WASIX Commentary (Q4 2019)

Q4 2019

As we did last quarter, we begin our report this quarter with a presentation of WASIX and benchmark returns over the past quarter, year, and three years. We believe that a quarter is such a brief period of time that the results presented are mostly random noise; they can’t be used to evaluate how the fund is performing. Even the results for a year are largely noise. For this reason I like to include results for the trailing three years as this longer period provides better information for assessing fund performance. Three years typically is sufficiently long to include both rising and falling markets. The relevant performance numbers for the Strategic Income Fund for the past quarter, year, and three years are in the table below.

Periods ended 12/31/19	WASIX	MSCI ACWI Index	Bloomberg Barclays US Aggregate Bond Index
Quarter	8.64%	8.95%	0.18%
Year	22.29%	26.60%	8.72%
3 Years	9.22%	12.44%	4.03%

Data shows past performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. For the most recent month-end performance data, visit www.sevencanyonsadvisors.com. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. The Advisor may absorb certain Fund expenses, leading to higher total shareholder returns. Total Expense Ratio: Gross 1.94%; Net 1.75%. Seven Canyons Advisors, has contractually agreed to limit the amount of the Fund’s total annual fund operating expenses, exclusive of interest, dividend expense on short sales/interest expense, taxes, brokerage commissions, other investment related costs, acquired fund fees and expenses, and extraordinary expenses such as litigation and other expenses not incurred in the ordinary course of business, to 0.95% of the Fund’s average daily net assets. This agreement is in effect through September 10, 2020, and may only be terminated before then by the Board of Trustees, and is reevaluated on an annual basis.

WASIX realized strong returns during the 4th quarter. In fact, the 8.64% returns for the quarter equalled what we strive to earn in a year. For 2019, WASIX returned 22.29%, again outpacing our expectations. Though we are not complaining, our results for both the quarter and the year are almost too good to be true. Better said, they are not sustainable. As I often note, quarterly and even yearly results cannot accurately capture the performance of an investment. For that reason, I like to consider performance over the past three years as a better indicator of how WASIX is actually doing. For the trailing three year period, WASIX returned 9.22% per year, which is spot-on our goal of achieving a high single-digit rate of return, as well as being  on target between the 12.44% return of our stock benchmark and the 4.03% return of our bond benchmark. This on-target performance also held true for the last quarter of 2019 and the year as a whole, with WASIX returns coming in right between those of our stock benchmark and our bond benchmark.

When markets are volatile, it is more important than ever to focus on the underlying performance of the companies we own. WASIX aims to own companies with both the ability and the willingness to pay a growing stream of dividends. Given the strong markets of both the quarter and the year, it isn’t surprising that stock prices grew faster than dividends. For the year, the prices of the stocks we own grew much faster (+22.29%) than the 10.5% growth of the dividends of the companies we own. The rate of price increase wasn’t supported by the rate of dividend increase, which suggests that stock prices may be running on fumes. When we extend to a more meaningful period of three years, dividend growth of the stocks we own is 14.4%, which exceeds the 9.22% return from the stocks. Apparently, there is still some gas left in the tank of the stocks we own.

Winners during the quarter include UnitedHealth Group (UNH) and Taiwan Semiconductor (2330.TT). There were no significant losers. For the year, stocks adding more than 1% to our 22.29% performance include MasterCard (MA), Visa (V), Comcast (CMCSA), Taiwan Semiconductor (2330.TT), and Microchip (MCHP). No losers hit our returns as much as 1%. Over the last three years only MasterCard (MA) and Visa (V) contributed more than 1% per year to our 9.22% annual returns. In fact, those two stocks alone accounted for one quarter of our 9.22% annual return. Again, no losers cost us as much as 1% per year.

During the quarter, we continued to add international companies to the portfolio. Several of those purchased early in the quarter have already made meaningful contributions to results. For example, PCA (9629.JP), the Quickbooks of Japan, was the earliest to introduce SAAS (cloud) accounting software for Japanese small business. SAAS software in Japan is underpenetrated but is growing rapidly. During WASIX’ short ownership, PCA has already appreciated 35%, but is still selling for only 18 times earnings. Another new investment, Guan Chong (GUAN.MK), has already added 28%. GUAN.MK is the leading independent chocolate cocoa bean processor. Producers of branded chocolates sold directly to consumers are ceding the lower margin processing business to Guan Chong. GUAN.MK has built a new plant in Africa to accommodate this incremental volume. The plant will double their capacity and improve margins. Qualicorp (QUAL.BZ) has risen 30% since our purchase. QUAL.BZ is one of the leading managed health care providers in Brazil. QUAL was founded with the goal of expanding access to high-quality, affordable, private health plans. Demand for private health plans in Brazil is growing rapidly in response to several factors, including a history of limited quality of and access to public health services.

During the quarter, we sold Herdez, the Mexican packaged-food producer. We deemed that Herdez’ growth prospects were less promising than those of Guan Chong so we decided to replace Herdez with Guan Chong. We also sold Selamat Sempurna (SMSM.IJ), a producer of automotive products such as fans and radiators. Our decision was based on the drag on SMSM’s business from weak auto markets, which seem to be having a difficult time maintaining traction. Perhaps buyers are stalling due to uncertainty about the future role of electric cars and ride-sharing.

LOOKING AHEAD

We’ve been in a long bull market in part due to stimulus from the Fed and other central banks. Based on all history, all bull markets revert towards the mean. Sooner or later, this one will too. Currently, the fundamentals (Gross Domestic Product, employment, and interest rates) are not flashing any warning signals. But when they do, our structurally sound portfolio should be able to manage its way through.

I am pleased that you have chosen to join me as a shareholder in the Seven Canyons Strategic Income Fund. I have committed the bulk of my retirement savings to WASIX and will do all in my power to assure that WASIX succeeds in providing a satisfactory return for its investors. I appreciate your confidence. 

DEFINITIONS

ACWI (MSCI All Cap World Index) is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets

Barclay’s aggregate bond benchmark is a broad- based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bondmarket

Gross Domestic Product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly.

All investing involves risk. Investments in securities of foreign companies involve additional risks, including less liquidity, currency-rate fluctuations, political and economic instability and differences in financial reporting standards and securities market regulation. Investing in small and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted.  For the most recent month-end performance data, visit www.sevencanyonsadvisors.com.  Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

For a current list of top ten holdings and performance charts, please click here.

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