QUARTERLY REPORT
June 30, 1998
FMI
Focus Fund
A NO-LOAD
MUTUAL FUND
FMI Focus Fund
August 11, 1998
Dear Fellow Shareholder:
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 6/30/98 AS COMPARED TO THE STANDARD & POOR'S 500 AND THE RUSSELL
2000
FMI FOCUS FUND STANDARD & POOR'S 500 RUSSELL 2000
12/16/96 $10,000 $10,000 $10,000
12/31/96 $10,245 $10,280 $10,350
3/31/97 $10,736 $10,549 $9,815
6/30/97 $12,709 $12,390 $11,406
9/30/97 $16,796 $13,333 $13,103
12/31/97 $17,391 $13,712 $12,664
3/31/98 $19,876 $15,626 $13,938
6/30/98 $19,689 $16,145 $13,289
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 6/30/98
Annualized
Total Return*<F1>
Through 6/30/98
Total Return*<F1> From Fund
Last 3 Months Inception 12/16/96
--------------- --------------------
FMI Focus Fund (0.9)% 55.4%
Standard & Poor's 500 3.3% 36.6%
Russell 2000 (4.7)% 20.3%
*<F1> Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain distributions.
The FMI Focus Fund closed the second quarter with a year-to-date gain of
13.2%, and with that gain we are pleased to report that the Focus Fund retained
it's number one ranking in the capital appreciation category for the twelve
months ending June 30, 1998 with a gain of 54.91%, according to Lipper
Analytical Services. For the second quarter alone, the Fund was off just under
a percent, considerably better than the -4.66% return posted by the Russell 2000
Index, and -2.14% for the S&P Mid-Cap Index. During the quarter, intensive
research, and a little scrambling, enabled us to side step some of the disasters
that befell many of our small- and mid-cap mutual fund peers. According to
Lipper Analytical Services, the average of 642 small-cap funds fell -4.11% in
the quarter, and are up just 6.48% year-to-date, while those same statistics for
the average of 341 mid-cap funds were -1.40% and 10.66% respectively.
Our relative outperformance was attributable to significant advances in two
of the portfolio's major positions, Jones Intercable and Covance. Covance, a
leading provider of research services to major pharmaceutical companies
worldwide, has been reporting 20% earnings per share growth, which helped drive
the stock price up 13% year-to-date. We have a high level of conviction that
Covance can continue to grow revenue and earnings over 20% and remain quite
bullish on the stock. Jones Intercable, our focus stock this quarter,
appreciated some 37% in the second quarter alone, as the Philadelphia based
cable giant Comcast purchased a large block of stock from Bell Canada.
We felt it appropriate to review Jones, not only because it is our largest
position, but also because it is a classic FMI Focus Fund type situation: great
franchise, misunderstood, virtually uncovered, and selling at a significant
discount to private market value at the time we initiated purchase. It may also
prove to be similar to our big winner last year - Bucyrus International, at that
time, our largest position. Bucyrus International was virtually unknown in the
investment world (even though it is the second largest producer of large mining
equipment in the world), was also selling at a healthy discount to private
market value, and was ultimately taken private at a big premium.
In any event, we were attracted to Jones for several reasons. The stock was
selling at a big discount to the other publicly held cable stocks, which were
attractive in their own right. It looked like Jones had an excellent franchise
both demographically and technologically, and there was virtually no Wall Street
coverage. Finally, there was a catalyst. After all, Jones's stock had been
dormant for years as founder, Glenn Jones, had not exactly established himself
as a shareholder oriented manager. However, there was evidence that was about
to change, as the Company had announced they were going to roll up various joint
ventures into the public parent, sell off non-core assets/properties, and
generally realign management and shareholder interests. Being somewhat
circumspect about the latter issue, we jumped on a plane to Denver to "kick the
tires". What we found confirmed all of the above, and we began accumulating the
stock around $12.00. The stock was boosted to the mid-20s recently, on the
strength of cable stocks in general, and the Comcast purchase in particular. We
believe there is a reasonable chance that Comcast will come back for the rest of
Jones. A take out price at about 12 times cash flow, actually on the low end of
recent transactions, would put the value of Jones in the mid-30s. And the value
should increase over time by the growth in cash flow from operations, and
increasing scarcity value, as other cable franchises are bought out.
Before we wrap-up the second quarter report, we feel compelled to comment on
the current "Big-Cap Craze", if for no other reason than to defend our own
performance this year, which, while certainly strong in an absolute sense, has
trailed the S&P 500. Certainly, we strive to outperform all the major market
averages, and would love to do so each and every quarter. But there are periods
of time when the vagaries of the market overwhelm even the best stock-pickers.
Indeed, there are times when certain sectors of the market become quite
speculative, and attempts to keep up or outperform those sectors becomes far too
risky, and outside of our disciplined, valuation driven approach. We believe we
are going through just such a time. It is now widely understood that a handful
of very large, very extravagantly valued companies such as GE, Coke, Microsoft,
Lucent Technologies, and Cisco Systems have driven the S&P 500 Index well above
the other market benchmarks. Dell Computer has more than doubled this year, and
sports a price-to-earnings ratio in the 50s. That is over two times the
multiple of the average publicly held company and over three times the median
P/E in the FMI Focus Fund. And Dell is in a cutthroat, commodity business. Our
view is that there is a mania going on in the 100 or so largest publicly held
companies resulting in a basic disconnect between stock prices and underlying
fundamentals. Coke, as an example, recently reported its second quarter results
of 48 cents vs. 52 cents per share, down 7.7%, as the company was impacted by
the Asian flu and negative currency translations. The market reaction to the
stock, already valued at well over 50 times earnings, was simply amazing. The
stock continued to climb.
The poor breadth of this market is quite evident when you consider the
following statistics:
Through the first half of this year, the Russell 2000 Index of small
companies is up only 4.93%, the S&P Mid-Cap Index 8.63%, but the S&P 500
Index is up 17.75%. The S&P 100 Index has risen by 21.42%. Even more
astonishing is that the NASDAQ 100 largest companies have appreciated by over
35%.
One-half of the stocks in the Russell 2000 Index are down 33% or more from
their 52-week high, 21% for the Mid-Cap Index.
In a NASDAQ comprised of 6,000 stocks, only 50 (less that 1%) accounted for
over 100% of the year-to-date gain. The "Nifty 50" enjoys a median price-to-
earnings ratio of 57!
In the S&P 500, 50 stocks, or 10%, accounted for nearly all of the year-to-
date performance, and have a median price-to-earnings ratio of 56!
Over half of the year-to-date gain in the NASDAQ comes from three stocks:
Microsoft, Dell and Cisco. The price-to-earnings ratio of these three
companies is 64, 57, and 60, respectively.
Again, the market has become so narrow and focused that a handful of
companies have rocketed up, while the vast majority of stocks have simply not
participated. It is an illusion that the market has been strong this year.
Overall it has been weak. Only a few very large companies have enjoyed huge
speculative type moves. The only realistic way to have outperformed the market
this year would have been to have over-weighted the very stocks we deemed to be
the riskiest and most overvalued to begin with.
We observed four fundamental drivers behind the vast outperformance on the
part of the large-cap stocks:
1. The massive influx of foreign money. Foreign purchases of U.S. equities
are running at a record $90 billion annualized rate, up from the $6-8
billion annual pace for most of this decade. Most of this money goes into
the 20, or so, largest U.S. companies, largely ignoring valuation and
underlying fundamentals.
2. The surge of money, 401(k) and other, into the S&P 500 Index funds. It's
been like "bees to honey" as the S&P has outperformed nearly all active
money managers in recent years, and only charge a fraction of the fee. The
irony now, though, is that indexing has helped drive the price/earnings
ratio of the S&P 500 Index so much higher than the rest of the market, that
in effect, investors are paying a large premium to be in the Index.
3. The negative earnings surprises emanating from the recession/depression
conditions across much of Asia. The fallout has been especially harsh in
certain industries, such as electronics and commodities such as paper and
oil. Stocks in these industries have really suffered. However, the market
treatment has been quite uneven. Coke, already selling at 50 times
earnings, and whose earnings have indeed been bruised by weak Asian demand
and negative currency translations, simply keeps rising because it is part
of the foreign and index buying phenomenon. At the same time, smaller- and
mid-cap companies that are reporting disappointing earnings get crushed and
don't bounce back.
4. The fourth factor is the interplay with the third factor. Investors have
recognized factor three cited above and their actions have served to
exacerbate the trends already in place by flocking to what is working, and
fleeing from what isn't, again, irrespective of valuation.
Eventually, the big-cap love fest will run its course, just like it did in
the early 70s. If you're tempted to throw in the towel and focus on big-caps,
just remember, it took Xerox's stock 20 years to recover from its high in 1973.
Ultimately, an individual company's fundamentals determine its stock price. We
believe that will work in favor of small-caps - eventually. In the meantime, we
continue to focus our efforts on finding strong, growing franchises, selling at
reasonable price-to-earnings ratios. With the average NASDAQ stock down over
30% from its 52-week high, despite relative valuations at their lowest levels in
ten years, we see terrific opportunities in smaller- to mid-sized companies. We
will continue to combine our intensive research efforts, with years of
investment experience, to uncover these opportunities, particularly in
industries we know well, such as financial services, wire and cable, specialty
manufacturing and communications.
Thank you.
Sincerely,
/s/ Ted D. Kellner, C.F.A. /s/ Richard E. Lane, C.F.A.
Ted D. Kellner, C.F.A. Richard E. Lane, C.F.A.
Portfolio Manager Portfolio Manager
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
FMI Focus Fund
STATEMENT OF NET ASSETS
June 30, 1998 (Unaudited)
SHARES OR QUOTED
PRINCIPAL MARKET
AMOUNT VALUE (B)<F3>
-------- ---------
LONG-TERM INVESTMENTS -- 104.5% (A)<F2>
COMMON STOCKS -- 104.5% (A)<F2>
BANKS/SAVINGS & LOANS -- 13.1%
5,000 Amcore Financial Inc. $ 120,000
8,300 Bay Bancshares, Inc. 161,850
36,200 Blackhawk Bancorp, Inc. 579,200
10,000 Home Federal Bancorp 302,500
20,000 Local Financial Corp. 260,000
14,000 Midwest Banc Holdings, Inc. 245,000
8,800 National City Bancorporation 292,600
16,000 Prime Bancshares, Inc. 406,000
12,000 Union Bankshares Ltd. 186,000
----------
2,553,150
CABLE TELEVISION & RELATED -- 12.6%
10,000 ANTEC Corp. 231,880
25,000 Channell Commercial Corp. 275,000
21,000 CommScope, Inc. 339,948
65,000 Jones Intercable Inc. Cl A 1,625,000
----------
2,471,828
CHEMICAL/SPECIALTY MATERIALS -- 2.1%
8,000 Minerals Technologies Inc. 407,000
COMPUTERS & ELECTRONICS -- 6.6%
8,000 Berg Electronics Corp. 156,504
4,000 Flextronics International Ltd. 174,000
26,000 MicroTouch Systems, Inc. 482,638
14,000 Plexus Corp. 278,250
7,000 Raychem Corp. 206,941
----------
1,298,333
CONSUMER PRODUCTS & RETAIL -- 8.3%
26,000 Elder-Beerman Stores Corp. 693,888
29,000 Jostens, Inc. 692,375
8,000 Renters Choice, Inc. 227,000
----------
1,613,263
ENERGY/ENERGY SERVICES -- 2.3%
12,000 Noble Affiliates, Inc. 456,000
FINANCIAL SERVICES -- 6.9%
13,500 Freedom Securities Corp. 244,687
20,000 Heller Financial, Inc. 600,000
22,100 Willis Lease Finance Corp. 505,538
----------
1,350,225
FOREST PRODUCTS/PAPER -- 2.9%
25,000 Wausau-Mosinee Paper Corp. 571,875
HEALTH INDUSTRIES -- 7.9%
55,875 Covance Inc. 1,257,187
8,000 Patterson Dental Co. 293,000
----------
1,550,187
INDUSTRIAL PRODUCTS -- 2.1%
13,850 General Cable Corp. 399,919
INSURANCE -- 22.2%
3,000 Ambac Financial Group, Inc. 175,500
14,000 Amerin Corp. 408,632
18,160 Delphi Financial Group, Inc. 1,022,644
14,000 Enhance Financial Services Group Inc. 472,500
6,000 Financial Industries Corp. 116,250
6,000 MBIA Inc. 449,250
6,200 Motor Club of America 94,550
8,000 Reinsurance Group of America, Inc. 473,000
16,000 Reinsurance Group
of America, Inc. Non Voting 821,008
11,000 Stirling Cooke Brown Holdings 309,375
----------
4,342,709
MEDIA/COMMUNICATION -- 15.6%
10,000 Anicom, Inc. 148,750
22,300 Anixter International Inc. 425,105
22,000 Imax Corp. 501,886
25,000 Paging Network, Inc. 350,000
20,000 PRIMEDIA Inc. 271,260
16,000 Superior TeleCom Inc. 666,000
26,500 Tollgrade Communications Inc. 682,375
----------
3,045,376
TRANSPORTATION -- 1.9%
10,000 Midwest Express Holdings, Inc. 361,880
----------
Total common stocks 20,421,745
OPTIONS -- 0.0% (A)<F2>
100 General Electric Co. put options,
expiration September 19, 1998,
exercise price $80.00 (c)<F4> 6,875
----------
Total long-term
investments 20,428,620
SHORT-TERM INVESTMENTS -- 0.1% (A)<F2>
Variable Rate Demand Note
$15,027 Firstar Bank U.S.A., N.A. 15,027
----------
Total investments 20,443,647
Liabilities, less cash and
receivables (4.6%) (A)<F2> (909,860)
----------
Net Assets $19,533,787
----------
----------
Net Asset Value Per Share
($0.01 par value 500,000,000
shares authorized), offering
and redemption price
($19,533,787 / 1,168,336
shares outstanding) $ 16.72
----------
----------
(a)<F2>Percentages for the various classifications relate to net assets.
(b)<F3>Each security, including securities sold short, but excluding short-term
investments, is valued at the last sale price reported by the principal
security exchange on which the issue is traded. Common stocks which are
listed on a national securities exchange or the Nasdaq Stock Market but
which were not traded on the valuation date are valued at the most recent
bid price. Securities sold short which are listed on a national
securities exchange or the Nasdaq Stock Market but which were not traded
on the valuation date are valued at the most recent ask price. Unlisted
equity securities for which market quotations are readily available are
valued at the most recent bid price. Options purchased or written by the
Fund are valued at the average of the most recent bid and ask prices.
Securities for which quotations are not readily available are valued at
fair value as determined by the investment adviser under the supervision
of the Board of Directors. Short-term investments are valued at amortized
cost which approximates quoted market value.
(c)<F4>The Fund may buy put options on securities. By buying a put option, the
Fund has the right, in return for a premium paid during the term of the
option, to sell the securities underlying the option at the exercise
price.
For the quarter ended June 30, 1998, the FMI Focus Fund had purchased the
following put options:
# OF
CONTRACTS COST
--------- -----
Balance at March 31, 1998 --
Options purchased (General Electric Co. - 09/98) 100 $26,750
Options expired -- --
Options closed -- --
------- -------
Balance at June 30, 1998 100 $26,750
FMI FOCUS FUND
225 East Mason Street
Milwaukee, Wisconsin 53202
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR TRUST COMPANY
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311 or 414-765-4124
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of FMI Focus Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance is not indicative of future
performance. Investment return and principal value of an investment may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
