Centre American Select Equity Fund Large Capitalization Stock Focused Concentrated Portfolio Focus on Risk Adjusted Returns Actively Managed to Seek Long Term Alpha
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
Blue-Chip, Quality Stocks
(Quadrant II, ++) and
Highest (>50%) Allocation
to Cyclical Restructuring
Stocks (Quadrant II, --)
Portfolio Concentration of
Blue-Chip, Quality Stocks
(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
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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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
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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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.
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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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
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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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
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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)
Source: Centre Asset Management, LLC & Intrinsic Research as of 09/10/2014
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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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