DEAR FELLOW SHAREHOLDERS:
For the fiscal year ended June 30, 2019, Adviser Class shares of the Olstein All Cap Value Fund appreciated 6.06% and Class C shares of the Fund appreciated 5.07%, while the Russell 3000® Value Index (the Fund’s primary benchmark) appreciated 7.34% over the same period. For the quarter ended June 30, 2019 Adviser Class shares of the Fund appreciated 4.95% and the Class C shares appreciated 4.73%, while the Russell 3000® Value Index, appreciated 3.68% over the same period.1
MARKET OUTLOOK
A significant swing in fortunes favored equity markets during the last half of the Fund’s fiscal year, with the broad-market Russell 3000® Index posting a double-digit gain of 18.71% during the first six months of 2019; a momentous improvement over the 8.20% decrease in the Index during first half of the Fund’s fiscal year. Although the issues that drove negative market sentiment at the end of 2018 remain unresolved – (e.g. the impact of trade wars, signs of an economic slowdown and growing political gridlock) investor apprehensions about these issues appeared to dissipate during the first six months of 2019.
The sharp swing in market sentiment and price volatility from October 1, 2018 to June 30, 2019 emphasized a key tenet of our value approach to equity investing. When we see a growing disconnect between stock prices and the intrinsic value of individual businesses, we look to buy stocks which are selling at prices that we believe represent a material discount based on our projection of a company’s normalized ability to generate future free cash flow. The disconnect or discount occurs when negative sentiment overwhelms equity markets (as it did during the last six months of 2018) or when investors and the business press are focusing on a small group of securities the public believes can grow forever (e.g. high tech, social media, Internet shopping, bio-tech etc.,) and continues to buy at higher and higher prices to avoid missing the runaway train. In order to raise funds to invest in the latest fad, the public often liquidates the stocks of more established companies in lower growth, “boring” businesses selling at what we believe are lower multiples of free cash flow. Each new high in the latest fad stocks convinces the public to continue buying these overpriced new age securities, or risk being left behind. Eventually these high growth securities are taken to prices that we believe have little chance in the future of being justified, based on their realistic future ability to produce normalized free cash flow. While these securities are becoming overvalued, the boring, more established high free cash flow yielding companies are being ignored or sold so the public can participate in the current momentum stocks. As a result, the boring, well established companies being sold move to prices that result in large discounts to our calculation of their intrinsic value based on their future ability to generate normalized free cash flow. During these periods selectivity and highly focused company-specific analysis become even more important factors for long-term investment success.
We believe it is important to withstand periods of short-term market volatility by favoring the equities of financially strong companies with stable or growing free cash flow that we believe are not properly valued by the market, and are run by managements that have a demonstrated history of deploying cash to benefit shareholders. As value investors, we also believe it is important to take advantage of market conditions and downward price movements caused by short-term factors to buy such companies at, what we believe, are advantageous prices. Our value philosophy emphasizes that the key to long-term performance is to pay attention to risk and the potential for losses. We believe a portfolio’s long-term performance is mostly determined by the number and severity of one’s losses. Big losses affect long-term performance more than big gains. Stock prices usually discount bad news already on the table setting up a better risk reward ratio, especially if the problems are temporary. The Fund’s attempt to control losses is to buy companies we believe are selling at material discounts to their intrinsic value because of temporary negative factors affecting free cash flow. On each buy, we believe the temporary problems creating the discount opportunities for the Fund should abate within 18-24 months and hopefully result in capital appreciation for the Fund. Waiting for the catalyst to attract investors can get lonely at times but patience is the most valuable asset of a successful value investor. Our experience has time and time again indicated that the attempt to perform all the time rather than over time decreases the probability of the Fund of achieving its long-term investment objective.
OUR STRATEGY
For the remainder of 2019 we will continue to focus on those companies that we believe demonstrate a commitment to maintaining a strong financial position; have the ability to generate sustainable free cash flow; and are led by management teams that intelligently deploy cash to increase returns to shareholders. Remaining true to our investment discipline, we will seek to buy such companies at a significant discount to our determination of their intrinsic value and intend to seize on market dips or other temporary issues as buying opportunities to either strategically add to existing positions in the portfolio or initiate positions in companies with these essential characteristics. The bifurcated markets of the past five years by which small groups of stocks led by the high growth “FANG” stocks (Facebook, Apple, Netflix, and Google), which in certain cases have been bid up to prices that we believe are not currently justifiable (based on our future free cash flow projections), has, in our opinion, created significant discounts in industrial companies selling at high free cash flow and dividend yields which in many cases are higher than the ten-year Treasury rate.
Reality has begun to set in and in our opinion, the high-growth overvalued securities have become a crowded trade. Currently, we are seeing stocks in our portfolio starting to appreciate and be recognized even though reported earnings have yet to turn. The free cash flow yields on some of the basic industrial companies in our portfolio are at levels exceeding 8% or more and exceed Treasury yields by material amounts. We believe that markets have just started to recognize these values. The dividend yield on some of the stocks in our value portfolio are in many cases between 3% and 6%. At June 30, 2019, our liquidity was strong as our cash position was in excess of 10% of the Fund’s net assets. Liquidity enables the Fund to seize upon the opportunity to purchase stocks that have experienced unwarranted downward price corrections caused by short-term problems which we believe will abate over the next two years. As the public begins to realize that the future cash flow projections were too low, we believe that a material number of these stocks should begin to rise resulting in capital appreciation for the Fund.
Our current portfolio consists of companies that we believe have sustainable competitive advantages, discernible balance sheet strength, management teams that emphasize decisions based on cost of capital calculations and deploy free cash flow to create shareholder value. We remain focused on individual companies, their operations and prospects for maintaining or growing sustainable free cash flow. From our perspective as long-term value investors, we recognize that companies generating sustainable free cash flow are well positioned to compete profitably during both favorable and challenging economic environments. We continue to seek and invest in companies that we believe have an ability to deliver long-term value to their shareholders, which in many cases is not currently recognized by the market. Periodic spikes in market volatility during the course of the Fund’s fiscal year created many individual opportunities in stocks that offered the potential for above-average capital appreciation. Our quest for value will continue to be guided by two prerequisites: (1) a company’s ability to generate sustainable future free cash flow and (2) securities prices that allow us to buy good companies, with solid balance sheets, and profitable business models, at what we believe are very advantageous prices. These two requirements guide our investment process and force us to focus on a company’s future prospects and value, while capitalizing on favorable prices the market provides as a result of temporary factors that the investing public think will go on forever.
PORTFOLIO REVIEW
At June 30, 2019, the Olstein All Cap Value Fund portfolio consisted of 94 common stock holdings with an average weighted market capitalization of $83.62 billion. During the fiscal year, the Fund initiated positions in fourteen companies and strategically added to positions in eight companies. Over the same time period, the Fund eliminated its holdings in nineteen companies and strategically decreased its holdings in another sixteen companies.
Positions initiated during the last twelve months include: Cracker Barrel Old Country Store Inc., Cummins Inc., Dollar Tree, Inc., Dow Inc., Equifax Inc., Littelfuse, Inc., McDonald’s Corporation, Mohawk Industries, Inc., Norwegian Cruise Line Holdings Ltd., Packaging Corporation of America, S&P Global, Inc., Schlumberger Ltd, and Starbucks Corporation On May 7, 2019, DowDuPont announced that its Board of Directors approved the previously announced spinoff of DowDuPont’s Agriculture Division, which will become Corteva, Inc. on June 1, 2019. As of the close of the Fund’s fiscal year on June 30, 2019, the Fund continued to maintain a position in its new holding, Corteva, Inc.
Positions eliminated during the past twelve months include: Casey’s General Stores, Inc., CommScope, Inc., Conduent, Inc., Coty, Inc., Delphi Technologies PLC, Dunkin’ Brands Group, Inc., The Goodyear Tire & Rubber Company, Henry Schein, Inc., Hormel Foods Corporation, Intuitive Surgical, Inc., The J. M. Smucker Company, Kimberly-Clark Corporation, Newell Brands, Inc., Owens-Illinois Group, Inc., PepsiCo, Inc., The Procter & Gamble Company, Sealed Air Corporation, Spirit Airlines, Inc., and Stericycle, Inc.
The Fund sold its holdings in Casey’s General Stores, Henry Schein, Hormel Foods, Intuitive Surgical, The J. M. Smucker Company, Kimberly-Clark, PepsiCo, and Procter & Gamble during the reporting period as the stock price of each of these companies reached our valuation. As the company’s stock price moved closer to our valuation, the Fund liquidated its position in Spirit Airlines to reduce the portfolio’s overall exposure to the airline industry. Similarly, the Fund eliminated its position in Sealed Air Corporation as the price of the stock moved closer to our valuation and the company altered its senior management team.
The Fund sold its position in Dunkin’ Brands Group (DNKN, Financial) as it reached its valuation in a relatively short period of time. The Fund built a position in Dunkin Brands beginning in November 2017, at an average price of $51.66 per share. As the company’s stock reached our valuation level, the Fund liquidated its position by early June 2019, within an average sale price of $73.31 per share. Over a period of a little more than nineteen months, the Fund’s holding in Dunkin Brands appreciated approximately 42%. By way of comparison, the broad Russell 3000® Index appreciated 10.51% and the Russell 3000® Value Index appreciated 6.52% over the Fund’s holding period for Dunkin Brands (September 5, 2017 to June 7, 2019).
A change in company management led us to eliminate the Fund’s position in Newell Brands (NWL, Financial) during the reporting period. Under intense pressure from shareholder activists, the company’s Chief Executive Officer, the architect and driving force behind the company’s consumer products acquisition strategy, was forced to resign following weak sales and missed turnaround targets. The Fund also eliminated its holding in Delphi Technologies PLC, due to continued pressure on the automotive and related industries, and invested the proceeds in other companies with what we believe to be more favorable risk-reward profiles.
The Fund liquidated its positions in Conduent and Stericycle as management at both companies attempted to reset expectations for their respective operational turnarounds. In both cases, extending the time line for achieving desired results invalidated our original investment thesis. Similarly, the Fund eliminated its holding in Owens-Illinois after several years of repeated non-recurring events and related expenses that kept the company from reaching our expected level of earnings and free cash flow.
The Fund liquidated its holding in CommScope (COMM, Financial) following disappointing results, as well as media reports that it was highly likely the company would acquire ARRIS International. We believe the potential ARRIS acquisition would not be in the best interests of shareholders and would force the company to shift away from improving its core operations to focus instead on post-acquisition issues. The Fund also liquidated its holding in Coty (COTY, Financial), as the company suffered from sluggish sales due to stiff competition in the mass-market beauty segment. The brand’s worse-than-expected results led us to question the expected duration of it turnaround efforts.
Our Leaders
Leading performers for the twelve-month reporting period ended June 30, 2019, include: Spirit Airlines, Inc., Keysight Technologies, Inc., Casey’s General Stores, Inc., Starbucks Corporation and Zebra Technologies Corporation. At the close of the fiscal year the Fund continued to maintain positions in Keysight Technologies, Starbucks and Zebra Technologies. During the fiscal year, the Fund liquidated its positions in Spirit Airlines and Casey’s General Stores as the price of each company’s stock reached its valuation
Our Laggards
Laggards during the twelve-month reporting period include: Delphi Technologies PLC Coty Inc., CommScope, Inc., Conduent, Inc. and The Greenbrier Companies, Inc. At the close of the fiscal year the Fund maintained a position in The Greenbrier Companies. As previously discussed, we liquidated the Fund’s holding in Delphi Technologies PLC, Coty, CommScope, and Conduent.
FINAL THOUGHTS
We continue to focus on understanding a business, its potential to generate sustainable free cash flow and ultimately its value. After identifying companies that meet well-defined investment criteria, we then seek to take advantage of market conditions and erroneous conclusions by the investing public which create downward price movements to buy such companies at prices that we believe increase the chance for a successful investment outcome. As previously stated, we believe that markets are in the process of shifting money from overvalued, over owned high-growth companies and beginning to invest in boring undervalued high free cash flow yielding companies which permeate our portfolio. While past performance is no guarantee of future results, the same process occurred without warning after the internet boom of 1999-2001.
We value your trust and remind you that our money is invested alongside yours as we work hard to accomplish the Fund’s objective of long-term capital appreciation. We look forward to writing to you again at the end of 2019.
Sincerely,
Robert A. Olstein Eric Heyman
Chairman and Chief Investment Officer Co-Portfolio Manager
All Cap Value Fund’s maximum CDSC of 1% during the one-year period, was 4.12%, 5.70%, and 11.72%, respectively. Per the Fund’s prospectus dated 10/28/18, the expense ratio for the Olstein All Cap Value Fund Class C was 2.18%. Performance and expense ratios for other share classes will vary due to differences in sales charge structure and class expenses. 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 may be lower or higher than performance quoted. To obtain performance data current to the most recent month end, please go to our website at www.olsteinfunds.com.
The above represents opinion, and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. The references to securities are not buy or sell recommendations, but are intended to be descriptive examples of the Fund’s investment philosophy and are subject to change. Do not make investments based on the securities referenced. A full schedule of fund holdings as of June 30, 2019is contained in this report, and is subject to change. This information should be preceded or accompanied by a current prospectus, which contains more complete information, including investment objectives, risks, charges and expenses of the Olstein Funds and should be read carefully before investing. A current prospectus may be obtained by calling (800) 799-2113 or visiting the Olstein Funds’ website at www.olsteinfunds.com.
The Olstein Funds follow a value-oriented investment approach. However, a particular value stock may not increase in price as the Investment Manager anticipates and may actually decline in price if other investors fail to recognize the stock’s value or if a catalyst that the Investment Manager believes will increase the price of the stock does not occur or does not affect the price of the stock in the manner or to the degree that the Investment Manager anticipated. Also, the Investment Manager’s calculation of a stock’s private market value involves estimates of future cash flow which may prove to be incorrect and, therefore, could result in sales of the stock at prices lower than the Fund’s original purchase price. There is no assurance that the Fund will achieve its investment objective.
