The Frank Value Fund Institutional class returned 12.10% YTD as of September 30, 2024, compared to 15.09% for the Russell Midcap Value Index and 22.09% for the S&P 500 TR Index. Since fully integrating catalyst-unlocking value into the strategy in January 2022, Frank Value Institutional class produced a Total Return of 34.78%, Russell Midcap Value Index 14.12%, and S&P 500 TR Index 26.25%. For the three years ended September 30, 2024, the Frank Value Fund Institutional class was in the top 13% of its Morningstar category, Mid-Cap Value. Please see the end of this letter for more performance information.
Western Union by the Numbers
Recently on our website, I shared a public investment case for Western Union. You can read it here: https://frankfunds.com/western-union-investment-case/. The research largely talks about the inflection point in Western Union’s business, but I think it would be helpful to show how stock picking adds value to portfolios. Below is a comparison between Western Union and Apple. Though the businesses have little in common, there are shareholder friendliness traits comparable across every publicly traded stock. Apple is about 6% of the S&P 500 and representative of the valuation in the index. Western Union is a 5% position for the Frank Value Fund and representative of our catalyst-focused strategy. Importantly, Western Union is 0% of the S&P 500 and 0.1% of the S&P 400 Mid Cap, so the opportunity is unavailable for indexers. I believe building a concentrated portfolio in extremely shareholder friendly opportunities like Western Union both lowers volatility and increases returns. These types of positions have driven us to the top of our category in the three-year period since implementation.
| Characteristic | Western Union | Apple | Comment |
| Dividend Yield | 7.9% | 0.4% | Both companies have adequate dividend coverage, but Western Union’s low valuation results in a much higher yield for shareholders. |
| Annual Repurchase Rate | 7.5% | 0.7% | Both companies spend millions repurchasing their stocks, but Western Union’s low valuation makes repurchases highly material instead of a rounding error like Apple’s. |
| Total to Shareholders | 15.4% | 1.1% | Add dividends to share repurchases for total annual capital returned to shareholders. Over 8% is attractive while the 15% from Western Union one of the best available. |
| Free Cash Flow / Enterprise Value | 8.1% | 3.0% | Another example of low valuation for Western Union. Free cash flow supports sustainable dividends and stock repurchases. Both companies produce significant free cash flow, but because Western Union has a lower valuation, management can use this cash to reward shareholders significantly more than Apple. |
Two vital quantitative components make Western Union an attractive opportunity: low valuation and shareholder friendliness. A business could be piling up cash, but if management is going to reward themselves through excessive stock-based compensation, or if they attempt to build an empire through overpriced acquisitions, this cash has little effect on shareholders and the stock price. Instead, Western Union’s management recognizes that their stock price is far too low, and the best opportunity for everyone is to repurchase shares. In fact, repurchases have a dual bonus: reducing the share count and removing some of the 8% dividend obligation. Since Western Union’s corporate debt trades at a yield to maturity below 6%, it makes more sense to repurchase shares with an 8% dividend cost than to buy back debt at 6%.
Western Union is only one of our twenty-six positions in the Frank Value Fund. Through excessive legwork and targeted research, I have built a portfolio of companies with either the extreme shareholder friendliness of Western Union, or the high-quality compounding growth characteristics of our blue-chip positions. These opportunities are difficult to find, but I think the effort and focus is well worth it as our recent results speak for themselves.
The Path Forward
The stock market rally has broadened as the Federal Reserve cut rates by 0.5%. Historically, the advent of Fed cutting cycles has marked the top of the economic and stock market cycles. Economic history, as well as the extreme valuations present in most stocks warrant caution. Over the past quarter, I have been reopening each investment case in the Frank Value Fund with an eye to recession resistance. By design, most of the businesses we own are recession resistant and I am confident to hold them through a downturn in price. Numerous of our holdings have significant catalysts occurring in the next twelve months that could release upside even in a tougher stock market environment. The vast differences between our portfolio and the rest of the publicly traded market reside in less cyclicality, extreme shareholder friendliness/valuation, and higher business quality.
Conclusion
Stocks have enjoyed large gains in the past twelve months and investors are complacent. Our portfolio has largely kept up with the roaring upside, but expecting perpetual bull markets is both foolish and greedy. Consider the Frank Value Fund’s positive performance in 2022 regarding the importance of downside focus. Avoiding large downside risks protected our capital in a downturn and allowed us to compound from a higher base once the cycle turned. I am thrilled that the Frank Value Fund has lowered correlation and offered downside protection without sacrificing upside in the past three years.
Sincerely,
Brian Frank – Frank Value Fund Portfolio Manager
| Performance as of 9/30/24 | Total Return | Average Annualized Total Returns | ||||
| YTD 2024 | 2023 | 2022 | 3 Yr. % | 5 Yr. % | Since 7/21/04 % | |
| Frank Value Fund | 12.10 | 15.13 | 4.43 | 11.37 | 10.61 | 7.02 |
| Russell Midcap Value Index | 15.09 | 13.44 | -12.03 | 7.39 | 10.32 | 9.93 |
| S&P 500 Total Return Index | 22.08 | 26.29 | -18.11 | 11.91 | 15.98 | 10.66 |
* Represents an estimate based on the performance of the Fund’s Investor share class, adjusted for fees.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end by calling the Fund at 1-888-217-5426 or visiting our website at www.frankfunds.com. Returns include reinvestment of any dividends and capital gain distributions.
Non-FDIC insured. May lose value. No bank guarantee. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling 1-888-217-5426. Please read it carefully before you invest or send money.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the individual portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of October 9, 2024 and are subject to change without notice.