Dear Fellow Shareholders,

Below is our quarterly commentary for the fourth quarter of 2020. In this document, we seek to update you on the Fund’s performance, discuss the key contributors to performance as well as any meaningful portfolio activity.

Performance update

During the fourth quarter of 2020, the Fund gained 13.9% (all figures in dollar terms, unless stated otherwise) net of fees and expenses compared to an increase of 14.7% for the MSCI All Country World Net TR Index. For the full year 2020, the Fund gained 14.9% compared to an increase of 16.3% for the Index.

Portfolio discussion

Worst performers

The largest disclosed detractor to performance this period was SAP. Based in Germany, the company is the world's leading provider of enterprise resource management software. Companies use this software to manage their financial reporting, supply chains, logistics, procurement and other critical processes. We have actively followed SAP for the past 15 years, including several periods when it was a portfolio holding. Historically, concerns over SAP’s transition from selling on-premises licenses to offering cloud-based subscriptions have provided us with opportunities to invest in the company at attractive prices. While the transition does not change the critical nature of SAP’s solutions, it ultimately enhances the net present value of its users for the group. The company also generates a significant portion of its revenues from maintenance and other recurring services that have proven to be extremely sticky. We believe the mission-critical nature of SAP’s software, along with the cost and complexity of installation, create considerable switching costs for customers. Last, strong cash generation and moderate financial leverage provide the group with abundant financial strength. We believe the combination of these positive characteristics makes SAP a compelling investment, particularly at times of market distress.

Such an opportunity arose during the downturn triggered by the pandemic. While SAP’s stock initially bounced back along with the rest of the market in the second quarter of 2020, management’s decision to cut guidance due to the impact of government lockdowns disappointed investors and caused the price to fall back to its March levels. The company also reported that the ongoing multi-year transition of its customers to the cloud would limit short-term profit growth. Looking beyond the temporary effects, we continue to believe this continuous migration will ultimately boost SAP’s enterprise value. Longer-term, we believe the fundamentals of the business will remain strong, and that demand driven by working-from-home and the growth in e-commerce will continue to benefit the company.

Best performers

It is often our experience that weak performance in one period can reverse to become strong performance in subsequent periods. That was the case with ISS which went from last quarter’s biggest detractor to the top performance contributor this quarter. Based in Denmark, ISS is a leading global provider of cleaning, property services, catering, security and facility management services. The company continues to work through COVID-19-related demand weakness and challenges with a few large integrated contracts. A new, well-regarded CEO joined from outside the company at the beginning of September.

Portfolio activity

With global equity markets largely returned to pre-COVID-19 highs, we are not surprised to observe a limited number of companies meeting our quality criteria and selling at attractive discounts. Casting our nets widely did allow us to find a few new purchase opportunities, including S-1 Corporation and dormakaba. Based in South Korea, S-1 is the country’s largest provider of security systems, with leading offerings for commercial and residential customers. This is a high-quality business we have followed for many years and the share price decline this quarter created an entry point for us to purchase the shares.

Based in Switzerland, dormakaba is a global leader in security and access solutions. It is another company we have researched for many years. In March 2020, after the company’s share price fell dramatically, we purchased the shares for the Fund. Several months later, as the price rebounded and reached our intrinsic value estimate, we sold. We recognize the inefficiencies of this short holding period but we prefer to accept those rather than taking on the risk of owning a company that is selling for more than we think it is worth. During the fourth quarter, the dormakaba share price fell again following the release of H2 fiscal year results. The results were in line with our expectations and we re-established a position in the company.

The market rally also lifted many of our other holdings and we sold several, including ALS and Samsung Electronics, as their share prices converged with our intrinsic value estimates. Based in Australia, ALS is a leading global provider of analytical test and inspection services for commodity, life sciences and industrial customers. Based in South Korea, Samsung Electronics manufactures a wide range of electronic equipment, including semiconductors, monitors, televisions, and home appliances.

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

Respectfully submitted.

Gregory Herr & Pierre O. Py
Portfolio Managers