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

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January 18, 2021

Dear Fellow Shareholder,

For the duration of the fourth quarter of 2020, the MSCI Planet Index attained 13.96% the Polaris World wide Worth Fund (“the Fund”) considerably outperformed, up 26.18%. This is the 3rd consecutive quarter of absolute beneficial efficiency following weak first quarter benefits, in a year marked by a international pandemic, ensuing region lockdowns and political tumult. By the close of the yr, stock markets ended up fueled by a selection of positive developments: two remarkably-effective COVID- 19 vaccines, ongoing aggressive government stimulus, history reduced interest fees and the summary of the U.S. Presidential race.

In a quarter when all portfolio sectors posted beneficial gains, cyclicals such as financials, shopper discretionary and materials have been the top contributors to performance. Utilities and strength included the the very least, thanks to underweight positions in these defensive sectors. At the state degree, U.S. gains had been driven by a recovery in financials, wellness care diagnostic screening providers and upbeat earnings from resilient shopper discretionary organizations. The portfolio maintained a modest 36% U.S. weighting as opposed to the MSCI Earth Index, which is dominated by U.S. shares (66%), a lot of of which are potent momentum and tech laden corporations that do not meet our benefit discipline. The MSCI Earth Index relegates the rest of created fairness markets to weightings of significantly less than 5% (with the exception of Japan at 7.8%). Polaris is steadfastly benchmark agnostic, ensuring that the Fund is extra diversified than the benchmark. As this sort of, the Fund was chubby and outperformed in practically all non-U.S. nations around the world all through the quarter Italy was the only notable decliner thanks to losses at Trevi Finanziaria. Rising market nations also played a part in quarterly results, as portfolio publicity in South Korea, Chile and Colombia boosted effectiveness.

A lot of Fund holdings rebounded in the fourth quarter, validating our belief that small-phrase macroeconomic disorders almost never overwrite excellent company fundamentals. Providers with potent hard cash flows, resilient, versatile enterprise models and proactive management teams withstood the amazing pandemic headwinds. In fact, extra than half of portfolio corporations had gains in extra of 20% in the course of the quarter and bundled a broad blend of very long-phrase holdings and new shares included through the calendar year. Among the top performers were being: Methanex Corp., Tapestry Inc., Magna Worldwide, Publicis Groupe, Samsung Electronics, Webster Money, Antofagasta and Crocs Inc. Decliners provided the aforementioned Trevi and U.S.-based mostly technological know-how and semiconductor company, Intel Corp.

FOURTH QUARTER 2020 Performance Examination

U.S. financial institutions attained on information of vaccine approvals and renewed federal government stimulus, staving off problems about financial loan losses and bankruptcies. Quite a few financial institutions lessened loan loss provisions and claimed less mortgage deferral balances and non-accomplishing financial loans, propping up Webster Fiscal, Ameris Bancorp and Puerto Rico-dependent Common Inc. The Federal Reserve also accomplished its 2020 bank anxiety tests, indicating banking institutions were sufficiently capitalized this could signal the resumption of funds return insurance policies and buybacks for much larger U.S. institutions like Funds 1 Monetary (NYSE:COF) and JPMorgan Chase (NYSE:JPM). Nordic banks, which includes DNB ASA (OSL:DNB) and Svenska Handelsbanken (OSTO:SHBA), done perfectly as area regulators decided to soften their dividend payouts stance. Each establishments also famous strong earnings with no evidence of large losses or bank loan deferment requests. Bancolombia (NYSE:CIB) recovered most of 2020’s shed floor with a sharp get in December on the back of a Moody’s score affirmation and a more robust Colombian peso.

It was gratifying to see the restoration in financials, where the Fund has been obese in current decades. Following thorough economical modeling and analysis, we held steadfast to our lender holdings even as the banking companies tumbled before in the year amid psychological investor selling. With the business restoration in the fourth quarter, the Fund’s economic sector holdings collectively obtained 34% when compared to 24% for the MSCI Environment Index financials benchmark, more validating our approach.

In a COVID-19 functioning environment, numerous retail providers lowered promotional exercise that commonly drove in-keep revenue. Fewer competitive conduct, together with streamlined brick-and-mortar outlets, permitted many businesses to strengthen margins in an usually hard financial state. Tapestry Inc. (NYSE:TPR) (the parent business for Mentor, Kate Spade and Stuart Weitzman brand names) amplified profits, expanded gross margins, and accelerated e-commerce gross sales. Footwear company, Crocs (NASDAQ:CROX), had document revenues on U.S. profits, particularly in the direct-to- client marketplace. Improving margins were being on development through the purchaser discretionary market. Honda Motors (TSE:7267), a new addition to the portfolio, managed superior operational margins as it began to refocus on core automobile and motorcycle versions and introduced shared system producing throughout products, main to closure of a lot less successful vegetation. Canadian car or truck sections provider, Magna Worldwide (TSX:MG), experienced sturdy quarterly results on much better revenue, volumes, and value cutting. The business also fashioned two electrical car joint ventures: a person with electrical automotive design and style/engineering firm, Fisker Automotive, and just one with LG Electronics.

As the COVID-19 pandemic unfolded, demand from customers for housing in several nations around the world strengthened as people fled towns for the suburbs, more lured by very low fascination prices. However, lockdown measures lessened the capability to construct properties in a well timed fashion. Homebuilders like Taylor Wimpey (LSE:TW.) and Bellway (LSE:BWY) manufactured progress, doing the job competently under the new socially-distanced building disorders. Reservation rates were being larger, cancellation rates dropped and balance sheets had been solid both equally companies noted 35%+ gains for the duration of the quarter with upbeat direction for 2021. Nevertheless, the mid-December U.K. lockdown may well dampen property completions in the short term.

The Fund’s substantial over weight in the elements sector contributed to outperformance. Methanex Corp. (TSX:MX) built momentum, as methanol place price ranges jumped due to 1) close desire restoration, largely in China and other Asian economies, 2) oil rate restoration, and 3) ongoing source outages as opponents faced unanticipated plant shutdowns. Methanex’s administration also took steps to strengthen the liquidity profile by refinancing this news fulfilled with trader acceptance. Favorable source-need metrics boosted Antofagasta (LSE:ANTO), a major Chilean copper and gold miner. The fundamentals (resumption of creating in China, improved industrial need) underscoring the increase in commodity rates may well translate into robust functionality in other substance sector organizations in a write-up COVID-19 environment consequently, the Fund maintains an chubby place in components. In actuality, sector holdings had been elevated with the buy of U.S.-based mostly plastic packaging manufacturer, Berry World (BERY).

In data technological innovation, Samsung Electronics (XKRX:005930) and SK Hynix (XKRX:000660) equally logged 50%+ returns as DRAM chip price ranges trended increased. A alternative cycle in details servers, Chinese inventory rebuilding and a current Micron fab disruption ended up the most important drivers for this chip price tag projection. Moreover, SK Hynix’s purchase of Intel’s NAND small business could carry greater source self-discipline, getting a person competitor out of the market. In other news, Samsung cited its tv division as a solid profits generator owing to remain-at-house mandates. Options to scrap its QLED/Lcd televisions have been backburnered even though Samsung capitalizes on demand. A single of the several portfolio detractors, Intel Corp. (INTC) dropped 3% as buyers nervous about competitors slicing into Intel’s facts heart chip sector share, and the opportunity for lower margins if Intel employs a third-celebration foundry for its following era of chips. However, enterprise remained stable as Intel exceeded its quarterly income anticipations and bought non-main item traces. Hewlett Packard Enterprise (HPE) was offered at a earnings, as we proactively exited the stock in advance of structural problems consider keep in the industrial printing sector. Indian IT outsourcing business, Infosys Ltd. (INFY), was also bought to make way for much more undervalued financial investment options.

French marketing business, Publicis Groupe (XPAR:PUB), was the prime contributor in conversation services. The enterprise beat sector expectations with comparatively-first rate natural progress and reduced expenditures, although announcing significant customer wins like Kraft Meals and TikTok. Stores tapped Publicis, which is recognized for its electronic advertising and marketing assets, to organize marketing/internet marketing strategies targeted on direct-to-client sales. The undercurrent was very simple: steer potential buyers away from large distributors like Amazon in favor of the retailer’s have branded sites, distribution channels and e- commerce platforms. It is a information that is resonating with consumers in a write-up COVID paying out setting. At the exact time, vendors have been eager to reformat their print, Television and online advertising to align with latest affairs – from COVID-19 masking to social fairness to journey planning. The creative teams at Publicis have been occupied.

Several industries were being additional impacted by COVID -19 than journey and leisure, from airways and motels to eating places and amusement venues. Cineworld Group was down 30% in Oct as it shuttered all of its theaters in the U.S. and U.K. By December, Cineworld’s (LSE:CINE) inventory partially recouped declines, gaining 68%, as the firm refinanced financial debt with 10% dilution to shareholders. Though streaming platforms are now common by default, we believe buyers will embrace the theatrical practical experience when lockdowns are lifted as has been the circumstance in nations like China and Japan. We initiated a posture in Cinemark Holdings (CNK) on this premise. Soon thereafter, Disney (DIS) (the company that offered almost 40% of the 2019 U.S. box workplace) introduced its intention to launch its major titles to the theater, while also focusing on its Disney+ streaming platform. Equally theater stocks jumped on the information.

In a standard year, almost a half dozen Fund firms are topic to takeover bids in 2020, there was a dry spell right until the fourth quarter. Signature Aviation (LSE:SIG) jumped far more than 70% for the duration of the quarter, soon after disclosing two competing high quality buyout gives. A 2020 portfolio addition, Alexion Prescribed drugs (ALXN), rose much more than 35% right after obtaining a $175 per share takeover bid from AstraZeneca (AZN). Alexion’s present-day extremely-exceptional ailment therapies and potential drug pipeline are really beautiful we do not imagine the bid demonstrates total benefit.

Trevi Finanziaria (MIL:TFI) was amongst the couple detractors to functionality. The Italian building engineering agency mainly marked time, as it experienced been a sturdy performer early in the year but drifted back again on postponed infrastructure projects. Normally, Trevi has manufactured slow but continual progress in its buy ebook and undertaking pipeline.

2020 12 months IN Review

No 1 could have anticipated 2020 to be the yr of a pandemic, replete with place lockdowns, rising unemployment, trade wars, political turmoil and unstable oil prices. But, every single of these developments rippled by the world-wide overall economy, with trader optimism souring as the initially outcomes of COVID- 19 took maintain. Governments and central banks initiated unparalleled monetary and fiscal guidelines, hoping to strengthen industries hardest hit. Nonetheless, most businesses cratered in the initially quarter of 2020, slipping into bear market place territory (MSCI Entire world Index down -21.05%), only to begin their sluggish climb out of the trough in the 2nd quarter. The third and fourth quarters heated up. For the yr ending 2020, the Index rose 15.90%, though the Fund was up 6.65%. Underperformance was attributable to lackluster benefits in the overweight economical sector, as effectively as notable losses in vitality, buyer staples and industrials. At the country stage, the portfolio outperformed in Canada, France, Finland, Belgium, Norway and Austria yet these modest weightings did little to soak up the underperformance and underweight in a robust U.S. sector. When full yr effectiveness was underwhelming, we are delighted to have markedly outperformed in the fourth quarter we think that the Fund is nicely positioned for the suits and spurts of a 2021 recovery.

We would be remiss in not mentioning that 2020 was 1 of the worst several years in heritage for price stocks, as globe marketplaces were driven by substantial flyer shares and FAANGs (Facebook, Amazon, Apple, Netflix and Google), shunning the fundamentally sturdy but considerably less glamorous sectors like elements, industrials and financials. In this context, the Fund outperformed the MSCI Earth Value Index, which was down -1.16%.

Part of our accomplishment stems from our get the job done to restructure the Fund, offering relatively-priced providers in favor of new suggestions that may perhaps have far more upside opportunity. We sold Wesco Intercontinental (WCC), Infosys, Hewlett Packard, L Brands (LB), JM Smucker (SJM), Kone OYJ (KNYJF) and a selection of other corporations on valuation, generating house for far more than two dozen buys including Crocs, Tapestry Inc, Antofagasta, Bunzl PLC (LSE:BNZL), Cinemark, CVS Health and fitness Corp. (CVS), Honda Motor Co., Berry Worldwide and Williams Organizations (WMB). We invested in some COVID-19 sensitive sectors, these types of as journey and leisure, early in the year only to subsequently provide some of them on loaded valuations pursuing a rebound. Illustrations include: airways, Delta (DAL) (+10%) and Ryanair Holdings (LSE:RYA) (+43%), U.S. cafe team Darden (DRI) (+60%) and Swedish RV solutions supplier, Dometic Team (OSTO:DOM) (+88%). We will go on to analysis such prospects in 2021, hoping to pinpoint additional undervalued shares that may perhaps enhance Fund overall performance.

Expense Atmosphere AND Technique

We acknowledge that we are not “out of the woods” nevertheless with the COVID-19 pandemic, as the upcoming waves and strains of the virus lead to place lockdowns. So significantly in 2021, we have currently viewed a moratorium on social functions in the U.K. until mid-February Canada is hinting at stronger enforcement actions France instituted a 12-hour curfew and Germany posted tougher limits throughout all 16 federal states. The U.S. isn’t significantly at the rear of, with many states mandating continue to be-at- home orders. Nonetheless, we really don’t imagine that any lockdown circumstance will have the similar gravity as it did in the to start with quarter of last 12 months. Vaccines are in distribution, international citizens have dealt with the virus for approximately a yr and most general public organizations discovered to adapt to the new performing affliction, focusing on e-commerce and operational restructuring. When economies turn the corner, numerous really-economical organizations will be positioned for outstanding growth. We are producing just about every hard work to create a Fund portfolio of these kinds of companies we anticipate admirable overall performance (like that of the fourth quarter 2020) to comply with.

Sincerely,

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

Before investing, you need to cautiously look at the Fund’s financial investment objectives, threats, fees and expenditures. This and other facts are in the prospectus, a duplicate of which may well be received by calling (888) 263-5594 or checking out the Fund’s website at www.polarisfunds.com. You should browse the prospectus meticulously in advance of you make investments. Foreside Fund Solutions, LLC, is the Fund’s Distributor.

About the creator:

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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