Dear Fellow Shareholders:
The returns over the last 12 months have been very strong for both of our international funds. They have performed very well — absolutely and relatively. The results for our domestic funds present a less consistent picture: some portfolios performed below expectations and others exceeded their benchmarks. A great deal of our near-term underperformance can be attributed to a lack of direct investment in technology stocks. Since the inception of our fund family, it is clear that many of our investments have benefited from the productivity gains and general efficiencies created by technology. Unfortunately, in the current market, this indirect benefit has not been sufficient to generate better returns in our stocks. Direct investment in the large technology stocks is winning for now.
As value investors, we are not precluded from technology investments. In fact, a number of our funds own some technology companies. The problem has been identifying technology companies that are selling at a discount to rational current values. Buying stocks at significant discounts to their business value is the cornerstone of our long-term investment success. To change our focus now would add substantial portfolio risk. Taking higher risk now is unjustified and unfair to our shareholders who have to bear the risk. When we can buy technology stocks at rational valuations we do — and we will in the future. Invariably, individual technology-based companies will suffer short-term disappointments in earnings or growth rates and their share valuations will fall to levels we view as attractive long-term investments. It will be a period when these stocks "have experienced a substantial price decline based on reasons which we believe are both transitory and irrelevant to the fundamental intrinsic value of the business." (Clyde McGregor 7/6/99 report).
This has been a difficult period for some of our funds, but we are confident that improvement is near. Not only are we convinced that our philosophy and process will provide attractive returns long-term, but our confidence is reinforced by the motivated group of professionals at our firm. Our professional group is very competent, loves the business, and believes strongly in our philosophy. In addition, we are large owners of our funds and appropriately have seen our own net worth penalized by our recent performance. These factors, in combination with the attractive valuation of our portfolios, are why we are confident about the coming year.
Our firm is entering its 25th year. We have had other periods of underperformance. Fortunately, they have been few in number and short in duration. We strongly believe this time will be no different!
Victor Morgenstern
Chairman
Robert M. Levy
President
