Q4 21

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Fourth Quarter 2021

The Frank Value Fund Institutional Class returned 1.39% in Q4 2021 compared to 11.03% for the S&P 500 TR Index and 8.37% for the Russell Midcap Value Index. Please see the end of this letter for more performance information.

 

The Fund’s conservative allocation slowed performance in 2021. With sizable investments in major gold miners, physical gold, and US treasuries, these investments declined in calendar 2021 and at their peak represented nearly 40% of the portfolio. In August, we eliminated our position in physical gold as the asset failed to protect against inflation. During the fourth quarter, we reduced our US treasuries as we found high quality investment opportunities in select US equities. At the end of 2021, the Frank Value Fund is much closer to its roots, with over 70% of the Fund in invested in high quality companies trading attractive valuations.

Dividend Protection

The Frank Value Fund’s best performing position in 2021 was also one of its largest dividend payers: H&R Block (NYSE: HRB.) The stock appreciated 48.5% in 2021, while paying a dividend of over 6% on our original cost. The fund has seven positions with dividend yields over 3.5%, and while this adds an obvious source of return, we believe it also protects against a reversion to the valuation mean in US equities. Records continued to be broken in 2021, with the market cap / GDP ratio exceeding 2.1x, vastly higher than the 2007 and 1999 peaks of 1.0x and 1.2x, respectively. A reversion to the 0.75x and 0.50x troughs of 2002 and 2008 require declines in the S&P 500 of 64% and 76%, respectively. Consider H&R Block currently has a dividend yield of 4.5% which exceeds its median best yield since 2007, and you can see how the fundamentals support HRB’s valuation here much more so than the fundamentals backing the rest of the S&P 500. We believe H&R Block is still about 50% undervalued relative to its cash flows, dividend, and other fundamentals, while the S&P 500 clearly exceeds twice its fair value. While we are happy with the quality and valuation of our dividend paying positions, we are not blindly buying yield, as extreme valuations affect most stocks, even those with dividends. Risk-wise, it is a stock picker’s market. We believe the long-term risks in the Frank Value Fund portfolio are far less than indices like the S&P 500 and other funds.

Rising Rates

Three interest rate increases are expected in 2022 from the Federal Reserve. This would increase the Fed’s rate by about 0.75%. While this doesn’t sound like much, these expectations are having a profound negative effect on growth stocks and a positive influence on value. Why this change? With rates so close to 0%, investors had no reason to make conservative allocations. The term TINA (There Is No Alternative) became a rallying cry for investing in highly speculative growth companies. Investors flocked to unprofitable companies focusing purely on revenue growth. After all, there was no alternative! Eventually these high growth companies would produce profits, albeit in the far future. Even if it was a distant future, since rates were close to 0%, there was no opportunity cost for waiting because investing conservatively had no immediate payoff.

 

We believe this TINA mentality created the opportunities in dividend-paying stocks and the market is now taking notice. Dividend-payers tend to be slower-growing, less exciting companies, and the lack of investor interest caused valuations to reach attractive levels. Now, with interest rates increasing, the bubble in growth has been deflating rapidly. Unprofitable companies like Lemonade (NYSE: LMND) and Wayfair (NYSE: W) have declined 50-75% from their peaks. Why wait for extremely risky high-growth companies to become profitable, if ever, when you can now invest conservatively for some return? Interest rates change everything, and value companies offer wonderful opportunities in this environment relative to growth. Furthermore, the non-dividend paying value companies the Frank Value Fund owns are producing material amounts of cashflow today. With valuation discount rates (interest rates) and inflation increasing, a dollar today is worth more than several dollars ten years from today, so dividends, cash flow, and low valuations are suddenly the alternative everyone needs. We are holding all the cards.

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* 6.68 3.78 6.55 6.34
Russell Midcap Value 28.88 11.18 13.42 10.37
S&P 500 Total Return 28.71 18.47 16.55 10.95

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 January 5, 2022 and are subject to change without notice.