July 2003
To Our Fellow Shareholders:
How do you spell relief? That's intended to recall an old commercial, not pose a trick question. We aren't quite sure how to commit to paper the practically audible collective sigh breathed by investors during the past few months. Neither "R-O-L-A-I-D-S" nor "Phew!" quite does it justice, but if you own stocks and haven't been in a coma since last year some time, you probably know what we mean. (By the way, the very durability of such slogans in consumers' memories is one reason we like the advertising industry, but we digress.) All major stock indices recorded double digit positive results in the second quarter, as an improved environment for equity prices broadly accompanied the cessation of full scale military activity in Iraq. The Oak Value Fund fully participated in the stock market rally that moved prices significantly off of their mid-March lows through the end of the second quarter.The extreme stock price volatility lately experienced (especially pronounced since last summer) in our view represents prima facie evidence of the distinction between price and value that is inherent in investing. Tracking the progress of an operating business is clearly more difficult and subjective than getting a price quote, but accepting the validity of the latter as a reflection of value on any given day (say, in March of 2000 or again in March of this year) can clearly be hazardous to your wealth. For truly long term investors, dramatic price adjustments like those recently witnessed stand as a testament to the folly of market timing and of taking cues about the value of a business from the behavior of its stock price.
To be sure, our estimates of intrinsic value for the few companies we select for inclusion in the Oak Value Fund are not validated by improved sentiment or changing stock prices, especially over such a short time frame. We remain confident that where our analysis is appropriate, value will ultimately be realized. Shifting sentiment and the price changes that often accompany it merely provide a mechanism to measure and periodically monetize those assessments in a portfolio context. Having said all that, we certainly welcome the recent improvement in portfolio pricing. It sure does feel good to post sizable positive results -the best single quarter in the Fund's ten year history.
With those results now part of history, "heigh-ho, heigh-ho, it's back to work we go." Our commitment to understanding the value of portfolio companies' underlying businesses remains both our focus and the largest determinant of our long term investment success. While on one end of the risk spectrum money market funds currently struggle to eke out a yield sufficient to cover their fees, a large number of stocks remain priced in our view at valuations that offer negligible upside and even less downside protection to investors. It is an interesting, and admittedly somewhat stressful, time to be an investor. We are certain that we have not seen the end of significant financial market volatility, and thus remain focused on the select few companies where we find both compelling opportunity and downside protection against erosion of real economic value over time.
The current economic backdrop is characterized by economic activity that remains subdued, sales and profit growth that are hard to find, interest rates which offer investors little return, aggregate market valuations that appear historically lofty (often for low quality businesses), and high stock price volatility. Against that context, we have confidence in the business profile and growth prospects of current Fund holdings, and in our disciplined approach to identifying new investment opportunities that meet our prospective return and safety criteria. We will provide additional portfolio detail in our forthcoming Second Quarter 2003 Oak Value Fund Managers' Commentary.
We continue to advise shareholders to maintain both modest return expectations and cautious optimism about investments. While some of the immediate worries about the economy and the geopolitical environment have abated with the end of the formal Iraq conflict, new concerns can be counted on to replace those. Mathematically, quarterly and to-date 2003 results are currently well above reasonable long term return expectations. Some of that is the periodic upside we count on to compensate for past periods of sub-par results. However, we also anticipate that some of the recent run of performance will be offset by future below-average or negative interim postings that will move long term results into the more modest range of 8-12% positive return expectations that we believe is reasonable. On average and over the long term, we expect a commitment to our time-tested investment principles to grow capital, though obviously not in each and every part of a market cycle.
We'd like to take this opportunity to thank you for your patience and continued support, especially during the times when the Fund net asset value likely made that patience a fully taxed virtue. We are appreciative of the commitment from long term shareholders and hope to reward that patience over time with returns that are both respectable in the absolute and competitive with alternatives. We remain committed to the same business evaluation and stock selection processes that have served shareholders well over time and welcome any questions or comments you may have. Please feel free to call, write, or email. Bonnie Stephens, our Shareholder Relationship Manager, will be sure to answer your questions and address your concerns. She can be reached at 800-680-4199 or via email at bps@oakvalue.com.
As always, we thank you for your support.
George W. Brumley, III
For more information about the Fund, including objectives, strategies, risks, charges and expenses, please obtain a copy of the Fund's prospectus which is available by calling 1-800-622-2474 or at www.oakvaluefund.com. Please read the prospectus carefully before you invest.
David R. Carr, Jr.
Please note: The information presented above is not to be construed as an offer or solicitation to purchase the Oak Value Fund (the "Fund"), which is offered only by prospectus. Information concerning the performance of the Fund and its investment adviser's recommendations over the last year are available upon request. Past performance is no indication of future performance. You should not assume that future recommendations will be as profitable or will equal the performance of past recommendations. The Fund and its investment adviser do not subscribe to any particular viewpoint about causes and effects of events in the broad capital markets, other than that they are not predictable in advance. Specifically, nothing contained in this letter should be construed as a forecast of overall market movements, either in the short or long term. Any performance data quoted represents past performance and the investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.