“Being president is like being a jackass in a hailstorm.
There’s nothing to do but to stand there and take it.”
– Lyndon B. Johnson
October 14, 2014
Dear Fellow Shareholders:
While the major U.S. stock indices eked out small gains for the
quarter ending September 30, 2014 and the S&P 500 reached
a record high on September 18, we unfortunately have little
new to say from our most recent quarterly letter. Specifically,
our performance continued to trail our benchmarks at the end
of the third quarter.
Short-term underperformance is frustrating, but our goal
always is to generate outstanding long-term performance.
We understand the long road to potentially reaching that
destination will be bumpy and periods of underperformance
are inevitable. That doesn’t make these periods any easier to
take. In other words, in times like these we know exactly what
being the proverbial jackass in a hailstorm feels like.
On the bright side, we are proud we continue to receive
national recognition. Value Fund was recognized in the
September 2014 issue of Kiplinger’s Personal Finance,
based on the fund’s performance for the five-years ending
June 30, 2014. This was the third consecutive year Value Fund
was recognized by Kiplinger’s. We are big believers in “eating
our own cooking” and are invested alongside our fellow fund
shareholders. In fact, Inc. published an article in September
highlighting KM and the importance of this fact in building
trust and credibility. You can’t spend national recognition, but
we think it validates we can compete very effectively against
the biggest and best in our industry.
We continue to think the overall U.S. stock market is fairly
valued. While it has become more challenging to find stocks
with attractive risk/reward characteristics, we still like what
we own and remain fully invested. The companies we own
have generally done a good job of increasing the value of
their businesses. While it’s frustrating to be in a cyclical period
Periods ending September 30, 2014 (4)
Value Fund (1)
Total Return
Russell 3000 (2)
Index
3-months-4.20%
9-months-1.02%
One-year 6.94%
Two-years17.70%
Three-years23.76%
Five-years18.72%
Ten-years
8.19%
Since Inception
7.89%
(December 31, 1998)
S&P 500 (3)
Index
0.01% 1.13%
6.95% 8.34%
17.76%19.73%
19.66% 19.54%
23.08% 22.99%
15.78%15.70%
8.44%
8.11%
5.51%
4.98%
The Fund’s Gross Expense Ratio and Net Expense Ratio were 1.54%
and 1.45% respectively, according to the Prospectus dated January 28,
2014. Until February 28, 2015, the Adviser has contractually agreed to
waive its management fee and/or reimburse the Fund’s other expenses.
Investment performance reflects waivers in effect. In the absence of such
waivers, total return would be reduced.
Performance data quoted represents past performance; past performance is
no guarantee of future results. The investment return and principal value of
an investment will fluctuate so that an investor’s shares, when redeemed, may
be worth more or less than their original cost. Current performance of the
fund may be lower or higher than the performance quoted. Performance data
current to the most recent month-end may be obtained by calling 1-800-8708039. The fund imposes a 1.00% redemption fee on shares held less than 30
days. Performance data quoted does not reflect the redemption fee. If reflected,
total returns would be reduced.
1. The performance data quoted assumes the reinvestment of capital gains
and income distributions. The performance does not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares.
2. The Russell 3000 Index is an unmanaged, capitalization-weighted index
generally representative of the overall U.S. stock market. This Index cannot be
invested in directly.
3. The S&P 500 Index is an unmanaged, capitalization-weighted index generally
representative of the U.S. market for large capitalization stocks. This Index
cannot be invested in directly.
4. One-year, Two-years, Three-years, Five-years, Ten-years and Since Inception
returns are Average Annualized Returns.
when we don’t think stock prices are adequately reflecting
these increasing values, we’re encouraged the private market
is, as evidenced by several takeovers of companies in our
portfolio. We think it could be a matter of when public
market valuations will catch-up, not if.
We believe investors are nervous about the strength of the
U.S. economy and on pins and needles regarding the impact
of the inevitable tightening of Fed monetary policy. Further,
this has caused investors to flee from smaller-capitalization
stocks to the perceived safety of larger-capitalization stocks.
We think these fears are misplaced. The Leading Economic
Index (LEI) points to a strengthening economy, which should
enable the Fed to slowly withdraw some of the emergency
measures implemented at the depth of the financial crisis,
over 5 years ago.
The Stock Market
We’re not making excuses for our weak relative performance
thus far in 2014, but it’s important to understand the
challenging stock market environment we’ve continued to
face. As stated in our most recent quarterly letter, one of
the primary reasons active managers have struggled this
year is the wide divergence in performance between the
largest-capitalization and smaller-capitalization stocks. Our
primary performance benchmark is the Russell 3000 Index,
a capitalization-weighted index comprised of the 3000
largest-capitalization U.S. stocks (representing about 98%
of the investible U.S. equity market). The Russell 3000 Index
can be divided into the Russell 1000 Index (largest 1000
market capitalizations) and Russell 2000 Index (smallest
2000). Because the Russell 3000 is capitalization-weighted,
the performance of the stocks in the Russell 1000 has a
significantly greater impact on the performance of the
Russell 3000 than the performance of the stocks in the Russell
2000. In fact, the stocks in the Russell 1000 (1/3 of the stocks)
comprise 92% of the weight of the Russell 3000, while the
stocks in the Russell 2000 (2/3 of the stocks) comprise only 8%.
The strength of the large capitalization-dominated indices has
also masked a “stealth correction” that has impacted the vast
majority of stocks. Bespoke Investment Group reported as of
September 10, 2014, the average large-cap stock was down
7.5% from its 52-week high, the average mid-cap stock down
11.1% and the average small-cap stock down 17.3%. Overall,
the average stock was down 12.4% from its 52-week high.
We’ve established it’s been a tough environment in 2014, so
what do we do going forward? We’ll continue to evaluate
stocks as if we’re buying the entire business to own for 5-10
years. We’ll look for companies with solid business prospects,
sound financial structures and strong, shareholder-oriented
management teams whose stocks are selling at a significant
discount to our evaluation of intrinsic value. We’ll remain true
to our value discipline and maintain a steely-eyed focus on
our investment process, tuning out the noise from short-term
results.
The performance disparity based on market capitalization can
be clearly seen in the two tables below. For the periods ending
September 30, 2014, the Russell 2000 Index underperformed
the Russell 1000 Index by 5.06% and 15.33% for the third
quarter and year-to-date, an enormous performance
gap. Wall Street research firm Strategas Research Partners
LLC (“Strategas”) examined YTD returns as of 9/30/14 for the
Russell 3000 by market-capitalization quintile. As you can
see, performance dropped-off dramatically after the largest
quintile (i.e. largest 600 stocks) and turned negative by the
middle quintile. Thus, funds like Value Fund having significant
representation in their portfolios outside of the largest 1000
stocks sailed into some stiff performance headwinds in the first
nine months of 2014.
We believe following this process can lead to long-term
success. Even during this difficult year, our approach has been
validated by the buyouts of portfolio holdings Time Warner
Cable Inc., Covidien PLC, Taminco Corporation and EPL
Oil & Gas, Inc.
Percent Change in Top Ten Holdings from Book Cost
(as 9/30/2014)
1. LyondellBasell Industries NV +434.1%
2. Canadian Pacific Railway LTD
+603.0%
3. Alliance Data Systems Corp.
+237.5%
4. Portfolio Recovery Associates, Inc. +177.3%
5. WABCO Holdings, Inc.
+377.7%
6. NCR Corporation
+116.1%
7. NewMarket Corporation +109.9%
8. Yahoo! Inc.
+152.3%
9. ARRIS Group Inc.
+82.0%
10. Rosetta Resources, Inc. +160.6%
Periods ending September 30, 2014
Russell Russell RussellPerformance
3000 Index 1000 Index 2000 Index
Gap
(R2000 vs R1000)
3-months 0.01%
0.65%
-4.41%
-5.06%
9-months 6.95%
7.97%
-7.36%
-15.33%
Performance quoted represents past performance and is no
guarantee of future results.
Russell 3000 Index Quintile Returns
Size quintile
YTD Returns (as of 9/30/14)
Largest (1)
6.79%
Larger (2)
2.35%
Middle (3)
-2.08%
Smaller (4)
-7.42%
Smallest (5)
-8.47%
Fund holdings and sector allocations are subject to change and are
not recommendations to buy or sell any security.
Portfolio Comments
Tessera Technologies, Inc. (TSRA) was up 20.4% in the
third quarter as its new management team continued to
Source: Strategas Resarch Partners LLC
2
execute its turnaround plan. CEO Tom Lacey and CFO Rob
Andersen joined the company less than a year ago after
Starboard, an activist investor, prevailed on the shareholders
and the board of directors to dismiss the prior management
team. The first step of the turnaround plan was to shut the
operations of money-losing Digital Optics Corp (DOC) and
extract value from DOC’s assets, patents, and technologies.
Tessera then worked to reach agreements with licensees,
rather than continue with expensive and time-consuming
litigation. Tessera is also refocussing on core technologies,
the part of the plan likely to take longer to bear fruit. We
remain enthusiastic owners. Yahoo! Inc (YHOO) rose 16.0%
during the third quarter in anticipation of the initial public
offering (IPO) of Alibaba Group Holding LTD. (BABA), the
largest IPO in history. Alibaba is a Chinese provider of internet
infrastructure, e-commerce, online financial and internet
content services. Think of Alibaba as the Amazon, eBay and
a smidge of Google of China. In 2005, Jerry Yang, co-founder
of Yahoo, contributed $1 billion of Yahoo’s cash and Yahoo!
China for a 40% stake in Alibaba. This original investment
would be worth nearly $92 billion dollars today. Prior to the
IPO, Yahoo still owned 523.6 million shares of BABA, roughly
24% of the company. As the buzz around the IPO continued
to heat-up, driving the initial offering price higher and higher,
Yahoo’s stock also rose. Yahoo sold 140 million shares at the
offer price of $65/share, netting roughly $6.2 billion (aftertax). Yahoo continues to hold 383.6 million shares of Alibaba,
worth about $33.8 billion pre-tax or over $33 per Yahoo share.
Yahoo has been a great investment since we purchased it in
mid-2012 for about $16 per share. We think Yahoo remains
attractive because if you subtract cash and investments
(including Alibaba) from the stock price, Yahoo’s remaining
core business is valued at zero. Open Text Corp. (OTEX)
rose 15.6% during the third quarter after its fiscal 4Q results
exceeded expectations by a wide margin. Open Text has
been a favorite target of short sellers (i.e. investors who place
negative bets on securities). Open Text has nearly doubled
since our original purchase in April 2012, so the short sellers
have been bloodied, for now. The new management team
has executed its strategy of growing via acquiring companies
offering cloud services.
the third quarter due to investor concerns about increased
industry capacity leading to weaker pricing and revenue. We
think American’s fundamentals remain strong and the stock is
attractively valued.
FNFV Group (FNFV) was purchased during the third quarter
after it was spun-off from Fidelity National Financial (FNF) on
July 1st. This security is a tracking stock which represents
an interest in a group of disparate assets distinctly separate
from FNF’s core mortgage business. FNFV is a portfolio
of investments including Remy International (REMY), J.
Alexander’s, American Blue Ribbon, Ceridian/Comdata and
other smaller investments. FNFV’s management team is
seeking to sell these assets, which we believe could be worth
as much as a combined $22 per share compared with our
cost of about $16.40 per share. We think the discount could
narrow as the asset sales proceed. We think FNFV is a good
example of our uncovering value in “special situations,” such
as spin-offs.
Summary
We’re not happy to be trailing our benchmarks thus far in
2014, but have been here many times before. We can’t say
when this hailstorm will end, but historically they have not
lasted forever. In the meantime, we’ll work hard to make-up
lost ground. We’re invested alongside you and you can rest
assured we’ll continue to manage your precious assets with
the same care as we invest our own.
Regards,
Mark D. Foster, CFA
Mickey Kim, CFA
PresidentVice-President,
Treasurer and Secretary
Value Fund invests in foreign securities, which involves greater volatility and
political, economic and currency risks and differences in accounting methods.
Value Fund may also invest in small- and medium-capitalization companies,
which tend to have more limited liquidity and greater price volatility than largecapitalization companies.
Past performance is not a guarantee of future results.
Rosetta Resources (ROSE) fell 18.8% during the third
quarter after reporting slightly disappointing results for the
second quarter. Production growth continued to increase
during the second quarter, allowing the company to raise
its guidance for 2014 production by 3%. In addition, the
price of crude oil declined roughly 13.5% during the second
quarter, which hurt stocks in the energy sector. Tribune
(TRBAA) fell 17.9% during the third quarter, despite reporting
solid results for the second quarter. Advertising remains
challenging and there are also concerns about Twenty-First
Century Fox possibly terminating its affiliate agreement with
Tribune’s Seattle television channel (KCPQ). We think the
new management team is doing a good job executing its
strategy. American Airlines Group (AAL) fell 17.4% during
Please refer to the Schedule of Investments for complete fund holdings information.
The ranking by Kiplinger’s Personal Finance (“Kiplinger’s”) was based on
Morningstar’s universe of 29,000+ funds. Kiplinger’s filtered out new funds
less than one-year old (as of June 30, 2014) and sorted based on Morningstar
category. In this example, Midsize-Company stock funds consisted of
Morningstar’s Mid-Cap Growth, Mid-Cap Blend and Mid-Cap Value categories.
Kiplinger’s then sorted by the four periods (e.g. 1-year, 3-years, 5-years and
10-years) ending June 30, 2014. Within each of those periods, Kiplinger’s filtered
out multiple share classes of funds, funds with high minimum investments,
leveraged funds and funds only available to select groups. Kiplinger’s MidsizeCompany stock fund universe for the 5-years period ending June 30, 2014
consisted of 295 funds. Kiplinger’s publishes rankings for only the top ten funds
in each of the four periods. The Fund did not qualify for published ranking in the
1-year, 3-years and 10-years periods ending June 30, 2014.
The Russell 1000 Index is an unmanaged, capitalization-weighted index generally
3
KIRR, MARBACH PARTNERS
VALUE FUND
representative of the U.S. market for large-capitalization stocks. It is
a subset of the Russell 3000 Index. This Index cannot be invested in
directly.
SCHEDULE OF INVESTMENTS
September 30, 2014
The Russell 2000 Index is an unmanaged, capitalization-weighted
index general representative of the U.S. market for small-capitalization
stocks. It is a subset of the Russell 3000 Index. This Index cannot be
invested in directly.
Number
of Shares
The Conference Board Leading Economic Index® (LEI) for the U.S.
is one of the key elements in an analytic system designed to signal
peaks and troughs in the business cycle. The leading, coincident,
and lagging economic indexes are essentially composite averages of
several individual leading, coincident, or lagging indicators. They are
constructed to summarize and reveal common turning point patterns
in economic data in a clearer and more convincing manner than any
individual component – primarily because they smooth out some
of the volatility of individual components. The ten components of
Leading Economic Index for the U.S. include:
47,800
31,397
6,500
55,275
12,120
22,820
5,705
1,442,677
9,046,925
Communications - 14.9%
2,252,238
Knowles Corp. *
1,336,262
769,034
Liberty Media Corp. - Class C *
1,531,874
News Corporation - Class A *
1,322,715
Tribune Co. *
1,501,556
NeuStar, Inc. - Class A *
412,799
Time Warner Cable, Inc. - Class A
1,739,099
Tribune Publishing Co. *
115,127
10,980,704
Consumer Cyclical - 6.1%
American Airlines Group, Inc.
1,640,063
25,695
Dollar Tree, Inc. *
1,440,719
AutoZone, Inc. *
1,427,048
4,507,830
Consumer Non Cyclical - 9.9%
55,280
Alere, Inc. *
31,500
Ascent Capital Group, Inc. - Class A *
13,100
2,143,758
Alliance Data Systems Corp. *
3,252,337
1,896,300
7,292,395
Energy - 3.0%
50,479
Rosetta Resources, Inc. *
2,249,344
38,525
American International Group, Inc.
2,081,121
123,340
1,676
53,550
54,420
For further information about Value Fund and/or an account
application, please call Matt Kirr at Value Fund at (812) 376-9444 or
(800) 808-9444 or write to Value Fund at 621 Washington Street,
Columbus, IN 47202-1729.
3,411,598
46,225
2,800
Quasar Distributors, LLC is the Distributor for Value Fund.
1,716,020
2,476,630
Taminco Corp. *
Liberty Media Corp. - Class A *
80,900
$
NewMarket Corp.
16,300
16,625
This material must be preceded or accompanied by a current
Prospectus.
LyondellBasell Industries NV - Class A
ARRIS Group, Inc. *
32,600
The information provided herein represents the opinion of Value
Fund’s investment adviser and is not intended to be a forecast of
future events, a guarantee of future results, nor investment advice.
Basic Materials - 12.3%
Innospec, Inc.
79,430
50,425
Average weekly hours, manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
ISM Index of New Orders
Manufacturers’ new orders, nondefense capital goods
excluding aircraft orders
Building permits, new private housing units
Stock prices, 500 common stocks
Leading Credit Index™
Interest rate spread, 10-year Treasury bonds less federal funds
Average consumer expectations for business conditions
Value
COMMON STOCKS - 93.0%
Financial - 13.3%
FNFV Group *
Industrial - 15.4%
28,386
EnerSys
19,891
28,353
2,796,917
Voya Financial, Inc.
Canadian Pacific Railway Ltd.
54,030
1,066,187
Portfolio Recovery Associates, Inc. *
15,763
33,060
1,697,158
Markel Corp. *
EMCOR Group, Inc.
2,127,822
9,769,205
$
3,270,350
1,321,077
1,664,555
MasTec, Inc. *
1,654,399
Tyco International Ltd.
886,542
WABCO Holdings, Inc. *
2,578,705
11,375,628
Technology - 18.1%
49,000
Cognizant Technology Solutions Corp. - Class A *
2,193,730
76,064
NCR Corp. *
2,541,298
21,007
35,520
31,180
67,390
59,940
eBay, Inc. *
1,189,627
Open Text Corp.
1,968,519
Oracle Corp.
1,193,570
Tessera Technologies, Inc.
1,791,226
Yahoo! Inc. *
2,442,555
13,320,525
TOTAL COMMON STOCKS (Cost $33,660,205)
68,542,556
SHORT-TERM INVESTMENT - 7.1%
5,216,200
Fidelity Institutional Money Market Portfolio, 0.04% **
(Cost $5,216,200)
5,216,200
Total Investments (Cost $38,876,405) - 100.1%
73,758,756
Other Assets and Liabilities, Net (0.1)%
TOTAL NET ASSETS - 100.0%
* Non-income producing security.
** Rate in effect as of September 30, 2014.
4
(96,147)
$
73,662,609