centre american select equity fund - centre · pdf filecentre american select equity fund ......

Centre American Select Equity Fund

Large Capitalization Stock Focused

Concentrated Portfolio

Focus on Risk Adjusted Returns

Actively Managed to Seek Long Term Alpha

Investment Objective:

The Fund seeks to generate long-term capital growth

Investment Strategy Highlights:

Invests in a diversified portfolio of large capitalization American blue chip equity securities

High conviction investment ideas – What we believe are best 45 to 75 stocks of American companies concentrated in the top 20 names

Bottom up fundamental stock selection process driven by Economic Value Added (EVA) investment philosophy

Focus on delivering risk adjusted returns and positive upside vs. downside market capture ratio over long-term

Stock selection is combined with quantitative portfolio construction and risk management for optimal stock position sizing within sector/industry emphasis and risk parameters

Fund Profile: Summary

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Fund Profile: Characteristics

Source: Morningstar as of 08/31/2014

Market Cap Definitions

Giant > $40 billion

Large $8 billion - $40 billion

Mid $1 billion - $8 billion

Small $500 million - $1 billion

Micro < $500 million

Source: Centre Asset Management, LLC. As of 08/31/2014

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Style: US Large Cap Valuation Sensitive Growth

12.35

8.92

6.08

4.54

0.99

16.78 15.67

28.68

1.95 2.17

Consumer Discretionary Consumer Staples

Energy Financials

Funds Health Care

Industrials Information Technology

Materials Telecommunication Services

Sector Allocation

Fund Profile: Fund Manager

James A. Abate, MBA, CPA, CFA, is the Managing Director and Chief Investment

Officer of Centre Asset Management and is responsible for the firm’s American Select

Equity and Real Return strategies. Prior to founding Centre, Mr. Abate was US

Investment Director for GAM. Previously, Mr. Abate served as Managing Director and

Fund Manager at Credit Suisse Asset Management responsible for the US Select Equity

strategy and the firm’s global sector funds. Previously, he was a Manager in Price

Waterhouse's Valuation/Corporate Finance Group and served as a commissioned officer

in the US Army. Mr. Abate is a contributing author to several John Wiley published

books: Applied Equity Valuation, Focus on Value, Short Selling, and The Theory and

Practice of Investment Management; as well as published research papers in

institutional investor journals, some of which were adopted by the CFA Institute®

candidate study programs.

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Additional Investment Personnel

Xavier Smith, MBA, CFA – Investment Director & Fund Manager, Global Select Equity Strategy

Weiqi Xia, MS – Analyst

Praveen Kumar, MBA – Analyst

Vu Phong Nguyen, MS - Analyst

Performance (as of 06/30/2014)

Total Return Since Inception

Fund Name Ticker 1 MO 3 MO 1 YR YTD Annualized Cumulative

Centre American Select Equity Fund - Investor Class DHAMX 2.63% 5.49% 23.80% 7.17% 19.16% 55.70%

S&P 500 Total Return Index

- 2.07% 5.23% 24.61% 7.14% 22.35% 66.47%

Centre American Select Equity Fund – Institutional Class DHANX 2.54% 5.40% – 6.32% – –

S&P 500 Total Return Index - 2.07% 5.23% – 7.33% – –

The performance information quoted above represents past performance, which is not a guarantee of future results, and does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 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. Total return includes reinvestment of dividends and capital gains, if any. Current performance may be lower or higher than the performance data quoted. For the most current month end performance data please call 855-298-4236. 1Inception date of 12/21/2011 for Investor Class. Inception date of 01/21/2014 for Institutional Class. Total Annual Fund Operating Expenses (before fee waiver and/or expense reimbursements) are 1.53% Investor and 1.28% Institutional. The investment adviser to the Fund, Centre Asset Management, LLC (the "Adviser" or "Centre"), has entered into a written expense limitation agreement (the Expense Limitation Agreement), under which it has agreed to reduce its advisory fees and/or reimburse other expenses of the Fund for a period of two years from January 11, 2013, to the extent necessary to limit the current operating expenses of each class of shares of the Fund including (but not limited to) investment advisory fees of the Adviser and distribution/service (Rule 12b-1) fees, but excluding interest, taxes, litigation, brokerage and extraordinary expenses incurred by the Fund in the fiscal year, to an annual rate of 1.05% of the average daily net assets of the Investor Class shares and 0.95% of the average daily net assets of the Institutional Class shares.

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Investment Process: EVA-driven Stock Selection

Excess Returns Relative to Capital Growth Rate ("Economically" Profitable Reinvestment)

Ex

cess

Ret

urn

on

In

vest

ed C

ap

ita

l (O

per

ati

ng

Ret

urn

Les

s R

equ

ired

Ret

urn

)

-35

% -

30

% -

25

% -

20

% -

15

% -

10

% -

5%

0

% 5

% 1

0%

15

% 2

0%

2

5%

3

0%

3

5%

QUADRANT I (- +) QUADRANT II (+ +)

"Dead Money" "Stable or High Growth"

AVOID POTENTIAL BUY

Underinvestment highlights few opportunities for creating shareholder

wealth or short-termism by management at the expense of long-term

investment for growth

Shareholder wealth is maximized by internal growth and related,

strategic acquisitions

Gilead Google

Int’l Flavors 3M

Newfield Explor. Apple

Facebook Disney

EOG Resources FMC Technologies

QUADRANT IV(- -) QUADRANT III (+ -)

"Wise Contraction or Cyclical Restructuring" "Empire Building"

POTENTIAL BUY AVOID

Stock repurchases, dividends, debt pay-down and other measures of wise

contraction (asset sales & restructuring) create shareholder wealth

Inefficient growth and wealth destruction - excessive capital

spending at cycle peak, empire building M&A transactions - non-

related, non-strategic or overpriced acquisitions

Calpine Halliburton

ADM Lowes

Micron Texas Instruments

Vulcan Materials Allegheny

Technology

-35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

Invested Capital Growth Rate 8

Investment Process: Portfolio Strategy & Management

How does our “Quadrant” emphasis pragmatically change under different environments?

ENVIRONMENT STAGES

Economic Stage Slowdown Recession Early Recovery Full recovery

Consumer Expectations Falling Reviving Rising Declining

Industrial Production Falling Bottoming Out Rising Flat

Interest Rates Peaking Falling Bottoming Out Rising

Yield Curve Flat/Inverted Normal Normal (Steep) Flattening Out

“TOP RIGHT” (++) ~70% ~60% ~40% ~80%

“BOTTOM LEFT” (--) ~30% ~40% ~60% ~20%

Portfolio Concentration of

Blue-Chip, Quality Stocks

(Quadrant II, ++) with

Increasing Allocation to

Cyclical Restructuring

Stock (Quadrants IV, --)

Portfolio Barbelled Between


(Quadrant II, ++) and

Highest (>50%) Allocation

to Cyclical Restructuring

Stocks (Quadrant II, --)

Portfolio Concentration of


(Quadrant II, ++) with

Decreasing Allocation to

Cyclical Restructuring

Stock (Quadrants IV, --)

Source: Centre Asset Management, LLC. The diagram above is a generalization of the investment process. Actual portfolio composition might be different

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Determine Investable

Universe of Large Cap

Stocks: ~ 550

Screen for

stocks with adequate

capitalization and

trading volume

Find the best 45-75 stocks across all

market sectors a. Start with approximately 550

b. Proprietary screening narrows universe to

approximately 100 (Quadrants II & IV)

c. Qualitative assessment used to pick what we

believe are the best 45-75 stocks to buy/hold

now

How much of each selected

stock to buy

Risk management &

attribution analysis

(ensure focus on stocks

level opportunity)

STEP 1 STEP 2 STEP 3 STEP 4

Quantitative and

Qualitative Analysis

to Determine Stocks

to Buy

Assess operating

condition, risk profile

and valuation to identify

selected stocks and then

rank by alpha score

Portfolio

Optimization,

Construction and

Trade Execution

Determine weight of

selected stocks based

upon alpha score,

risk/return attributes and

portfolio parameters

Portfolio

Monitoring and

Evaluation

Assess risk and sources of

return for stop-loss

adjustment and future

decision making

improvement

Investment Process: Portfolio Strategy & Management

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The Only Question that matters is “Are Profit Margins Sustainable and for How Long?” – Strong Correlation of

Valuation and Incremental Profit Margins

The S&P 500 Index (ex-Financials) is at its most expensive valuation level ever given the incredibly high level of earnings as a result of profit margin improvements and asset efficiency

The “typical” catalysts [high asset growth (earnings are now growing faster than assets which is good), interest rate rise, costs of goods & labor increasing] to cause profit margins to fall are not yet evident

A violent change in sentiment within an expectations environment of stability and complacency/low volatility (conflict or terrorism) could compress valuation multiples

Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014

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The Cyclical Trend is Inflationary (Fire) - Interest Rates Will Stay Lower for Longer as Increasing Wage Inflation is

the Federal Reserve's Key Objective

“Not too hot, not too cold”

economic backdrop continues

(Good for Financial Assets) but

growing risk that policy makers

may embrace higher inflation in

exchange for higher nominal

growth; real wage gains dependent

upon increase in productivity or

structural fiscal reforms, neither of

which are evident

Negative real short term interest

rate policy will likely remain in

effect until US wage inflation

Reaches at least 3.5+% nominal

(now at <2%)

We worry more about an increase

in long-term interest rates due to

rising investor inflation premiums;

than a change in short-term rate

Federal Reserve policy


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The Secular Trend is Deflationary (Ice) - Demographic Trend of US Population by Age Groups - 1980 versus 2025

(This looks good versus other developed countries)

One of our biggest concerns is that we lurch from an unexciting economic recovery straight into the next economic

downturn with real interest rates already negative and debt levels high (deflation/recession due to demographics)

Source: Centre Asset Management, LLC & US Census Bureau as of 09/10/2014

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Operating Earnings Growth (%) & Revenue Growth (%) Have Accelerated in 2Q14

Data is for 487 Companies Representing 99% of the S&P 500 Index companies that reported through August 22, 2014

Source: Centre Asset Management, LLC, S&P, Compustat, First Call, IBES, Worldscope, FactSet and UBS as of 09/10/2014

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Source: Centre Asset Management, LLC & Intrinsic, Factset, Bloomberg & UBS as of 09/10/2014.

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Market Cap Definitions

Large-cap $8 billion - $40 billion

Small-cap $500 million - $1 billion

Larger Companies versus Smaller Companies Profit Margin (%) Trends – Expect to See Continued Small Cap

Underperformance & Stock Selection Rather Than Sector/Industry Themes Will Be Dominant Within Large-Caps

Tighter labor markets and higher

COGS (Cost of Goods Sold) beginning

to affect smaller companies; One of the

reasons to expect continued Small Cap

underperformance

Large-cap and small-cap companies as represented by large-cap and small cap equity indices

Economic Growth Acceleration – Strong Correlation of Stock Market Returns & Manufacturing Index

The ISM Composite Manufacturing Index (PMI) remains >50 (latest reading of 59!) signaling a continuing improvement in the US economic outlook for 2014 – strong link to earnings We remain cyclically bullish US equities until the advent of signs of economic contraction or a rise in interest rates US stocks rarely have a 10% or more correction unless there is an earnings recession and the latest ISM readings are strong


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PMI – Purchasing Managers Index BF – Best Fit

Economic Growth Acceleration – So Why are Bonds Yields Not Consistent with the Improving Growth Outlook and

De-linking from Stock Returns?

The ISM Composite Manufacturing Index (PMI) remains >50 (latest reading of 59!) signaling a continuing improvement in the US economic outlook or being driven by a short-term inventory led bounce. Headwinds from lower overseas growth will hamper exports and impact US multi-national companies.


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Earnings Re-acceleration - Despite Positive Recent Results, Consensus Estimates are Pointing at Very Sharp

Acceleration in Operating Earnings for 2014-2016.

Earnings estimates remain very

high and, more importantly, 89%

of Largest 1500 US Industrial

Stocks have Net Profit Margin

Expansion Expectations for

2015


18

EPS TTM – Earnings per share trailing

twelve months

CAGR – Compounded Annual Growth Rate

Monetary Policy – Another Reason (Not Talked About Much) Why Interest Rates May Stay Lower for Longer

Normalized interest rates could

produce an uncontrollable US

debt service burden and

massive increase in federal

budget deficits (estimated to be

~30% of annual federal

government spending versus

current level of 6%); the Federal

Reserve is trapped in keeping

its short-term policy rate lower

for longer; risk is loss of control

over longer-term interest rates


19

Declining Labor Productivity and Demographics – Large Part of Drop in Unemployment Due to People Dropping

Out of the Workforce

Assuming birth rates remains at or close to present levels and no dramatic change in immigration allowances, populations of industrialized countries, including the US, will start to decline US Civilian Labor Force Participation Rate has declined despite “economic recovery” and has dropped below a level that we last saw 30 years ago Investors underestimate the deflationary and negative growth impact from the aging population across the developed countries, including the US (reason why monetary/inflationary stimuli will be needed to offset in absence of productivity increase)


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Summary of U.S. Equity Market Outlook

• Business Cycle Indicators are not in sync - Stock picking within sectors should be

more important than trying to exploit a sector/industry theme

• Best ideas concentrated in Large Capitalization Companies with domestic

competitive advantages

• Embedded profit margin expectations for most stocks are too high and heavily

dependent upon further acceleration of economic activity/sales growth momentum

• While an expected change in Federal Reserve policy is contributing to market

volatility, we’re more concerned about lurching from current unexciting recovery

into next downturn with monetary policy exhausted and fiscal levers unavailable

– “Ice” is winning over “Fire” and recession risk is under-appreciated by investors

• Concerned about a near or intermediate term violent change in sentiment within

an expectations environment of stability and complacency

Disclosures

The statements and opinions expressed are those of James A. Abate and are as of the date of this brochure. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in the securities mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results. Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus containing this and other most current information regarding the fund, please go to our website www.centrefunds.com or call 1-855-298-4236.Read the prospectus carefully before you invest. Important Risk Disclosure: There is no assurance that this investment philosophy will consistently lead to successful investing. An Investment in the Funds involves risk, including loss of principle. The Fund is subject to risks including undervalued securities risk, portfolio turnover risk (which may result in tax consequences), and political/economic risk. Funds focusing on a single sector may experience greater price volatility. Centre American Select Equity Fund is distributed by ALPS Distributors, Inc. Centre Asset Management, LLC and ALPS Distributors, Inc. are not affiliated. Vu Phong Nguyen is a registered representative of ALPS Distributors, Inc.

Holding Weight

Microsoft Corp 3.85%

Apple Inc. 3.70%

Johnson & Johnson 2.98%

Gilead Sciences Inc. 2.53%

Pepsico Inc. 2.47%

Schlumberger Ltd. 2.40%

Google Inc - Class C 2.30%

Verizon Communications Inc. 2.17%

Comcast Corp - Class A 2.09%

Biogen Idec Inc. 2.07%

Centre American Select Equity Fund Top 10 Holdings (as of 08/31/2014 and subject to change):

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Disclosures

DRX000293 Exp 12/31/2014

Definitions

1. S&P 500 - The S&P 500 Index is the Standard & Poor's composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. You cannot invest

directly into an index.

2. S&P 500 Ex-Financials – S&P 500 Ex-Financials is the S&P 500 index without the financial services companies index constituents.

3. Net Profit Margin – Net Profit Margin is the ratio of net profit (net income) to the overall revenue

4. ISM Composite Manufacturing Index - An index based on surveys of manufacturing firms by the institute of supply management. The index monitors statistics such

as employment, production inventories, new orders and supplier deliveries. The index is widely followed and is considered a good indicator of overall economic

condition of the country.

5. Enterprise Value/Sales – Enterprise Value/Sales is the ratio of the enterprise value of the company over the total sales the company it has generated. The ratio is often used

as a valuation metric.

6. R Squared - R Squared is a statistical measure that indicates the explanatory or predictive power of a regression model. R Squared shows the percentage proportion of

variability of the subject that can be explained by its benchmark.

7. Standard Error - The standard deviation of the sampling distribution of a statistic. It measures the accuracy with which a sample represents the whole population.

8. PMI - Purchasing Managers Index - An Indicator Of The Economic Health Of The Manufacturing Sector. The PMI Index Is Based On Five Major Indicators: New Orders,

Inventory Levels, Production, Supplier Deliveries And The Employment Environment.

9. BF – Best Fit

10. COGS – COGS Or Cost Of Goods Sold Is the Direct Cost Attributable To The Production Of Goods That Is Sold By A Company.

11. CAGR - Compounded Annualized Growth Rate (CAGR) - The Year Over Year Growth Rate Of An Investment Over A Specified Time Horizon. It Is The Geometric

Average Of The Total Return Over A Certain Number Of Periods.

12. EPS TTM – Earnings Per Share Trailing Twelve Month – Is The Earnings Per Share For The Latest Twelve Month Historical Period.

13. Alpha – A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a

benchmark index.

14. Blue Chip - A nationally recognized well-established and financially sound company. Blue chips generally sell high quality, widely accepted products and services. Blue chip

companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and

reliable growth.

15. Economic Value Added - An estimate of a firm's economic profit - being the value created in excess of the required return of the company's investors (being shareholders

and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's

economic capital employed is greater than the cost of that capital

16. M&A – Mergers and Acquisitions

17. Standard Deviation – A risk measure that indicates the dispersion of a set of data from its mean value.

18. Sharpe Ratio – Risk adjusted excess return over the risk free rate.

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