Fenimore’s Director of Private Client Services, Kevin Smith, CFP®, hosts this investor education video and covers topics such as:
At Fenimore Asset Management, we never try to avoid an economic slowdown. Instead, our investment research team spends its energy on finding and owning what we believe are quality companies that can weather economic turbulence and emerge from volatile periods even stronger. This includes businesses with strong, sustainable cash generation, sound balance sheets with little financial leverage, and capable management teams.
To ensure that we have our finger on the pulse of their operations, our investment research analysts are on the road visiting companies, touring facilities, and having face-to-face meetings with management teams. It’s these in-person meetings — a longtime tenet of Fenimore’s research process — that help us gain a better understanding of the current macroeconomic challenges facing businesses while reinforcing our confidence in our holdings’ abilities to persevere and potentially thrive during a variety of environments.
For nearly five decades, we have followed our business-first investment approach of conducting in-depth research at the company level. Fenimore’s steadfast focus is to invest in a collection of quality businesses that we think are becoming more valuable over time — regardless of the short-term political or economic environment.
During these uncertain times, it is certain that our team will remain committed to Fenimore’s investment philosophy and principles that have successfully guided us through difficult times since 1974. We believe that our holdings will partake in future growth because their management teams are focused on shareholder interests and they possess strong financial footings to help them endure the current decline and potentially prosper when the markets recover.
All investing involves risk including the possible loss of principal. Before investing, carefully read the fund’s prospectus which includes investment objectives, risks, charges, expenses and other information about the fund. Please call us at 800-721-5391 or visit fenimoreasset.com for a prospectus or summary prospectus.
Securities offered through Fenimore Securities, Inc. Member FINRA/SIPC, and advisory services offered through Fenimore Asset Management, Inc.
Our Investors Ask, Our Portfolio Managers Answer: Will Preston — Portfolio Manager, FAM Dividend Focus Fund — answers the question, “What gives Fenimore long-term confidence during short-term volatility?”
On Friday, June 10, the latest Consumer Price Index (CPI) showed inflation accelerated to a 40-year high in May, with the CPI increasing 8.6% year-over-year.1 This was an increase from April and halted any hope that the U.S. economy had reached “peak” inflation.
One of the biggest contributors to surging inflation is the price of oil. At approximately $115, the price of a barrel of WTI oil is up 60% year-over-year and more than 20% since the start of the Russia-Ukraine War in late February.2 (WTI stands for West Texas Intermediate, which is a pricing benchmark commonly used for the oil industry.)
The impact of rising oil prices is most evident to consumers at the gas pump. In the May CPI report, gas prices were up 49% year-over-year, representing roughly one-quarter of the total increase in the CPI!3 Of course, higher gas prices also drive up shipping costs and airfare.
William Preston, CFA
Portfolio Manager,
FAM Dividend Focus Fund
But transportation isn’t the only way higher oil prices reverberate throughout the economy. Oil has derivatives that are inputs for thousands of products ranging from plastic and packaging to clothing and medicine. This can lead to broad-based increased costs for consumers.
Higher-than-expected and persistent inflation has forced the Federal Reserve (“the Fed”) to step-up how aggressively it fights inflation. The Fed combats inflation by raising interest rates in hopes of slowing consumer demand.
Last Wednesday (June 15), we saw this aggressiveness in action when the Fed announced its largest rate hike since 1994 (0.75 percentage points). While good for fighting long-term inflation expectations, in the short term, higher interest rates have led to lower stock valuation multiples and increased the probability of an economic recession and the potential for a reset in corporate earnings. This has pushed the market returns into bear market territory with the S&P 500 declining -24% since its all-time high on January 3, 2022.4
No one knows how much longer the bear market will last or if/when the U.S. economy will enter into a recession as a result of inflation and higher interest rates. What we do know is that recessions and bear markets do not go on forever and they have often presented us with opportunities to invest with better long-term return prospects.
At Fenimore, we never try to avoid an economic slowdown. Instead, our research team spends its energy on finding and owning what we believe are quality companies that can weather economic turbulence and emerge from volatile periods even stronger. This includes businesses with strong, sustainable cash generation, sound balance sheets with little financial leverage, and capable management teams.
Over recent weeks, our research team has been busy on the road meeting with management teams face to face. It’s these in-person meetings — a longtime tenet of Fenimore’s research process — that help us gain a better understanding of the current macro challenges facing companies while reinforcing our confidence in our holdings’ abilities to persevere and potentially thrive during a variety of economic environments.
During these uncertain times, we’d like to reiterate what we stated in our May Investor Update. Our team tells you with certainty that we remain committed to Fenimore’s investment philosophy and principles that have successfully guided us through difficult times since 1974. We believe that our holdings will partake in future growth because their management teams are focused on shareholder interests and they possess strong financial footings to help them endure the current decline and prosper when the markets recover.
If you have any questions about your investments, please connect with us at 800-721-5391, through our website’s contact us section, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill location or virtually.
Thank you for your ongoing trust and we hope you have a safe and enjoyable summer.
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1 bls.gov
2 FactSet, as of 6/16/2022
3 bls.gov, as of 6/10/2022
4 FactSet, as of 6/16/2022
As we came into the new year, the consensus was that the U.S. economy and earnings of American companies would grow. Perhaps at a slower rate than 2021’s pace, but still grow. It was also well understood that the Federal Reserve (“the Fed”) would be reducing the stimulus put in place at the pandemic’s onset, meaning they would increase short-term interest rates to cool off the rate of inflation.
As 2022 is unfolding, two events have increased the rate of inflation and forced the Fed to act quicker and, perhaps, with more intensity than previously expected.
One of the potential outcomes of higher interest rates and energy costs is that they slow the economy so much that we experience a recession.
You have heard us say that stock prices follow earnings and, in a recession, it is normal for company profits to decline. The stock market is trying to figure out if we will have a recession and, if so, when. Of course, no one knows the answer and this is creating volatility in stock prices. The one thing we do know about recessions is that they end and a new cycle of growth begins.
An interesting aspect of the current “recession watch” is how strong corporate profits are today. Our Investment Research team recently finished digesting a couple hundred earnings reports for the quarter ended March 31, 2022. Earnings continue to grow and, in some cases, companies have reported record results. In cases where earnings are down, it is usually due to temporary factors like elevated transportation costs. We don’t know if there will be an overall decline in earnings at some point, but we are watching results carefully.
Additionally, our analysts continue to travel and meet with our holdings’ management teams — we just visited two in Dallas and Richmond — to ensure that we have our finger on the pulse of their operations.
During these uncertain times, we can tell you with certainty that we remain committed to Fenimore’s investment philosophy and tenets that have successfully guided us through difficult times in the past. We believe that our holdings will partake in future growth because their management teams are focused on shareholder interests and they possess strong financial footings to help them endure the current decline and prosper when the markets recover.
Please contact us with any questions or concerns at 800-721-5391, through our website’s “Contact Us” section, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill location or virtually.
Dear Fellow Shareholder,
As I write this, our thoughts and hearts are with the people of Ukraine. May our world leaders soon find a path to peace.
After a terrific 2021, the stock market has dropped 10% to 20%, depending on the index, since the beginning of 2022.1 The war in Ukraine has certainly played a role, but that is not the only reason in our view. As we entered the year, stock valuations were stretched and this left stock prices at an all-time high and susceptible to decline. Additionally, the inflation that began gripping our nation late last year has proven to be more firmly entrenched than originally believed.
Inflation has led to decreased consumer spending as higher prices on essentials like energy and groceries are forcing many people to cut back on discretionary spending (such as vacations and entertainment). As the first quarter ended, the Federal Reserve was beginning the gradual and delicate balancing act of trying to raise interest rates enough to further slow spending — and inflation — but not so much as to trigger a recession.
As long-term investors, it is always helpful to remember that stock market downturns are part of the experience. I have been at Fenimore for 26 years and in every one of those years but one, the market had a decline of 5% or more at least once during the year. This is a normal part of stock investing and, while some uncertainty lies ahead, we see no reason for panic.
First, the current downturn started when our economy was in a position of great strength with consumer spending and corporate earnings at record highs. This is helping to cushion the fall. In addition, interest rates, while rising, are still low by historical standards.
At the same time, what reassures us the most about the days ahead is what our research analysts are hearing directly from the individual companies in which we invest. In recent months, we have met with dozens of businesses to discuss the health of their operations and their roadmaps to growth. While there are certainly challenges (global supply chain problems and elevated transportation prices will be with us the rest of the year), these executives are far from pessimistic.
They intend to grow, reinvest, make acquisitions, and return profits to shareholders in the form of stock buybacks and increased dividends — maybe not to the degree we thought possible three months ago, but certainly at what we consider healthy levels. Overall, these leaders reported that order backlogs are robust, business remains good, and profit margins, while down, are still expected to allow for growth-related activities. We are confident in the collection of businesses in our funds.
Fenimore continues to invest toward a return to “normal.” This means focusing on quality companies that meet our rigorous standards and have the ability, in our opinion, to weather the challenging times and excel when the environment is better. We have made slight adjustments in the funds with an eye on strengthening positions in well-managed, reasonably-priced businesses that may be experiencing short-term pressures, but that we believe should be stronger three years from now. Similarly, we reduced our stakes in companies whose prices peaked in our view and whose long-term prospects are not as favorable.
Fenimore is proud to celebrate the 10-year anniversary of our FAM Small Cap Fund (FAMFX). Our team is pleased with the performance we delivered for shareholders over that time while seeking to mitigate risk. Under the direction of Portfolio Managers Andrew Boord and Kevin Gioia, we pursue quality, solidly profitable, and sustainable small-cap companies with long-term growth potential. Congratulations to Andrew and Kevin and the entire investment research team! We also thank everyone who is invested in FAMFX and look forward to the next decade.
We value our personal connections with shareholders. You can reach us with any questions at 800-932-3271, through our website’s “Contact Us” section, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill location or virtually.
Sincerely,
John D. Fox, CFA
CHIEF EXECUTIVE OFFICER
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1 FactSet, as of 3/18/2022
As we continue the 10-Year Anniversary of the FAM Small Cap Fund, Andrew Boord, Portfolio Manager, discusses the long-term outlook for the fund.
Marc Roberts, Portfolio Manager, FAM Value Fund, explains why visiting companies, meeting with management, and discovering what’s new are an integral component of our distinctive investment research process.
By John Fox, CFA®
CEO
After two years of limited travel, Fenimore’s investment research analysts are back in full swing meeting with management teams in person at their headquarters, conferences, and industry events. During the last month, we met with a couple dozen companies. While there are certainly challenges, executives are not pessimistic.
Insights from Our Travels
Fenimore’s firsthand, in-depth research helps us know our holdings well and this gives us confidence as we seek to protect and grow your capital over the long term. We hope our research insights from these face-to-face meetings give you assurance too.
Please call us at 800-721-5391 if we can assist you. Thank you for your ongoing trust.