Q1 22

Q1 22

First Quarter 2022

The Frank Value Fund Institutional Class returned 5.92% in Q1 2022 compared to a loss of -4.60% for the S&P 500 TR Index and -1.82% for the Russell Midcap Value Index. Please see the end of this letter for more performance information.

 

In last quarter’s letter to shareholders, we mentioned how increases in interest rates drastically changed the growth vs. value equation, benefiting the Frank Value Fund. High inflation in the first quarter 2022 accelerated this transition, with markets more than doubling their expected Federal Reserve rate increases to seven. Then, the Russian invasion of Ukraine acted as a wake-up call to developed countries for energy and materials independence. This scramble for energy with nascent government cooperation has created opportunities for going green that further improves the investment cases for our energy holdings.

Green Energy is Green for Portfolios

The Frank Value Fund owns two refining companies, and both are converting to produce renewable diesel. Renewable diesel is made from recycled animal fats, inedible corn oil, and used cooking oil, and this conversion reduces the carbon intensity of diesel by 50-90% (standard diesel engines can use renewable diesel.) We believe conventional energy producers like the ones we own should lead the renewable energy revolution because they have existing infrastructure, distribution networks, knowhow, and the ability to balance the United States’ energy independence during the transition. Russia’s aggression has shocked the west into avoiding dependence on rogue nations. Though the United States exports oil, it is a little-known fact that specific grades for refining still must be imported from countries like Russia. Switching to renewable diesel will mitigate this reliance and help the environment.

 

Recognizing both the environmental and strategic importance of this transition, governments are incentivizing conventional energy companies to convert. Converting to renewable diesel will allow our holdings to both increase sales as well as lower costs by reducing Renewable Identification Numbers expenses, or RINs. The Environmental Protection Agency collects payments from conventional energy producers through RINs. For our small and mid-cap companies, RINs are their largest cost! Bigger companies can spread this cost around a large organization, but small companies cannot. Happily, the inverse is also true: as our small refiners convert to renewable energy, their RIN cost will plummet, and profits will slingshot higher. While the above example is more of an adversarial relationship between government and business, if the two work together like in Canada, the results can be even more impressive and profitable.

 

Frank Value Fund took a position in Algoma Steel (NASDAQ: ASTL) during the first quarter. Algoma, after a merger in 2021, is the third largest steel producer in Canada, and its blast furnaces are heavy emitters of carbon dioxide. Recently, Algoma secured two loans from Canadian government agencies to convert its entire operation to electric arc furnaces. This transition will reduce the company’s total CO2 emissions by 70%, eliminate coal as an input, and transform Algoma into one of the leading producers of green steel in North America. This project is a large value-add. Algoma’s production capacity will increase by about 30%, and the cost of using the government’s capital is extremely low. Adding fuel to the electric arc furnace-fire, western sanctions on Russia have also spurred the developed world to reduce its rogue nation reliance on materials like steel, spiking prices in the futures market and heavily incentivizing local production. We believe ASTL could be trading at a P/E of 1 before it even converts to electric arc furnaces! Opportunities like these exist because the investing world is nearly 50% passive and fewer firms are conducting in-depth analysis at the company level – especially for small and mid-caps. We are thrilled to compete with the zero fundamental analysts at index funds!

Catalyst Value Investing and Growth

We expect ASTL to close its valuation gap through dividends, (first payment declared March 2022) stock repurchases, and by being acquired or conducting M&A itself. Catalysts like capital projects and their ensuing cashflow enable modern value-investors like us to outperform in a world of passive indexers.

 

Throughout the Frank Value Fund’s lifetime, high quality firms trading at low valuations have been our bread and butter. Over our history we have invested in companies that have compounded earnings at double-digit rates, but in the past five years, it became impossible to hold these quality investments without sacrificing the valuation discipline. As passive investing captured market share, markets increased in volatility and no longer trade on fundamentals. Our adaptation has been twofold. First, we aim to advantageously trade into the volatility, and second, we demand catalysts on our deeper-value, small-cap names. Volatility returned during Q1 2022, and we opportunistically invested nearly 20% of the fund in high quality compounders like Twitter and Paypal, which, due to greater than 50% declines from their highs, fit our valuation criteria. These compounders and stories like Algoma steel dramatically increase our expected future returns.

Performance as of 6/30/21 Total Return  

Average Annualized Total Returns

1 Yr. % 5 Yr. % 10 Yr. % Since 7/21/04 %
Frank Value Fund* 8.57 4.66 5.96 6.59*
Russell Midcap Value 11.46 9.99 12.01 10.11
S&P 500 Total Return 15.65 15.65 14.62 10.49

Please see our website for distribution information. 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 April 6, 2022 and are subject to change without notice.