SEMI-ANNUAL REPORT
DECEMBER 31, 1999
(UNAUDITED)
[OAK VALUE FUND LOGO]
LETTER TO SHAREHOLDERS
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IF AT FIRST YOU DON'T SUCCEED, TRY HARD WORK
Given the returns, or rather lack thereof, that we posted for 1999, it is
appropriate and proper that we begin by expressing our disappointment with that
outcome. It is not our expectation to lose money for shareholders, and we know
that in many cases, patience has been sorely tested. We think there are
mitigating factors as well as the anticipation of better things to come in
reward of your persistence. The fact remains however that we are disappointed
and chagrined by 1999's results.
We take limited comfort from a rebounded fourth quarter return, which while
below the broad market S&P 500's 14.9% posting, nevertheless helped make up a
fair amount of previously lost ground. Some of the earlier damage to our
portfolio values was reversed and a number of previously forlorn company prices
improved appreciably from the lows of the third quarter. We aren't out of the
woods yet, but the trail of breadcrumbs is visible.
In short, we had a good fourth quarter, but it wasn't enough to salvage a good
year. We're perturbed by that, and want to let you know that we are working and
thinking hard to make the best portfolio decisions we can. We know you expect
better results, long term; we certainly do. (In fact, we'll provide further
details below about exactly what we do expect, over what time horizon, and what
we think is reasonable for you to expect from us. Also what we do not view as
reasonable expectations.)
FOURTH QUARTER SUMMARY
During the fourth quarter rebound, Tiffany remained our shining star, followed
by strength in Interpublic. Avon, Coke, Gillette, Disney and AFLAC made up some
lost ground. Conversely, the prices of Progressive, Household, UAM, First Union
and E. W. Scripps deteriorated further and Oakwood Homes remained an unmitigated
disaster (it has been sold).
Of course, any particular three or twelve months isn't how we measure progress.
We prefer to focus on and track the advancement of the value of the underlying
businesses of portfolio companies, believing that when that occurs, value builds
pari passu and returns generally follow. In that regard, we have looked hard at
the portfolio companies and on that count, we remain comfortable - no, make that
convinced - that the Fund's portfolio companies are improving their underlying
businesses and represent attractive investment opportunities going forward.
4Q99 BEST AND WORST FIVE STOCK RETURNS
BAR CHART:
TIFFANY 49
INTERPUBLIC 40
AVON 35
GILLETTE 23
COCA COLA 23
FIRST UNION -7
GTE -9
SCRIPPS -12
PROGRESSIVE -16
OAKWOOD -33
Don't get us wrong, we're happy to have the near term, late year performance
improvement, if only as a beacon of hope to you as shareholders that the
investment strategy we all believe in hasn't come completely unglued. But as we
have indicated in the past, we could not have predicted any imminent improvement
in stock prices in advance. Nonetheless, a strong fourth quarter has backed us
all a step or so away from the precipice we collectively faced and we hope that
a modicum of our credibility has been restored.
KNOW WHEN TO HOLD 'EM, KNOW WHEN TO FOLD `EM
We have primarily chosen - by active decision, not default - to continue to hold
existing portfolio positions. Our sales activity has been moderate, though
vigilant, even in the face of price weakness for many portfolio companies. In
cases where we did not feel complete confidence that the underlying business
would meet our expectations, we departed.
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4Q99 PORTFOLIO SALES ACTIVITY
(ELIMINATED POSITIONS ONLY)
POSITION SUMMARY REASON FOR SALE
OAKWOOD HOMES We had seen enough of the business and stock price
deterioration, coupled with a loss of confidence in company
management.
CAMPBELL SOUP Our hopes for domestic volume improvement and
international sales driving revenue growth did not
materialize; we exercised our preference for superior
deployment of capital elsewhere.
FIRST UNION The relatively short-term improvement expected in this
"special situation" did not materialize; position used as a
source of cash for the Fund.
A. H. BELO We have a preference for the superior capital allocation
strategies and prospective business mix of the other media
companies we own (Washington Post and E. W. Scripps), and
thus sold Belo.
NEW FACES
In the purchase area we added three new names in the fourth quarter. We
instituted a small position in VALASSIS COMMUNICATIONS, a sort of new name,
since we previously owned the stock in 1993-94. We owned Valassis briefly at
that time and sold based on valuation, but we have followed the company for
years and like the business and the management. This little known entity behind
a product we've all seen (color coupon advertisements inserted in newspapers) is
a cash generating machine that recently came down in price enough for us to
re-enter with a small position.
We also instituted our first positions in the telecommunications area,
purchasing small positions for the Oak Value Fund in both AT&T and GTE. Demand
for a variety of telecom services is increasing at a very attractive pace, a
trend expected to continue for a number of years. We believe these two
well-known (but less well understood) companies are poised for margin-expanding
transformation as they grow themselves from the long distance and local phone
businesses they have been to the modern telecommunications giants they will be.
Our attraction to both companies is essentially that after their respective
pending mergers, they plan to operate an evolved business model (see box below).
Both AT&T, poised to merge with MediaOne, and GTE, ditto with Bell Atlantic, are
attractive to us for their realistic business plans to sell a broader array of
services than ever before to both existing and new customers, escalating both
revenues and profit margins. AT&T has purchased their way into the cable
business; that is their beachhead into broadband. They also have an attractive
national footprint in cell phone service, and business data traffic. The merged
Bell Atlantic/ GTE, recently granted regulatory approval to offer long
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WHY TELECOMMUNICATIONS? (TECHNOLOGY LITE)
Telecommunications has been impacted by the advent of new technologies,
including the Internet. It currently represents an evolved business model -
expanded revenue opportunities that simply did not exist in the past - courtesy
of technological advances. But it is offered in a business we believe we
understand, where established brand name and customer relationships should
matter, where scale requirements present something of an obstacle to ruthless
competition from as yet unknown competitors, which does not come to us at a
nose-bleed valuation that has discounted not only all the good news but also
some outright fantasy. We like to call it the thinking man's technology play -
at a value price.
We think one key to succeeding in the evolving telecom landscape will be the
ability of a provider that is trusted by customers to deliver a wide range of
services. GTE and AT&T fit that bill in our view. These services have heretofore
been delivered separately by various providers (cable TV, local telephone
company, internet service provider, long distance company, cell phone company),
but will be newly offered through a money-saving "bundled" package of a
combination of these services to a variety of customer types at attractive
prices.
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distance voice and high-speed data to both businesses and consumers in New York,
will similarly offer a package of services to customers, for instance using DSL
technology for high speed Internet. (Note: We purchased GTE for the Fund in
anticipation of the merger being completed, as a slightly cheaper way to
ultimately own the combined company, versus a direct purchase of Bell Atlantic).
1999 SUMMARY
Calendar 1999 contributions to the under-performance of our portfolio holdings
came in several flavors.
1. Rising interest rates, and their dampening effect on financial stocks. As
you can see, the Fund owns lots of financials.
2. A cyclical downtrend in property casualty insurance. The Fund owns lots of
those too.
DISTRIBUTION BY BUSINESS CATEGORY
PIE CHART:
CASH 1%
RETAIL 9%
DIVERSIFIED 11%
MEDIA 17%
FINANCE 24%
ADVERTISING 6%
CONSUMER 15%
INSURANCE 14%
TELECOM 3%
3. Weakness in our consumer companies, some company specific, some related to
the earnings drag of a three year adverse trend in the U. S. dollar.
4. In the clarity of hindsight, one stock selection on our part that
conspicuously did not work out - Oakwood Homes. It was a painful lesson,
but it is now behind us.
Adding insult to injury in terms of comparing our results to a rising market,
5. Lack of technology stock exposure hurt, as that sector continued its rapid
ascent.
THERE IS IN THE WORST OF FORTUNE, THE BEST OF CHANCES FOR A HAPPY CHANGE.
EURIPIDES
So what are we doing about this turn of events? Little that you haven't heard
before. We sold the four positions reported above. We performed some trimming
activity of existing positions on a tactical basis, to adjust weightings and
raise cash for redemptions. As for lacking technology stocks, our thoughts are
well documented, in our third quarter comments (mailed separately to
shareholders with the most recent prospectus and available on our website), in a
Morningstartm Q&A session we participated in (also available on our website at
WWW.OAKVALUEFUND.COM, or call for reprints) and again some more below. The
Reader's Digest version is this: we're looking carefully at the technology area
for business models, new or evolving, that fit our criteria, including the one
about attractive price. We are resolved not to capitulate to irrational pricing
no matter how many twenty-something speculators make a hillion jillion dollars
in those stocks. It's just not our style.
That is because, in the majority of cases in the Fund's portfolio, not to sound
like a broken record here (does that phrase mean anything anymore in the age of
the compact disc?), we still like the selections that have come out of our
style, their short term price disappointments and challenges notwithstanding. We
believe the business fundamentals are intact, the stocks are worth more than
they are currently being afforded in the market and we will continue to monitor
their business progress for the improvement we feel is likely. Not surprisingly,
we said much the same three months ago. We struggle with seeking new or more
articulate things to say on this issue, but we find ourselves tilling familiar
soil.
We think long term, and look at the progress of the businesses we own through
that prism. By and large, the companies purchased on your behalf are
experiencing significant momentum in growing their businesses and building their
future franchise strengths. Those that ultimately fail this litmus test will
depart from the portfolio, as evidenced in the recent sales activity. But in
many cases in the portfolio, the progress in the underlying business is
substantial, and the gulf between market price and economic (or intrinsic) value
is extreme in its disparity (and in certain cases greater than it was when we
said much this same thing three months ago). We continue to own these businesses
because we
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believe that the gap will ultimately be closed by price moving up to meet value,
not vice-versa.
BENJAMIN GRAHAM AND WARREN BUFFETT ASSAULTED. FILM AT ELEVEN.
As you might imagine, we've gotten an earful over the last year or so from a
goodly percentage of our shareholder base. If it included only the apparent
legion of recently minted "professional" investors who own one or two big
winning stocks (or perhaps momentum funds) and have thus recently put our
returns to shame, we wouldn't worry too much. We recognize that what we do is
not for everyone, even those who appear to understand when times are good but
find they really don't understand or care about philosophy, or prudence, or
margin of safety when times get a bit tough or when the siren song of "easy
money" calls.
But the odd juxtaposition of many, many stories of millions of apparently
risk-free dollars being made by even average Joes on the one hand, and the
seeming fall from grace of even Mr. Buffett and Berkshire Hathaway on the other
is seemingly unsettling to all. If the "pope" of value investing can be declared
fallible, even the committed and clergy are apparently shaken.
We are in the midst of an age when Internet millionaires are created by the
gross. When poets and artists are convinced they should follow their own
investment counsel and patronizingly commiserate in our misfortune. When the
returns of companies that lose money far and away outpace those that earn
profits. When David Bowie raises millions by selling his future royalties in the
form of bonds and reinvests the proceeds in an Internet bank (yes, the singer,
Ziggy Stardust himself - we couldn't make this stuff up). When people who came
aboard with us years ago indicating they wanted 10-12% a year are now
disappointed enough to dismiss us for annualized results that are substantially
in excess of that goal. When the market value of six (Times-Mirror, Gannett,
Tribune, New York Times, Washington Post, and Knight-Ridder) publicly-traded
newspaper companies - combined - was recently two-thirds that of Yahoo's. Risk
is in; margin of safety is out. These MAY well all be logical outcomes, but they
strike us indicative of an investment climate more financially prurient than it
is prudent.
In such a setting, perhaps even our longtime shareholders may be tempted to
question the faith as they read our umpteenth discussion of the value philosophy
and the fundamental details of the underlying businesses we know so well.
Perhaps even the previously committed may be wondering if our approach is either
quaint, passe or "fine for that doddering old fool Warren Buffett and maybe
Grandma," but much too tame for the likes of the new intelligentsia. There's
gold in them thar hills after all.
HOLY GREAT EXPECTATIONS, BATMAN!
Before concluding that we, and you, by virtue of your association as our
shareholders, are the investing equivalent of that legendary scrawny guy getting
sand kicked in our collective faces at the beach, we have a few thoughts (then
we'll shut up, we promise).
u OWNERSHIP OF TECHNOLOGY STOCKS
To some extent, wea culpa. Yes, we could have owned some of those large-gaining
stocks. Nothing restricted us from doing so. In hindsight and in a limited
number of cases, we arguably might have invested, even within our value
discipline. As we detailed in last quarter's comments, we know what technology
means to the economy and what the stocks are currently doing. You should not
conclude from the lack of technology names in our portfolio that we have not
looked for superior business models, reasonably priced, in this area.
Yet in this regard as well we echo Mr. Buffett in that we will trade the size of
a payoff for its likelihood, and above all avoid doing "dumb things." We will
tread carefully, and subject all investment ideas to our familiar crucible of
GOOD BUSINESSES, with GOOD MANAGEMENT, at ATTRACTIVE PRICES. All three matter.
While many investors have accepted as a foregone conclusion that technology is
the only area that matters for a successful investing future, we remain
skeptical about the efficacy of that conclusion.
So with an open mind, but feeling somewhat like the proverbial minister in the
cathouse, we have sifted selected technology industries and businesses through
our exacting research process, visited with many of them, and read a shelf full
of worthwhile evolving business strategy books, all in search of new business
models and VALUES that fit our investment criteria. Our collective long term
experience tells us that superior businesses are difficult to find. We expect
our experience in the technology sector to parallel others, in which we evaluate
and visit with many "frogs" before we find the princes.
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We are on guard against the German proverb that "an old error is always more
popular than a new truth" in examining the "new paradigm" ostensibly created by
technology and the Internet. But technology businesses (not a monolith by the
way, though glibly referred to as such) are like any other in that they are
subject to competition, and must ultimately provide a cash return on invested
capital to be successful. Our charge is to be sure that any forays we make in
this area provide a
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THE BIG PICTURE
Surprising no one we're sure, we happen to agree with Mr. Buffett's calculus in
a recent Fortune article. All investors really should read it, and just to prove
we're not technophobic rubes, you can get on the Internet (for a fee paid to
Northern Light) a copy of the Fortune article on Warren Buffett's analysis of
inflated expectations at: http://library.northernlight.com/
PN19991109040000127.html?cb=13&sc=0#doc, or you can check out the hard copy for
free at the library, in the November 22, 1999 issue. The article discusses the
level of inflated investor expectations for returns from the overall stock
market prospectively.
We will echo Buffett's sentiment that this in no way should be interpreted as a
stock market prediction, or opinion on "the level of the market." We don't think
in those terms and never will. Nonetheless, it seems prudent to allow that
conditions going forward are less likely to be as favorable as those that have
helped achieve the returns of the last two decades. While we view the threat of
an ill wind on a macro-market basis with appropriate respect, we take comfort
from our thesis that such an environment would ultimately favor the stock picker
versus the index funds or sector theme players.
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return on (and first a return of) your invested capital. It seems to us that
we've now officially said more than enough on the topic of technology in our
communications. You know where we stand. The next noise we make in this regard
should be a vote with dollars. Someday.
u REASONABLE RETURN EXPECTATIONS
The Fund's long term track record has compounded capital at a rate that we
believe most people would be quite happy with, at least in the days before one
could begin an investment career at breakfast, be rich by lunch time and retire
before dinner. We're happy for the long term returns, but truth be told, they
remain in excess of that which we believe is sustainable over the very long term
(20+ years). We believe both our skill and a supportive environment for equity
investors have contributed to that outcome. We're proud of and happy for the
long-term results, while admittedly less than satisfied with short-term returns.
But we realistically shoot for 12-15% a year over the very long term. Anything
else is attributable to good fortune and should be deemed "gravy". If that makes
us stodgy, so be it. It's the truth.
In investment returns as in weight lifting, especially lately, it's the "BIG
NUMBERS!" that foster the oohs, aahs, and envious silences. NASDAQ aberration
(85% in 1999 - see feature on the last page) and late year comeback for us
aside, we still look weak of late versus the big numbers posted by the S&P 500.
We take this seriously, since the S&P is not only an investable alternative, but
also represents the passive investing approach recommended by Messrs. Graham and
Buffett for those who don't care to perform the thorough analysis necessary for
prudent individual stock selection.
So we take our recent shortfall seriously, but we don't obsess over it. To do so
would transmogrify our primary aim from this, our general common sense goal:
u to earn good returns for shareholders over time, by PRUDENTLY deploying
capital in situations where we have adequately assessed and balanced both the
opportunity for gain and the possibility of loss
to this, a specific portfolio objective
u to beat the S&P 500 Index, whatever that requires, up to and including the
moral bankruptcy associated with abandoning everything we know and have
espoused to our shareholders about independent thinking, diligent company
research, and allocating capital with one eye on a margin of safety for that
capital. Not that we have an opinion.
u INTELLIGENT INVESTORS WANTED
As you might guess, we aren't ready to capitulate on our investment principles.
Index returns or no index returns, and Internet or no Internet. We're not
knocking anyone's ability to do things differently or to take a different tack.
In fact, an investor with perfect foresight might logically select and
substantially overweight his portfolio toward the superior investment
alternative, as he or she sees it on a prospective basis, in order to
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maximize his or her investment return. While we are dubious about the likelihood
of its existence, those who maintain such a superior level of proprietary
knowledge should act on it, and be rewarded in a fashion commensurate with the
level of achievement implied by such singular wisdom.
Whether our future investment results will "keep up with the Joneses", as
represented by either broad market averages or other available investment
alternatives, has become an uncertain proposition. Until what we perceive as the
seeming triumph of irrationality over prudence, of greed trouncing fear as the
investment zeitgeist, we would have believed we would beat broad market averages
over a reasonable time frame. We are less certain in the prevailing environment
of how long "reasonable" is.
What we can say with almost total certainty is that five years hence there will
be some category or class of investments that has posted results superior to
ours. We do not view it as our charge from shareholders to try to identify what
will be the most popular or most lucrative investment trend or fad and to flit
from one strategy to the next like a dog chasing butterflies. For our part, we
will continue to implement an investment philosophy based on the teachings of
Ben Graham and Warren Buffett - invest in GOOD BUSINESSES with GOOD MANAGEMENT
for the long term, through the purchase in the public markets of pieces of those
businesses, at ATTRACTIVE PRICES. Charlie Munger is known to put it more
succinctly, "Our job is to find a few intelligent things to do, not to keep up
with every damn thing in the world."
Having informed shareholders who have consistent objectives with ours is as
important to us as finding the right investments. It affords us the ability to
think about the right things and not to waste any time at all thinking about the
wrong things. Generally, we look to attract shareholders as partners who find a
kindred spirit in our logical, rational approach to prudently deploying
long-term investment capital. Those who will likely find a pleasurable
experience as shareholders are those who know and understand what we do and how
we think, and who buy into why we believe it is a logical way to invest money.
/s/David R. Carr, Jr.
David R. Carr, Jr.
Co-Manager
/s/George W. Brumley, III
George W. Brumley, III
Co-Manager
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INVESTMENT TRACK RECORDS AND TIME HORIZON
The focus of investor attention and shareholder ire remains predominantly on
relatively short time horizons, with a calendar year having somehow worked its
way into the position of graybeard in a CNBC-obsessed, instant gratification
glorifying, "everyone should be day-trading" investment landscape. Even if a
calendar year were our investing time horizon (it isn't), we submit that the
news of the death of value investing has been greatly exaggerated. As a Tweedy
Browne study and Buffett's own "Superinvestors of Graham-and-Doddsville" both
detail, there is a well-known propensity of even very good managers, who have
vastly outpaced passive indices in terms of wealth creation, to trail the
overall market 30-40% of the time measured in annual time periods. Please read
that sentence again; it's important. It says that, on a historical basis, many
investors who are considered to be successful and who have created real wealth
over and above that available from investing in a passive index, have trailed
that very same index during at least one-third of the individual calendar years.
Value investing may appear a pretty lean horse on various occasions, but
investing is a long race.
In short, even good managers' returns are volatile in the short term, much as
stock prices are. We've clearly had our share of companies in the portfolio
whose stock prices have disappointed, on occasion for a period longer than we
would have liked. When the same management, executing a consistent business
strategy, working through short term challenges in a business where the
underlying fundamentals are in place, we are typically patient because we
believe that patience will be rewarded. We submit for your approval (thank you
Rod Serling) that those who understand our philosophy should be willing to
practice the same discipline when evaluating us that we practice ourselves when
deciding what to do in the case of a company whose stock price hasn't performed
as hoped in the near term.
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A NOTE ON "BENCH" MARKING
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Mr. Buffett has been known to refer to items like this as "spinach time." If you
have never thought, "boy, I'm running out and chasing down that 85+% NASDAQ
return" and/or already implicitly believe in what we do and how we do it and/or
do not enjoy dissecting benchmark stock index minutiae, feel free to skip this
part. For the curious, here come the veggies.
Looking at 1999's relative investment results, many shareholders are giving us
some version of "explain yourselves, or at least why your style remains
relevant." For example, you may notice the rather substantial gap between our
mildly negative 1999 results and the NASDAQ Index's 85+% posting for the year.
We'll focus on the NASDAQ as a microcosm in addressing the market relative
shortfall. Several of our points below apply equally to the S&P 500 and also to
that other more amorphous benchmark to which we are apparently being compared.
We refer here to the vague yet discernible inference we've gotten from
shareholders. We call it the "everyone else is becoming an overnight millionaire
and your stocks are going down - are you stupid? Index." Catchy, isn't it?
Like that guy in every gym who crows about his 400-pound bench press, the NASDAQ
currently towers over all as cock of the investment walk. Let's take a closer
look and see if this steroidal return has further explanations?
Concentration - NASDAQ was largely powered by outsized if not gigantic gains in
the four or five companies - Microsoft, Qualcomm, Intel, Cisco, Oracle (all
technology) - that are basically the only ones that matter when calculating
returns for this benchmark. The companies have our admiration and its
shareholders our envy. But at the prices they generally sell for, and in the
huge proportions of a portfolio they would have to make up to generate
NASDAQ-like results (the "Fab Five" above represent ONE THIRD of the NASDAQ 100
Index and a similarly large proportion of the S&P 500), we simply have had to
pass. They have been too rich for our blood as prudent investors of your money.
A Stockbroker's Dream - The Wall Street Journal reported in November that there
were 4,694 stocks in the index. Owning all of them seems a bit unwieldy as a
strategy to match 1999's staggering results.
Which Stocks? - Random (or thoughtful even) selection of companies in hopes of
achieving NASDAQ-ish results with fewer stocks could have been possible in 1999.
For any hope of matching returns, five of them better be the suspects listed
above, regardless of your investment opinion on the companies. As for the
others, about as many NASDAQ stocks had negative 1999 results as positive.
Welcome to the stock-picking club.
No Indexing - You simply can't get that 85+% by "buying" the NASDAQ, like you
can the S&P 500 via Vanguard or others. Not even the derivatives market works;
NASDAQ top 100 yes, all of NASDAQ, no. Vanguard does have a total market index
fund, but since nothing touched NASDAQ's 1999 results, adding anything else
would only reduce returns.
IPO Envy - Even if you could own all those thousands of stocks, you still
wouldn't likely match the NASDAQ Index return. Unless you are a regular and
large consumer of initial public offerings (IPOs) from a number of different
brokerage houses, don't count on having received Red Hat, VA Linnux or other
"hot issues" at the offering price, so the NASDAQ gets to count a couple of
anecdotes of several thousand percent worth of (fluff) return, actually
available to a select few, but you don't.
Remember our big bench press guy from earlier? There are lots of extenuating
factors in the gym, such as body type, arm length, age, weight, etc. that could
in fact make one person's lower gross poundage moved a more impressive feat than
"the bigger number." Nobody really focuses on subtler issues though, when the
question is "How much do you bench?" No details, no excuses, just tell us the
number. Similarly we realize that finer points are no more likely to matter at
the proverbial cocktail party than they are at the gym. Sadly, faced with such
details, many people opt for some version of, "don't confuse me with the facts."
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DISCLOSURES:
Where shown or quoted, recent company returns (for example calendar quarter or
trailing twelve months) are stock price changes only, and reflect neither
dividends nor any fees associated with an investment in the Oak Value Fund. This
commentary seeks to describe our current views of the market and to highlight
selected activity in the Oak Value Fund. Any discussion of specific securities
is intended to help shareholders understand the Fund's investment style, and
should not be regarded as a recommendation of any security. Displays detailing a
summary of holdings (e.g., best and worst stocks, business category
distribution, etc.) are based on the Oak Value Fund's holdings on December 31,
1999 or held during the fourth quarter of 1999.
We do not attempt to address specifically how individual shareholder accounts
have fared, since shareholders also receive account statements showing their
holdings and transactions. Information concerning the performance of the Fund
and our recommendations over the last year is available on request. Past
performance is no indication of future performance. You should not assume that
future recommendations will be as profitable or will equal the performance of
past recommendations.
Statements referring to future actions or events, such as the future financial
performance or ongoing business strategies of the companies in which the Fund
invests, are based on the current expectations and projections about future
events provided by various sources, including company management. References to
securities purchased or held are only as of the date of this letter to
shareholders. Although the Fund's investment adviser focuses on long-term
investments, holdings are subject to change.
This letter to shareholders may include statistical and other factual
information obtained from third-party sources. We believe those sources to be
accurate and reliable; however, we are not responsible for errors by them on
which we reasonably rely. In addition, our comments are influenced by our
analysis of information from a wide variety of sources and may contain
syntheses, synopses, or excerpts of ideas from written or oral viewpoints
provided to us by investment, industry, press and other public sources about
various economic, political, central bank, and other suspected influences on
investment markets.
Although our comments focus on the most recent six-month period, we use this
perspective only because it reflects convenience and industry convention. The
Oak Value Fund does not subscribe to the notion that six-month calendar periods
or other short-term periods are either appropriate for making judgments or
useful in setting long-term expectations for returns from our, or any other,
investment strategy. The Oak Value Fund and the 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 the portfolio commentary should be construed
as a forecast of overall market movements, either in the short or long term.
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OAK VALUE FUND
PERFORMANCE INFORMATION
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LINE CHART:
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE OAK VALUE FUND AND STANDARD & POOR'S 500 INDEX
OAK VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR 5 YEARS SINCE INCEPTION*
- -3.12% 21.40% 18.05%
Oak Value Fund S&P 500 Index
1/93 10000 10000
10350 10350
6/93 10360 10401
11440 10669
12/93 12205 10917
11615 10503
6/94 11818 10547
12470 11062
12/94 12021 11061
13158 12138
6/95 13333 13296
14711 14353
12/95 15487 15217
16632 16034
6/96 17205 16753
18483 17272
12/96 19976 18711
20044 19213
6/97 24019 22568
25812 24257
12/97 27507 24954
31255 28435
6/98 32319 29374
26295 26452
12/98 32713 32085
33204 33685
6/99 34516 36062
28874 33806
12/99 31691 38837
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
NON-STANDARDIZED TOTAL RETURNS
- -----------------------------------------------------------------------------------------------------------------
SINCE
CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR INCEPTION*
1993* 1994 1995 1996 1997 1998 1999 (AS OF 12/31/99)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Oak Value Fund 22.04% -1.54% 28.89% 28.99% 37.70% 18.93% -3.12% 216.91%
S&P 500 Index 9.60% 1.32% 37.58% 22.96% 33.36% 28.58% 21.04% 288.37%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31, 1999
SINCE
SIX MONTHS(A) ONE YEAR THREE YEARS FIVE YEARS INCEPTION*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oak Value Fund -8.18% -3.12% 16.63% 21.40% 18.05%
S&P 500 Index 7.69% 21.04% 27.56% 28.56% 21.55%
</TABLE>
* Inception date of the Oak Value Fund was January 18, 1993.
(A) Unannualized.
9
<PAGE>
<TABLE>
OAK VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999 (UNAUDITED)
============================================================================================================
<CAPTION>
<S> <C>
ASSETS
Investment securities at market value (Note 1) (acquisition cost of $352,857,656) $ 390,504,443
Cash 1,798,235
Receivable for securities sold 2,834,586
Receivable for capital shares sold 73,120
Dividends receivable 520,704
Interest receivable 20,301
Other assets 67,158
-------------
TOTAL ASSETS 395,818,547
-------------
LIABILITIES
Payable for securities purchased 1,221,809
Payable for capital shares redeemed 230,874
Payable to affiliates (Note 3) 345,596
Other accrued expenses and liabilities 14,893
-------------
TOTAL LIABILITIES 1,813,172
-------------
NET ASSETS $ 394,005,375
=============
Net assets consist of:
Paid-in capital $ 358,625,063
Accumulated net investment loss (362)
Accumulated net realized gains from security transactions (2,266,113)
Net unrealized appreciation on investments 37,646,787
-------------
Net assets $ 394,005,375
=============
Shares of beneficial interest outstanding (unlimited number of shares
authorized, no par value) 15,437,852
=============
Net asset value, offering price and redemption price per share (Note 1) $ 25.52
=============
See accompanying notes to financial statements.
</TABLE>
10
<PAGE>
<TABLE>
OAK VALUE FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 (UNAUDITED)
============================================================================================================
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 3,143,601
Interest 409,745
-------------
TOTAL INVESTMENT INCOME 3,553,346
-------------
EXPENSES
Investment advisory fees (Note 3) 2,243,069
Administrative services fees (Note 3) 192,181
Registration fees 38,245
Transfer agent fees (Note 3) 65,413
Postage and supplies 36,553
Fund accounting fees (Note 3) 35,034
Trustees' fees and expenses 34,086
Professional fees 60,932
Custodian fees 25,028
Reports to shareholders 8,856
Insurance expense 7,843
-------------
TOTAL EXPENSES 2,747,240
-------------
NET INVESTMENT INCOME 806,106
-------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains from security transactions 198,991
Net change in unrealized appreciation/depreciation on investments (53,976,320)
-------------
NET REALIZED AND UNREALIZED GAINS/LOSSES ON INVESTMENTS (53,777,329)
-------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (52,971,223)
=============
See accompanying notes to financial statements.
</TABLE>
11
<PAGE>
<TABLE>
OAK VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1999 AND JUNE 30, 1999
============================================================================================================
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 806,106 $ 1,443,100
Net realized gains from investment transactions 198,991 18,511,197
Net change in unrealized appreciation/depreciation on investments (53,976,320) 23,144,708
------------- -------------
Net increase/decrease in net assets from operations (52,971,223) 43,099,005
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (806,468) (1,463,037)
From net realized gains from security transactions (1,710,155) (17,498,045)
In excess of net realized gains -- (754,949)
------------- -------------
Decrease in net assets from distributions to shareholders (2,516,623) (19,716,031)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 70,259,003 485,772,850
Net asset value of shares issued in reinvestment of distributions
to shareholders 2,449,201 18,577,671
Payments for shares redeemed (247,987,638) (336,863,855)
------------- -------------
Net increase/decrease in net assets from capital share transactions (175,279,434) 167,486,666
------------- -------------
NET INCREASE/DECREASE IN NET ASSETS (230,767,280) 190,869,640
NET ASSETS:
Beginning of period 624,772,655 433,903,015
------------- -------------
End of period $ 394,005,375 $ 624,772,655
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME/LOSS $ (362) $ --
============= =============
SUMMARY OF CAPITAL SHARE ACTIVITY:
Shares sold 2,739,504 18,644,142
Shares issued in reinvestment of distributions to shareholders 96,037 667,046
Shares redeemed (9,739,824) (13,015,998)
------------- -------------
Net increase/decrease in shares outstanding (6,904,283) 6,295,190
Shares outstanding, beginning of period 22,342,135 16,046,945
------------- -------------
Shares outstanding, end of period 15,437,852 22,342,135
============= =============
See accompanying notes to financial statements.
12
</TABLE>
<PAGE>
<TABLE>
OAK VALUE FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=========================================================================================================================
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR TEN MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, AUG. 31,
1999 1999 1998 1997 1996 1995(A) 1994
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 27.96 $ 27.04 $ 20.63 $ 15.62 $ 12.19 $ 12.50 $ 10.96
------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss) 0.05 0.07 0.05 (0.02) (0.04) (0.05) (0.02)
Net realized and unrealized gains
(losses) on investments (2.34) 1.76 6.98 6.06 3.57 0.55 1.78
------- ------- ------- ------- ------- ------- -------
Total from investment operations (2.29) 1.83 7.03 6.04 3.53 0.50 1.76
------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment income (0.05) (0.07) (0.05) -- -- -- --
From net realized gains from
security transactions (0.10) (0.81) (0.44) (1.03) (0.10) (0.81) (0.22)
In excess of net realized gains -- (0.03) (0.13) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Distributions (0.15) (0.91) (0.62) (1.03) (0.10) (0.81) (0.22)
------- ------- ------- ------- ------- ------- -------
Net asset value at end of period $ 25.52 $ 27.96 $ 27.04 $ 20.63 $ 15.62 $ 12.19 $ 12.50
======= ======= ======= ======= ======= ======= =======
Total Return (8.18%)(d) 6.80% 34.56% 39.60% 29.04% 5.78%(c) 16.07%
======= ======= ======= ======= ======= ======= =======
Net Assets at end of period (000's) $394,005 $624,773 $433,903 $ 82,661 $ 22,066 $10,250 $ 8,769
======== ======== ======== ======== ======== ======= =======
Ratio of expenses to average
net assets(b) 1.10%(c) 1.10% 1.22% 1.59% 1.90% 1.89%(c) 1.89%
Ratio of net investment income (loss)
to average net assets 0.32%(c) 0.27% 0.41% (0.16%) (0.43%) (0.53%)(c) (0.58%)
Portfolio turnover rate 4% 38% 15% 22% 58% 103%(c) 91%
(a) Effective July 1, 1995, the Fund was reorganized and changed its fiscal
year end from August 31 to June 30.
(b) Absent fee waivers and/or expense reimbursements by the Advisor, the ratios
of expenses to average net assets would have been 2.15%, 2.38(c) and 2.80%
for the periods ended June 30, 1996, June 30, 1995 and August 31, 1994,
respectively.
(c) Annualized.
(d) Not annualized.
See accompanying notes to financial statements.
</TABLE>
13
<PAGE>
<TABLE>
OAK VALUE FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999 (UNAUDITED)
<CAPTION>
============================================================================================================
MARKET
SHARES COMMON STOCKS -- 99.1% VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADVERTISING -- 6.1%
397,325 Interpublic Group Companies, Inc. $ 22,920,686
29,375 Valassis Communications, Inc. (a) 1,241,094
-------------
24,161,780
-------------
BEVERAGE -- 5.2%
351,600 Coca-Cola Company 20,480,700
-------------
CONGLOMERATE -- 10.6%
243 Berkshire Hathaway, Inc., Class A(a) 13,632,300
15,294 Berkshire Hathaway, Inc., Class B(a) 27,988,020
-------------
41,620,320
-------------
ENTERTAINMENT -- 5.2%
699,878 The Walt Disney Company 20,471,432
-------------
FINANCE - CONSUMER LOANS -- 5.3%
556,375 Household International, Inc. 20,724,969
-------------
INFORMATION SERVICES -- 5.5%
730,100 Dun & Bradstreet Corporation 21,537,950
-------------
INSURANCE - ACCIDENT & HEALTH -- 4.6%
387,400 AFLAC, Inc. 18,280,438
-------------
INSURANCE - FINANCIAL GUARANTEE -- 6.5%
490,850 Ambac Financial Group, Inc. 25,616,234
-------------
INSURANCE - PROPERTY & CASUALTY -- 9.3%
215,000 The Chubb Corporation 12,107,188
212,990 Progressive Corporation 15,574,893
269,000 RLI Corporation 9,146,000
-------------
36,828,081
-------------
INVESTMENT MANAGEMENT/ADVISORY SERVICES -- 6.1%
1,286,550 United Asset Management Corporation 23,881,584
-------------
MEDIA -- 12.4%
568,235 Scripps (E.W.) Company 25,464,030
42,040 Washington Post Company - Class B 23,368,985
-------------
48,833,015
-------------
14
<PAGE>
<CAPTION>
OAK VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
============================================================================================================
MARKET
SHARES COMMON STOCKS -- 99.1% (CONTINUED) VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PERSONAL CARE/COSMETICS -- 10.1%
593,200 Avon Products, Inc. $ 19,575,600
491,345 Gillette Company 20,237,272
-------------
39,812,872
-------------
RETAIL (8.8%)
388,695 Tiffany & Company 34,691,029
-------------
TELEPHONE - INTEGRATED (3.4%)
151,000 AT&T Corporation 7,663,250
83,625 GTE Corporation 5,900,789
-------------
13,564,039
-------------
TOTAL COMMON STOCKS (COST $352,857,656) $ 390,504,443
-------------
TOTAL INVESTMENTS (COST $352,857,656)-- 99.1% $ 390,504,443
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.9% 3,500,932
-------------
NET ASSETS -- 100.0% $ 394,005,375
=============
(a) Non-income producing security.
See accompanying notes to financial statements.
15
</TABLE>
<PAGE>
OAK VALUE FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 (UNAUDITED)
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Oak Value Fund (the Fund) is a diversified series of shares of The Tuscarora
Investment Trust (the Trust). The Trust, registered as an open-end management
investment company under the Investment Company Act of 1940, was organized as a
Massachusetts business trust on March 3, 1995. The Fund itself began operations
on January 18, 1993 as a series of the Albemarle Investment Trust.
The investment objective of the Fund is to seek capital appreciation primarily
through investments in equity securities, consisting of common and preferred
stocks and securities convertible into common stocks.
The following is a summary of the Fund's significant accounting policies:
Securities valuation -- The Fund's portfolio securities are valued as of the
close of business of the regular session of the New York Stock Exchange
(normally 4:00 p.m., Eastern time). Securities which are traded over-the-counter
are valued at the last sales price, if available, otherwise, at the last quoted
bid price. Securities traded on a national stock exchange are valued based upon
the closing price on the principal exchange where the security is traded.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market value. At the time the Fund enters into a
repurchase agreement, the seller agrees that the value of the underlying
securities, including accrued interest, will at all times be equal to or exceed
the face amount of the repurchase agreement. In addition, the Fund actively
monitors and seeks additional collateral, as needed.
Share valuation -- The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding. The offering price and redemption price per share
are equal to the net asset value per share.
Investment income and distributions to shareholders -- Interest income is
accrued as earned. Dividend income is recorded on the ex-dividend date.
Dividends arising from net investment income, if any, are declared and paid
semi-annually. Net realized short-term capital gains, if any, may be distributed
throughout the year and net realized long-term capital gains, if any, are
distributed at least once each year. Income distributions and capital gain
distributions are determined in accordance with income tax regulations.
Security transactions -- Security transactions are accounted for on trade date.
Securities sold are determined on a specific identification basis.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is the Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
16
<PAGE>
The following information is based upon the federal income tax cost of portfolio
investments of the Fund as of December 31, 1999:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 64,454,076
Gross unrealized depreciation (27,562,238)
-------------
Net unrealized appreciation $ 36,891,838
=============
Federal income tax cost $ 353,612,605
=============
- --------------------------------------------------------------------------------
The difference between the acquisition cost and the federal income tax cost of
portfolio investments is due to certain timing differences in the recognition of
capital losses under generally accepted accounting principles and income tax
regulations.
2. INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales and maturities of investment
securities, other than short-term investments, amounted to $20,765,226 and
$157,375,578 respectively, for the six months ended December 31, 1999.
3. TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Trust are also officers of Oak Value
Capital Management, Inc. (the Adviser) or BISYS Fund Services Ohio, Inc.
(BISYS). Effective November 22, 1999, BISYS assumed the duties as administrator,
transfer agent and accounting services agent for the Trust from Countrywide Fund
Services, Inc. In addition, effective November 22, 1999, The Bank of New York
assumed the duties as custodian from Firstar Bank, N.A.
INVESTMENT ADVISORY AGREEMENT
The Fund's investments are managed by the Adviser under the terms of an
Investment Advisory Agreement. Under the Investment Advisory Agreement, the Fund
pays the Adviser a fee, which is computed and accrued daily and paid monthly, at
an annual rate of 0.90% of the Fund's average daily net assets.
ADMINISTRATION AGREEMENT
Under the terms of the Administration Agreement with the Trust, BISYS supplies
non-investment related statistical and research data, internal regulatory
compliance services and executive and administrative services for the Fund.
BISYS supervises the preparation of tax returns, reports to shareholders of the
Fund, reports to and filings with the Securities and Exchange Commission and
state securities commissions, and materials for meetings of the Board of
Trustees. For these services, BISYS receives a monthly fee based on the Fund's
average daily net assets.
TRANSFER AGENT AGREEMENT
Under the terms of the Transfer Agency Agreement with the Trust, BISYS maintains
the records of each shareholder's account, answers shareholders' inquiries
concerning their accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent and performs other
shareholder service functions. For these services, BISYS receives a monthly fee
based on the number of shareholder accounts in the Fund. In addition, the Fund
pays BISYS out-of-pocket expenses including, but not limited to, postage and
supplies.
FUND ACCOUNTING AGREEMENT
Under the terms of the Fund Accounting Agreement with the Trust, BISYS
calculates the daily net asset value per share and maintains the financial books
and records of the Fund. For these services, BISYS receives a monthly fee based
on the Fund's average daily net assets. In addition, the Fund pays certain
out-of-pocket expenses incurred by BISYS in obtaining valuations for the Fund's
portfolio securities.
17
<PAGE>
OAK VALUE FUND
INVESTMENT ADVISER
Oak Value Capital Management, Inc.
3100 Tower Boulevard, Suite 700
Durham, North Carolina 27707
1-800-680-4199
www.oakvaluefund.com
ADMINISTRATOR
BISYS Fund Services Ohio, Inc.
3435 Stelzer Rd.
Columbus, OH 43219
INDEPENDENT AUDITORS
Arthur Andersen LLP
425 Walnut Street
Cincinnati, Ohio 45202
CUSTODIAN
The Bank of New York
100 Church St.
New York, NY 10286
BOARD OF TRUSTEES
George W. Brumley, III
C. Russell Bryan
David R. Carr, Jr.
John M. Day
Joseph T. Jordan, Jr.
OFFICERS
George W. Brumley, III, President
David R. Carr, Jr., Vice President
Georgette Horton, Vice President
Frank M. Deutchki, Treasurer
Paige C. Hodgin, Secretary
This report is for the information of the shareholders of the Oak Value Fund. It
may not be distributed to prospective investors unless it is preceded or
accompanied by the current fund prospectus.
