Dear Fellow Shareholders,

Fiscal 2020

For the past 12 months, the Fund gained 11.7% (all figures are in in dollar terms, unless stated) compared to an increase of 10.4% for the MSCI All Country World Net TR Index.

Among the portfolio holdings, ISS A/S (ISS) was the largest detractor to performance in the fiscal year ended 30 September.[1] Based in Denmark, ISS is a global leading provider of cleaning, property services, catering, security and facility management services. While the business was recently hit by the COVID-19 pandemic, the company had produced weak operating results during the period leading into the current health crisis. Over the past 12 months, ISS issued multiple profit warnings, suffered execution problems with several large contracts and saw cashflow seemingly curtailed by changes to a receivables factoring program. As 2020 began, the company’s IT systems also received a largescale malware attack that significantly affected operations. With those issues weighing on the share price, we established a position and have further added to it as the spread of coronavirus put further pressure on its share price.

Turning to future prospects for the business, we note that cleaning, which is about half the portfolio, is seeing increased demand as customers require deep cleaning and disinfection services as they ready their work environments for the safe return of employees. We believe customers are likely to ascribe greater value to cleaning services in general going forward. Further expansion of outsourcing services is also likely in the current environment. While financial leverage ratios appear elevated due to both depressed current profitability and the way some obligations are classified, we believe ISS has sufficient financial strength to weather the weak environment. Finally, a new, well-regarded CEO joined the company at the beginning of September. We will closely monitor the business as he firms up his plans for the business in the months ahead. Based on its quality attributes and its discounted valuation, we remain owners of ISS.

Among portfolio holdings, ALS was the top performance contributor for the fiscal year.[2] ALS, based in Australia, is a leading global provider of analytical test and inspection services for commodity, life sciences and industrial customers. Long-term shareholders will remember we previously held ALS for a number of years. During the first quarter of 2020, the company’s shares fell significantly due to concerns about weakening economic activity and the related impact on demand for its testing services. We saw the price decline as an attractive opportunity. We have long appreciated the company’s strong reputation with clients, its technical capabilities and the benefits of scale from its global testing network of more than 350 laboratories. We believed the company possessed ample financial strength based on the combination of expected cashflows and the company’s balance sheet leverage. We have also known and respected the company’s CEO since his tenure running the life sciences segment.

Since our purchase, reported results have been stronger than the market had likely expected. Global gold and copper exploration growth boosted results for the commodities division. In addition, a rebound in growth across environmental, pharmaceutical and food testing customers lifted results for the life sciences division. We remain interested in owning shares of ALS, as long as they continue to sell at a discount to our intrinsic value estimate.

Third Quarter 2020

During Q3, the Fund gained 7.8% (all figures in dollar terms, unless stated) compared to an increase of 8.1% for the MSCI All Country World Net TR Index. Since the start of 2020, the Fund gained 0.8% compared to an increase of 1.4% for the Index.

While the Q3 results were slightly weaker than the Index, we continue to believe short-term performance is not the best way to judge results. Instead, we advocate evaluating the Fund’s performance over longer periods, ideally over a market cycle.

Key performers

Among portfolio holdings, the biggest performance detractor in Q3 was ISS.[3] The weakness in the company‘s share price in the period largely reflected the issues previously noted.

Metso Outotec was the top performance contributor for the quarter.[4] Based in Finland, Metso Outotec is a leading global manufacturer and servicer of industrial equipment for the mining, aggregates, recycling and process industries. During Q1, the company’s shares fell significantly due to concerns about weakening economic activity and the related impact on demand for its equipment. We saw the price weakness as an attractive opportunity for several reasons. First, the company has strong market positions across its portfolio. In addition, more than half of total sales stem from servicing its customers’ equipment. While we expected weaker demand for new equipment, we believed those aftermarket services, which are more profitable, would be more resilient. We also noted that significant financial synergies were available from the merger of then standalone companies Metso and Outotec (which was scheduled to close at the end of the second quarter). We believed the combined company also possessed financial strength and the management skill necessary to navigate through a weak economic environment.

Since our purchase, the company’s shares have rebounded sharply. As the discount to our estimate of intrinsic value closed, we sold our holding. We continue to believe the business retains its quality attributes, and we would consider owning Metso Outotec shares again in the future, assuming they provide an attractive margin of safety.

Portfolio activity

Unlike the first two quarters, when the market selloff produced business valuations that enticed us to purchase a number of new positions, Q3 featured rising valuations and ended with global equity markets largely back to year-end 2019 levels, causing us to be much less active. In fact, we purchased only one new holding during the quarter – Hexpol. Based in Sweden, Hexpol is a world leader in polymer manufacturing for customers across the automotive, engineering, construction, transport and cabling industries.

The market rally also lifted many of our holdings and we sold several, including Metso Outotec, as their share prices converged with our intrinsic value estimates. In the case of AIB and Valmet, we sold both for reasons other than valuation.

Based in Ireland, AIB is one of the two largest financial services and lenders in Ireland. It is, to date, the only such business in which the Fund, under current management, has ever invested. In past commentaries, we highlighted many times why banks are seldom a good fit for our investment philosophy. However, we thought AIB was a relatively simple bank that lent itself to appraisal. For the most part, AIB provides basic account management and payment services as well as mortgage lending in its home market. While such services are essentially commodities, AIB was well-positioned in Ireland because of its established network of physical branches and strong digital banking platform. Furthermore, the industry had consolidated since the financial crisis of 2008, with AIB and Bank of Ireland now controlling the market. We were also positively impressed by AIB’s management. They had in effect managed the group out of bankruptcy following the crisis. They had restructured AIB into a customer-focused, profitable, lower-risk bank and brought it back to the public markets in a good operating and financial standing. Since then, they had continued to deliver steady improvements in book value per share. AIB’s balance sheet also stood out in a highly leveraged industry. It was, and remains, the best-capitalized bank in Europe. Lastly, AIB’s stock traded below 1x book value and the Irish mortgage market appeared early in its recovery, with loan issuance at less than a quarter of peak levels and well below normal levels.

At the same time, banks belong to a highly regulated industry and are subject to supranational administrative powers that do not operate in the sphere of economic rationality. In the case of AIB, we believed that strong fundamentals and a superior management team, government ownership, an over-capitalized balance sheet and the below-book valuation would help mitigate this political risk. We were wrong. The aggressive monetary policies of most central banks combined with governments’ responses to the COVID-19 crisis have put dramatic pressure on banks, including AIB. We no longer felt that we could rely on fundamental analysis to support our investment in AIB, so we sold the stock.

Based in Finland, Valmet is a leading supplier of technology, automation and services for the pulp, paper and energy industries. When we purchased the stock, we believed the underlying quality characteristics of the business were compelling, as was the valuation. Unfortunately, the company announced a material strategic and financial decision shortly thereafter that caused us to sour on our view of the management team.

As part of the previously discussed Metso Outotec merger, that company announced it would simultaneously spin off its pumps business into a new public company called Neles. A short time after that spinoff became effective, Neles received an unsolicited takeover offer from Sweden-based Alfa Laval. Almost immediately, Valmet announced it had acquired a position in Neles with the intention of blocking Alfa Laval’s attempted acquisition. We had valued Neles as part of our assessment of Metso Outotec and our multi-decade experience investing in industrial pump companies. The price paid by Valmet’s management team for the Neles shares significantly exceeded our estimate of their intrinsic value. Even worse, Valmet threatened to acquire the rest of Neles’ shares and take over the company thus potentially initiating a bidding war with Alfa Laval. We were highly concerned the situation could lead to a material destruction of Valmet shareholder value and force the issuance of debt that would substantially weaken the company’s financial strength. Considering these actions, we sold our Valmet shares.

Portfolio profile

We owned 48 disclosed positions as of 30 September. This is within the range of the number of businesses we would expect to own at any given time.

Most of the Fund’s positions are in large-cap companies, with a weighted average capitalization of approximately $182bn). However, we do not consider a company’s size to be a relevant criterion from an investment perspective. The Fund’s median capitalization was approximately $32bn, reflecting investments across a wide market capitalization range, including several businesses around $2bn in size up to several others that are considered mega-caps.[5]

At quarter end, almost half the Fund’s assets (47%) were invested in companies domiciled in Europe. The US represented about 25%, the UK 9%, Asia-Pacific about 10% and the balance in other regions and cash. Across regions, investments in emerging markets companies represented about 9%. Where a company is domiciled is largely irrelevant to us, however, since many of our holdings are large companies that conduct business on a global scale. That means they often generate significant amounts of their cashflow outside their home countries, rendering traditional country classifications less useful.

We thank you, as always, for your confidence, and look forward to continuing to serve your interests as shareholders of the Phaeacian Partners Global Value Fund.

Respectfully submitted.

Gregory Herr & Pierre O. Py
Portfolio Managers


[1] Reflects the top detractor to the Fund’s performance based on contribution to return for the fiscal year. Contribution is presented gross of investment management fees, transaction costs, and Fund operating expenses, which if included, would reduce the returns presented.

[2] Reflects the top contributor to the Fund’s performance based on contribution to return for the fiscal year. Contribution is presented gross of investment management fees, transaction costs, and Fund operating expenses, which if included, would reduce the returns presented.

[3] Reflects the top detractor to the Fund’s performance based on contribution to return for the quarter. Contribution is presented gross of investment management fees, transaction costs, and Fund operating expenses, which if included, would reduce the returns presented.

[4] Reflects the top contributor to the Fund’s performance based on contribution to return for the quarter. Contribution is presented gross of investment management fees, transaction costs, and Fund operating expenses, which if included, would reduce the returns presented.

[5] Large-cap refers to companies with a market capitalization value of more than $10 billion. Mega-cap refers to the biggest companies in the investment universe, as measured by market capitalization. While there is no exact definition of the term, mega-cap generally refers to companies with a market cap exceeding $100 billion.