform well, independently of what the market is doing. Broadly speaking, these ideas can be grouped into under-followed securities and unique securities. The first bucket included within under-followed securities are those that have catalysts. Explaining this strategy is better done with a couple of examples.
The first is Pacific Brands, an underwear company in Australia. Historically, the company held a wide range of brands but went through a restructuring that included large divestitures. After the thorough cleansing was a leading underwear company that had largely been neglected by the market due to being hidden by larger, lesser-quality businesses.
This underwear brand was a significant market leader with catchy marketing campaigns including the “Keep your boys comfy” advertisements like the one on the slide. Additionally, the divestitures produced a large cash influx that allowed the company to significantly reduce debt.
We did our homework on the underwear business and felt that it was just as good, if not better than Hanesbrands in the United States. We valued the business and felt that it was undervalued based on a standalone basis, although felt that it would make for an attractive buyout candidate. We were not expecting a buyout but when HanesBrands made an offer to buy the company we were not surprised and happily sold our shares for a tidy profit.
The second example within the same bucket is GUD Holdings. Again, this is a holding company with many different underlying businesses, but the market appeared to be focusing on only one: their struggling consumer product segment. We agreed with the market about this business; it had significant headwinds that may be insurmountable. Thus, we gave this part of the holding company little value.
As the consumer products business continued to decline it made another one of their businesses, their automotive segment, much more important to the consolidated earnings picture. We were fond of the automotive business model and management had a good history of focusing on their better operations while eliminating their lesser ones. This history gave us some confidence that appropriate changes would be made; however, once again we valued the holding company as if this did not occur, and we were still able to buy it at a discount to our estimate of intrinsic value.
Fortunately, management increased the size of their automotive business with an acquisition and later divested their poor-performing consumer products business. Both of these catalysts helped drive improved performance in the stock. These are just a couple of examples where catalysts have helped shares reach their underlying value.
The second bucket, which is still within underfollowed securities, includes equities that are selling at a deep discount to the assets on their books. They are not valued based on their profitability, or lack thereof, and are thus insulated from macro events that cause investors to dump stocks based on changes in earnings forecasts or earnings multiple contractions.
While searching the globe for these types of securities we have been able to find a few attractive “net-nets.” Many believe these securities, which trade at a lower value than their current assets minus total liabilities, no longer exist. Coventry Group, an Australian supplier of products to the industrial market, is a “net-net” that trades at a 33 percent discount to the net current assets on the balance sheet. We have given them zero value for their PP&E, or deferred tax assets that would have real value to an acquirer.
The third bucket, also within under-followed securities, includes special situations. Our most prominent example here is a German company, CLERE, which used to be called Balda. The company’s operations were sold and a large chunk of the cash received will be returned to shareholders in the form of a dividend that will be treated as a return of capital, meaning there will not be any taxes. This dividend will also reduce our position size when paid out.
While this security already trades below the cash and short-term securities on the balance sheet the discount increases after they have paid out their dividend. While this may look like financial alchemy, it’s not — it’s simple math. The table on the slide illustrates the calculations, which is essentially the same as removing one unit from both the numerator and the denominator in a fraction. To summarize this idea, we believe a security without any operations is likely overlooked by most market participants, and we like the idea of our discount increasing without having to endure a decline in the stock price.
The fourth bucket is a catch-all for unique securities. These include ideas that are in securities other than common equity. While they are not in the asset class we purport to be in, this does not mean we won’t invest in them.
Imagine a British Airways pilot of a Boeing 747 that enters the lottery and wins a G5 private jet. The pilot’s family is ecstatic, especially knowing they won’t have to hire a pilot for the fancy new flying machine. However, surprising everyone, the pilot turns down the extravagant prize. When his appalled family asks him why he would do such a thing he responds, “I’m a pilot of large jets, and the G5 is smaller.”
This is an extreme example of a closed mindset. Sure, the pilot would require training on the technics, systems, and numbers such as fuel burn, but this not a reason to give up a free jet. However, turning this down illustrates the same mentality many portfolio managers have when they come across an attractive security that’s not in their asset class. In contrast, we try to look across the capital structure. And to use the pilot analogy, if we need to learn to fly a smaller jet we’ll happily adapt.
The securities other than equities that we are analyzing are not leveraged derivatives or esoteric financial instruments, and are typically securities that are higher up in the capital structure than common equity. Despite this, these securities can have equity-like return potential.
Securities in this bucket include EZCORP, a domestic convertible bond that we purchased at one point at close to 60% of par when it was yielding in the double digits, and the preferreds of Dundee Corporation, a company whose common stock we already own and were familiar with. When the preferreds dropped in price, we took the opportunity to invest in what we considered distressed prices relative to par, and at high yields.
It’s important to note here that we are using the same fundamental research we use on common equities and bonds to analyze these types of securities. Furthermore, the price we pay for these types of securities is of primary importance.
A common theme throughout this discussion in under-followed and unique securities, is that we utilize a number of real-life examples, rather than broad philosophical explanations. This is done because it is the way we approach investing, studying the microeconomics of each security in ways that we don’t have to make a guess on the macro outlook. Furthermore, we think it better helps our investors understand the way we think. Now I’m going to pass it off to Jason.
Intrepid also strives to be different with our fixed income investments. Throughout our history, we have found opportunities in bonds with small issue sizes. Bonds with relatively small amounts outstanding are often passed over by larger managers. These managers simply cannot acquire enough of the given issue to move the needle in their portfolios.
Small issue bonds are often unrated, which limits ownership to managers with less restrictive investment policies. Our investible universe is also greatly expanded by the inclusion of smaller issues.
This chart shows the number of bonds issued in the U.S. with $150 million or less outstanding. The bar on the left shows the high-yield index, which is the pond most high-yield managers fish in. There are only 96 issues in this index with less than $150 million outstanding out of more than 2,000 issues. The middle bar represents all high-yield rated bonds in the U.S. with $150 million or less outstanding, including the bonds in the index. As you can see, there are over 800 small high-yield bonds that are not represented in the index. Lastly, if we add all unrated bonds with $150 million or less, the universe jumps to more than 2,200 bonds.
Another feature of small issues that we like is, in our opinion, the yields are often quite attractive relative to the credit quality. Lastly, we’ve been involved in several private placements where funds are usually lent directly to the borrower. These deals allow us to be involved in covenant negotiations and we often receive an attractive coupon. Two examples of private placements that we’ve been involved in are Spartan Stores and Smith & Wesson.
Operating leverage is a characteristic that we are very focused on. Companies with high operating leverage can experience large swings in earnings with even a small change in revenue. While this is clearly beneficial during a growth phase, it can be devastating during a slowdown, particularly when combined with financial leverage.
We look to find companies with low operating leverage. Not only does this increase our confidence in our valuations but it also reduces the risk of permanent capital impairment.
Regarding asset allocation, our strategies have the ability to invest across market caps and even asset classes, as Ben reviewed previously. Our Disciplined Value Fund typically invests in mid-cap equities, but regularly owns small caps all the way up to mega caps.
In our Income Fund, we are primarily involved in high yield, but we also own convertible bonds, preferred stock and investment grade bonds. Lastly, the Intrepid Capital Fund can shift its allocation between stocks and bonds based on where are finding value. It can also invest in equity securities of any market cap.
Now I’m going to turn it back over to Matt for Q&A.
Thank you, Jason. We’ll start the Q&A session. Please just type your questions into your toolbar in the GoToWebinar section and we’ll take them as they come in.
All right, we got our first question. I’m going to have Jayme Wiggins answer it.
The first question is: “As you search the capital structure for yield, is the market for preferreds looking as expensive as other markets?”
Honestly, it’s not a market that we focus on by itself, in the sense that we’re not canvassing a preferred market, but occasionally things pop up there. I think yields have been compressed there just like they’ve been compressed anywhere else. But I’m actually going to give Ben a chance to comment for a few sentences, maybe expand a little bit on Dundee because that’s the last time we actually had an investment in preferreds across our funds. So let me give it to him for a second.
Just to reiterate what Jayme said, with yields this low in general preferreds are not something – you know, with very low yields – are not something we would even look at. In the case of Dundee, it was a company where we owned the equity and as the price of the equity, the common was falling, we were looking across the capital structure. So it was sort of a unique situation. And the price of the preferreds were not trading like the overall preferred market. It was more sort of one of these one-off situations. And that’s what we’re looking for is something that’s not really trading with the market in general; something that’s doing something independent. In that case it was very beneficial, the work that Jayme had already done on the common to allow us to enter the preferreds.
This is Jason. I look at preferreds, pretty frequently, with our fixed income products. One of our main concerns is most of the market is fixed return with perpetual maturity. So, obviously you’ve got an ultra-long duration interest rate risk there. So, I don’t think we’ve ever owned anything with a perpetual maturity. Like Ben said, those had a maturity date.
One security that we do own is Pitney Bowes. I’m sure you’re all familiar with Pitney Bowes; they make the mailing equipment. This security is fairly unique because it has what’s called a step up coupon. So beginning in October of this year, the coupon begins to increase by 50% every six months. So, essentially what that does is it forces the company to redeem the security at that date. So while it’s a perpetual security, in reality, it’s going to end up maturing in October, is our view.
Okay, here we go. So: “Are you seeing any opportunities in the energy space in regards to debt? And what’s your view on oil?” Honestly, most of the opportunities in energy, at this point, are gone. If you have been following the asset class closely, it’s basically recovered all of the drawdown from February – you know, there were many, many distressed energy bonds in February, trading in the 30s and 40s. Many of those are back to the 80s, 90s, or even close to par, at this point.
Our view is that all of those companies, or most of those companies are still going to have structural issues with energy prices at current levels. You know, we have a long-term view on oil. We don’t think that oil or natural gas – we don’t think that drillers can profitably drill and produce, at this point. But, obviously the length of the downturn has been longer than anyone has expected, including ourselves. So, we’re favoring sort of unique companies. We own one E&P at this point; the name of the company is Unit Corp. It’s a bit of a unique security in that it has an E&P business, it has a drilling business, and it also has a midstream business. We think the balance sheet is better than most high-yield E&Ps out there at this point. We we’re comfortable with a small position in that security that’s trading in the high 70s. We think we’ve got a reasonable “margin of safety” there. But in general, if energy prices stay where they are for a prolonged period of time, basically, the entire high yield energy space is going to have serious issues.
The next question is, “How are you finding the market for net-nets in North America and have more come through with the increased weight of indexing?”
I guess we’d say the market for net-nets in the U.S. is very thin. I haven’t personally run a screen recently to capture those specifically, but if I had to guess, I’d say there could be half a dozen, maybe more, depending on how low you go in capitalization. And I’m guessing that several of those are probably bleeding cash and have a different dynamic to what’s going on with their business compared to a couple of the ones that Ben talked about that he sourced for the International Fund.
Do you want to take the next one?
“Do I expect the Fed to raise rates?” No, I really don’t. I mean if they were September would be when they would do it. After that it’s probably even more politicized for them to move. But, I don’t think the U.S. government can afford higher rates, for one, with the indebtedness we have. And I think they’ve gotten themselves into a box canyon, personally. But – and the market could set the rate on its own without the PhDs at the Fed. But that’s a whole other story. So I don’t think they move in September, but that’s just a guess.
All right, those are a bunch of great questions. We’ll wait for another minute and see if anyone else has any further questions. We appreciate everyone joining us today. Don’t be a stranger; if you’ve got questions don’t hesitate to give us a ring. We’ll be at the Schwab Conference – I believe it’s in San Diego – in October. We really appreciate everyone taking the time this morning. We do have one more question coming in about the Select Fund. I’ll let Jayme take that.
The last question is, from “an investor in the Intrepid Select Fund, which has done,” — they’re saying this, not us, so don’t bust us for compliance. They’re saying, “it’s done well this year. Do (we) anticipate reshuffling positions, you know, selling names to take profits, redeploying in the near term, or is there continued upside in your models?”
The Select Fund is our product that operates with the mandate where we try to stay almost fully invested with hugging sort of 90% or more to the best of our abilities. That fund owns small and mid-cap securities. We’re constantly rejigging weights to keep that fund up to its invested mandate. In some cases, those weights can get pretty large, larger than we have in our other products that have those same securities. So it is a higher volatility product. It can potentially go up more and can potentially go down more, depending on the environment.
Recently, we’ve actually purchased a couple of very small put positions on the small cap index that are very deep out of the money with the goal of – I want to choose my words carefully – protecting – and I don’t know what the right word is but helping our exposure in the event that markets turn south here because we are sitting on a decent year-to-date gain in that product.
Because of the equities that we own have done swell on a security-specific basis, the discount to intrinsic value for many of those has decreased, and in some cases those weights have been reduced and they’ve been shuffled and the things that still have a decent discount to fair value. But on average, our discount is lower today than it was seven months ago. So stay tuned for updates on that. One more question, too.
This question is about the International Fund and it says that, “(we) have reduced cash since the end of the first quarter. Where do (we) put it to work?”
There have been several new ideas entering the portfolio. I believe all three of these have been entered since the end of the first quarter. One of them is a Japanese firm that is a supplier to the auto retail market. Another one was a U.K. school supply company that we entered into, we started before the whole Brexit vote, but we were able to purchase them even cheaper after that. Then lastly, there was an Australian position that we entered. I believe that was since the end of the first quarter. And then other than that we have – we changed our weights around throughout the quarter based on where our stocks move, and I think we have added to some that did fall during the quarter.
All right, great, thanks, Ben. If there’s no more questions we want to just thank everyone for joining us this morning. We appreciate your business; we appreciate your confidence in our process. And again, if you have any questions in the meantime don’t hesitate to reach out for us. Thanks for joining us and have a great day.
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EBITDA is calculated as the company’s Earnings Before Interest, Taxes, Depreciation and Amortization.