2nd Quarter, 2005
A recent news article speculated that the majority of discussion about economic matters has lately revolved around oil prices, China, and China's impact on oil prices. Based on a similarly unscientific methodology of "number of search results" - see table - for various catchphrases recently Googled on the internet, we would expand to add home prices, interest rates, the value of the dollar, the Federal Reserve, and real estate bubble to the buzzword bingo list of things people are likely chatting about at the beach circa the summer of 2005.
On a number of fronts, economic news is sending mixed messages. The Federal Reserve moved short term rates eight times from 1.25% to 3.25% over the past year. On the other hand, levels of first (and second) home ownership have been reaching new highs. While the per barrel price of oil has been topping nominal milestones, the recent July Fourth holiday weekend set records for number of travelers. The dollar has seesawed; individual states' revenue pictures have fluctuated from deficits to surpluses; and long term federal fiscal direction is less than clear. Retail sales were slow earlier in the year, but have lately rebounded. As the ink was drying on this communiqué, tragic events in London recalled the specter of terrorism.
Perhaps owing to investors' mixed feelings about and reactions to economic conditions, observable outcomes in the broad US equity market have maintained something of the quality of watching paint dry. The Fund's portfolio crossed the year's halfway mark just ahead of the S&P 500 Index return with market values little changed from the beginning of the year. We have enclosed the second quarter 2005 statement for your Oak Value Fund account indicating any account activity (contributions, share purchases or redemptions, etc.) and the June 30, 2005 share balance, net asset value and total account value.
As you know, we avoid allowing opinion on the overall market or macro items to chart our investing course, preferring to consistently focus our effort on understanding a few businesses well enough to value their underlying prospects. While we are certainly observers of the economic backdrop, we remain most keenly attuned to implications those conditions may have for specific businesses and our investment strategy. In that light, there may be some positive news embedded in the current haze. We are selectively finding a few companies possessing what we view as robust growth prospects that are priced as if their progress will stagnate.
Just a few years ago it was seemingly common for analysts and investors to assume that growth rates would extend to infinity. In our opinion, the recent market environment provides much the opposite - a selection of reasonable prospects being truncated, undervalued, and under priced. Company management teams with proven abilities to allocate capital and add value for their shareholders are being under appreciated to a degree we have not seen in a few years. Despite entirely rational concerns about interest rates, gas prices, and other items, we note that even broadly speaking, several years of progress in earnings and corporate financial position have not been accompanied by proportionate increases in stock prices. We therefore find the valuations and the implied opportunities in Fund portfolio positions to be compelling, despite a somewhat tentative investment landscape. Progress in recent years has resulted in cleaner, healthier balance sheets, good cash conversion profiles, and achievable growth prospects in select companies we are investigating. As value investors, the "icing on the cake" is that these businesses are often presented at prices that leave a comfortable margin of safety - the discount of current price to intrinsic value that we seek.
Like any professionals executing a craft, we expect that experience and maturity offer incremental improvement and blend into wisdom and skill as time passes. As an organization, we have a greater confidence than ever before in our ability to vet ideas and allocate shareholder capital, filtering the available content about investing through context earned from experience. We are actively engaged in analyzing information that is timely and relevant to the future prospects of a few quality companies suitable for the Fund portfolio. The environment for us to ply those skills has grown marginally more attractive as businesses progress while market prices remain largely inert. Our research effort continues apace, and it remains our expectation that our efforts will surface additional opportunities in selected individual good businesses, with good management, offered at attractive prices. In the culmination of that process, we spent a bit of the Fund's cash on two new companies that qualified for that intersection of criteria during the quarter. We are excited about the Fund's ownership of these businesses and believe they add to the overall quality of the Fund portfolio. We also sold one Fund position and will provide a more detailed review related to buy and sell activity and other thoughts in the forthcoming 2Q 2005 Investment Adviser's Review.
Oak Value Fund Co-Managers,
David R. Carr, Jr.
Larry D. Coats, Jr.
Matthew F. Sauer
Important Information: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. 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.
An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The Fund's prospectus contains this and other important information. To obtain a copy of the Oak Value Fund's prospectus please visit our website at www.oakvaluefund.com or call 1-800-622-2474 and a copy will be sent to you free of charge. Please read the prospectus carefully before you invest. The Oak Value Fund is distributed by Ultimus Fund Distributors, LLC.