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2016 August Newsletter

General Investment Team Commentary

FIM Group trading activity has remained relatively high over the past month. We’ve been actively trimming back holdings that are reaching our fair value targets and adding select exposure to European holdings after the BREXIT vote. Selling has generally been focused within fixed income closed-end funds, common stocks of U.S. real estate investment trusts, and other holdings benefitting from the global hunt for “yield” (e.g., income-generating securities). In some of our strategies, cash balances have been building as a residual effect of this process, and we are very comfortable having dry powder to deploy when prices for stocks and bonds on our watch lists become more favorable. 

We continue to find new, attractively priced equity ideas. This is especially the case in Europe, since BREXIT has created a unique level of temporary uncertainty for economic growth in that region. The fixed income side has been much trickier for our value hunting, although we have found a few select preferred stocks and closed-end bond funds that meet our investment criteria. Rebounding market prices in some of the deeper value holdings that negatively affected 2015 performance (including U.S. REITs and natural resource-related stocks) have been good reminders for us that patience can be one of our most valuable assets as a team. We continue to feel very good about the balance and quality in our portfolios and the significant value that remains yet to be reflected in our holdings. 

Recent Client Questions

Q: Precious metals stocks in my portfolio have done exceptionally well this year. Is it time to ring the cash register? 

A: We have been trimming back select gold and silver mining-related stocks this year to keep overall portfolio exposure at modest levels. This part of the market was generally given up for dead by investors last year after four straight years of negative performance. With geopolitical risk on the upswing, central banks entering unknown policy waters (see next question), and negative interest rates around the world, we think there is still a case to hold some precious metals-related exposure despite the run so far this year. 

Q: What is all the recent talk about “helicopter money”? 

A: Over the last decade, central banks around the world have tried all sorts of tactics to “do their part” in stimulating economic growth. They’ve taken short-term interest rates to zero (and now to negative rates in many parts of the world) and have tried other things (like so-called quantitative easing programs). Their efforts have aimed to stimulate bank lending and “wealth effects” resulting from higher stock and bond prices. As these policies have had mixed results to date for the real economy, monetary policy-makers are going back to the drawing board and exploring more direct ways to stimulate spending. 

One idea attracting significant recent press is something American economist Milton Friedman discussed in an academic paper about money back in 1969. He used the parable of a helicopter flying over a community and dropping newly printed dollar bills from the sky to stimulate the economy. As nutty as that may sound, we may very well see similar direct-money-transfer experiments in the not too distant future. In other words, central banks may be dropping newly printed money into bank accounts around the world to drive a jolt to consumption. 

Support of the idea from the likes of former Fed Chair Ben Bernanke may be the catalyst that gives central bankers the ammunition to move forward. To go from theory to practice, however, will require close coordination between central bankers and their respective fiscal policy counterparts (like the U.S. Treasury in the U.S.). In the U.S., such coordination does not come easily, so we may see initial experiments in other countries. On that note, Bernanke recently made a highly publicized trip to meet with Japan’s most senior policy-makers, prompting some to speculate that the Land of the Rising Sun may soon be known as the Land of the Rising Money-Copters. 

Portfolio Holding Developments

Gaia (formerly Gaiam): Gaia recently completed the sale of its core yoga/ fitness/wellness products business to Sequential Brands for $146m. Part of the cash proceeds was used to fund a tender deal in which Gaia offered shareholders $7.75 per share. We participated in the tender and sold some of our holdings back to the company, in most cases retaining a smaller position in the stock. Gaia’s remaining assets now consist of a rapidly growing health and wellness video streaming service, corporate real estate, and cash. 

Global Water Resources (GWRS): Global Water, a water utility company focused on the greater Phoenix market, announced a successful refinancing of its debt and a 10% dividend hike. The debt restructuring reduced its interest rates by two percentage points and adds to the three-pronged value generation story we expect to unfold: above-market organic growth, tuck-in acquisitions, and profit margin expansion as new connections are added to one of the country’s highest quality water infrastructure portfolios. 

Halfords


Investment Team Spotlight: Halfords 

Ticker: HLFDF Corporate Website: www.halfords.com 

Share Price/Market Capitalization (7/21/2016): US$4.49/US$895m 

Company Description: Halfords is the leading UK retailer of cycling/ motoring products and services. It sells products through a network of UK/ Ireland stores and websites. Revenues split roughly 55% car maintenance and travel goods, 30% bicycles/parts, and 15% auto repair services. 

Investment Thesis: Halfords is a high quality UK retailer with leading market shares in the niches it serves. We took an initial position as the share price weakened following the BREXIT decision and at valuation levels near the low end of historical ranges. New management is executing on its Moving Up a Gear strategy, which involves initiatives including new brand positioning, exclusive products and partnerships, new online investments, and expanded service offerings like windshield chip repair. We believe that these initiatives will allow Halfords to take further market share and improve profit margins in the years ahead. The primary near-term risks we are accepting is the BREXIT impact on both the UK currency (Sterling) and the UK retail environment. Given our expected upside from long-term earnings growth and valuation multiple normalization and a well-supported 5% dividend yield, we believe that we are well-compensated for this near-term uncertainty. 

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