1q15 aristotle/saul global opportunities fund · 1q15 shareholder letter for more information,...

ARISTOTLE/SAUL GLOBAL OPPORTUNITIES FUND1Q15

Shareholder Letter

FOR MORE INFORMATION, PLEASE CONTACT:Phone: (844) ARISTOTLE | Email: [email protected] | Web: www.aristotlefunds.com

April 1, 2015 Dear Fellow Shareholders, Driving around Los Angeles to get to work, one can’t help but notice the significant number of new apartments under construction. The City of Angels continues to densify and everything seems to be going upwards (this creates an increasing traffic nightmare but that is a topic for another day). An observation that amuses us is how all of the signs advertise these developments as “luxury apartments” whether it is beachfront property or interstate-front property. The term “luxury” is clearly overused. In the investment community something similar exists with the term “high-quality” company. In fact, we have yet to come across anybody saying they focus on low-quality companies. We believe our definition of the term “quality company” merits further discussion. WHAT IS A QUALITY COMPANY? When asked the question of what a high-quality company is the most common answer is some derivation of the following:

• high and stable returns on capital • sustainable pricing power resulting in stable or increasing margins • dominant market share and industry leader • consistent revenue and earnings growth • capable management team

But most of these characteristics are just the footprints a quality company leaves behind; or put another way, they are simply the results of the game, the scoreboard if you will. For example, when asked who the greatest golfer in the world is, the most likely answer will be based off world rankings, which is based off tournament wins, which are the footprints a great golfer leaves behind. To determine the sustainability of this greatness, one should dig deeper to understand the unique attributes that make this player great; such as swing fundamentals, consistency, work ethic, discipline, judgment, mental strength and self-belief. We believe these unique attributes are the true essence of sustainable greatness, the world ranking is merely a lagging indicator that validates greatness. With regards to companies, our interest lies less in the statistical footprints, as they are an easily identifiable lagging indicator, and more in understanding the company-specific attributes that created the footprints. Our objective is to identify companies with what we believe to be unique attributes that are both sustainable and difficult to reproduce. A few examples of economic moats are brand prestige, network effect, high switching costs and a low-cost producer. Flipping the initial question around to “what is a low-quality company?” typically gets a much less nuanced answer and often highlights specific industries:

• lack of pricing power • cyclical companies • commodity-related companies

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1Q15 Shareholder Letter ARISTOTLE/SAUL GLOBAL OPPORTUNITIES FUND

If quality is solely defined by stability and predictability of revenue and earnings, then these answers are just. But if quality is more about the moat, then these answers are too simple-minded. Many investors refuse to invest in these seemingly less predictable businesses. We posit that certain cyclical and commodity-related companies do have unique attributes that can provide a sustained competitive advantage. Typically their moat is the result of being the low-cost producer; due to a geologic advantage, obsessive cost control, integration, innovation in processing/production and the ability of management to invest counter-cyclically. We believe these companies can not only ride out a cycle, but they emerge from it stronger through cost cuts and consolidation, and can generate attractive returns on capital. Given the negative biases towards these businesses and the volatility in the revenue stream, cyclical businesses can provide prudent opportunities to a disciplined investor that remains diversified and focuses on companies with a moat. To summarize, in its most reduced form, we believe a quality company is a company with a sustained competitive advantage that creates a moat capable of withstanding the tests of time and adversity. We believe these companies have the potential to not only stand the test of time, but improve over time through innovation or some other evolution. A strong business model has the potential to lead to higher returns on capital and increasing profitability. While identifying and understanding a company’s moat is one of the key parts of the investment process, an even more crucial component to a strong investment is identifying the attributes of a moat before the footprints are clear. This requires one to be able to recognize when a company’s “quality” is improving. These company-specific fundamental improvements may include, among other things, changing business mix, organizational restructuring, industry consolidation, management change, innovative new products and improving competitive position. Let’s look at a few case studies to drive home the importance of recognizing improvement. In our opinion, one of the best examples of misleading footprints disguising an improving wide moat company is Union Pacific. For well over a decade, the company earned a return that did not exceed its cost of capital (as shown in the chart below). To the statistically focused investor these footprints implied that one of the most dominant railroads in the United States was not a high-quality company. But if that investor had dug a little deeper to observe the company-specific attributes, he would have seen a business with a network that is impossible to replicate providing an impenetrable barrier to entry. By looking beyond the footprints, he would have observed the significant progress the company was making in asset utilization and operating efficiency which increased the company’s competitive position particularly relative to trucking. The inflection point came in 2005 when the company finally began raising rates and aggressively rightsizing the asset base, eliminating unprofitable routes, reducing crew sizes and deploying technology. Compelling investment opportunities like this can arrive when an independent thinking investor identifies a company with an overlooked wide moat that is experiencing fundamental improvement. Footprints can tell you where a company has been, as hockey great Wayne Gretzky liked to say “Skate to where the puck is going, not where it has been”.

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While Apple is undoubtedly considered a high-quality company today, that was not always the case. In the mid-nineties, Apple was arguably one of the worst-managed companies in the industry, focusing primarily on the lower margin computer hardware business. Neither the return of Steve Jobs in 1996 nor the introduction of the iPod in October 2001 resulted in footprints that implied a moat existed (as shown by poor returns on capital in the chart below). The inflection point for Apple was the introduction of iTunes in 2003 and the iPhone in 2007, which not only revolutionized the industry but enhanced the iOS ecosystem that resulted in a seamless user experience, amplified customer switching costs and an ever increasing network effect. By focusing on the footprints of the 1995-2004 period, one would have missed the ever widening moat the company was generating that has given rise to one of the most profitable companies in the world.

Given the enormity of our investable universe, our reluctance to rely on backward-looking statistical screens and our belief in the benefits of managing a relatively concentrated portfolio, it is paramount that we know what we are looking for in a potential investment. With a highly selective approach, similar to a spearfisherman, we focus our time and energy on well-established companies with a moat and improving fundamentals. We believe these “quality” companies potentially have the ability to compound wealth for long-term owners such as ourselves and our fellow shareholders.

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MARKET OBSERVATIONS:

Source: Bloomberg All returns are as of 3/31/2015.

• The current bull market celebrated its six-year anniversary in March • Europe was the best-performing equity market in the quarter, in local currency terms • The U.S. dollar index is at its highest level in 12 years • Nearly $2 trillion of European sovereign debt now trades at negative yields

The ultra-easy monetary policies of nearly every central bank on the planet is creating distortions and risk taking that would not occur under normal market conditions and is likely to result in unintended consequences. We believe, the volatility and uncertainty caused by constant central bank intervention is damaging to both economies and investor psyche.

On January 15, 2015, just two days after publicly reaffirming the peg as a “cornerstone of its policy”, the Swiss National Bank (SNB) surprised the market by completely abandoning the Swiss franc’s cap against the euro and the franc rallied as much as 25% against the euro in one day! The SNB had been expanding its balance sheet at an alarming rate to over 80% of Gross Domestic Product1 in order to sustain this artificial peg. Those that believed the reassurances from the SNB that they would maintain this peg for a long time and borrowed in Swiss Francs at negative yields in order to invest in higher yielding securities got hurt.

In our last letter, we mentioned the potential for the dollar’s rally to continue and that has occurred during 1Q15. One important reason to be concerned about a stronger US$ is that it increases the risk of an unwind of the massive carry trade in credit markets, which is the consequence of six years of zero short-term rates in the reserve currency of the world. An unwind of such a carry trade becomes much more likely if it is accompanied by a monetary tightening scare. That is why the Federal Reserve (the Fed) might be more constrained than the market thinks in their ability to raise rates. While the unwind of the Swiss carry trade might have been scary, the US$ carry trade is the mother of all carry trades. 1 The monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

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FROM THE HORSE’S MOUTH As opposed to us pontificating on what we think is going on around the world, we would like to begin this quarter by sharing some tidbits from what the company management teams of the Aristotle /Saul Global Opportunities Fund (the Fund) are seeing in the “Real World”: Unilever NV, CEO, Paul Polman discusses the current cyclical trends in global consumer spending: “…we need to recognize that we are in a lower-growth environment, and this is not likely to change in the near future…the slowdown in emerging markets continued….growth in consumer spending in 2014 hit multi-year lows in many countries…(emerging market) consumers have struggled to cope with imported inflation, higher interest rates and reduced fuel subsidies….in Europe…premium segments continue to do better than mid-tier ones…as consumers look to make savings on many of their purchases so they can afford to spend it on the brands and products they value most….in this very uncertain and unpredictable environment, there’s a premium for reliable performance…” Givaudan SA, CEO, Gilles Andrier providing some longer-term perspective on Emerging Markets: “…we have seen a slowdown in Asia, but namely China…and Southeast Asia….we have not seen any slowdown in the momentum in Africa and the Middle East…It remains a fact that today around 80% of the world’s population live in the fast developing markets, …The penetration for consumer goods in developing markets is still relatively low especially in India, in China and even more so in Africa leaving a very significant growth potential for years to come. This is obviously reflected in the growth strategy that most of our clients have today, whether in the household and personal care or in the food and beverage category.” Royal Dutch Shell, CEO, Ben van Beurden providing some longer-term perspective on oil markets: “…short-term movements in the oil price can be driven by perception, and prices tend to overreact….in the medium term, supply and demand fundamentals tend to reassert themselves again around the marginal cost of supply…we have not changed our long-term planning assumptions of $79 to $110 Brent because the long-term outlook remains robust and industry underinvestment today simply leads to more upside risk in oil prices in the future….however, we don’t have much visibility as to how long this downturn will last –months, years.” Dassault Systèmes SA, CEO, Bernard Charles on the resilience of demand in the aerospace business: “I would suggest that for a sector like aerospace everyone keeps in mind that the backlog to produce airplanes has never been as high for the next 20 years ever in the entire aerospace history. The backlog of airplanes to be produced is absolutely huge.” Oracle Corp., CEO, Safra Catz on the transformational impacts of the cloud “… our customers are clearly embracing Oracle PaaS (Platform-as-a-Service) faster than we expected…for every $1 million of license we sell, we expect to collect another $1 million from support over five years for a total of $2 million, while for every $1 million of PaaS we sell, we actually expect to collect $5 million over five years.” The companies identified above are examples of holdings and are subject to change without notice. These companies were selected to help illustrate the investment process described herein. A complete list of holdings is available upon request. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the holdings listed were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Past performance is no guarantee of future results. Recommendations for the last 12 months are available upon request. Please refer to the disclosures at the end of this document.

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PERFORMANCE/PORTFOLIO POSITIONING The Aristotle/Saul Global Opportunities Fund returned 1.36% in 1Q15. Japan and Europe were the strongest-performing regions while the U.S. was the weakest. Despite the Euro and Yen forward contracts in place to start the year, translation back to U.S. dollars detracted 2.54% from the Fund’s performance. At the end of the first quarter, all material foreign currency exposure is now 50% hedged through forward contracts. The Fund’s bottom five contributors for the quarter detracted 1.38% (in local currencies) from total return:

The Fund’s top five contributors for the quarter added 2.60% (in local currencies) to total return:

Below is a snapshot of the Fund’s holdings, allocation and contribution to return in each style bucket:

Performance data quoted here represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain performance information current to the most recent month-end please call 1-888-661-6691.

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INVESTMENT ACTIVITY During the first quarter, we added an investment in one company (Banco Santander) to the Fund and sold positions in five companies (DBS Group, Ericsson, Texas Instruments, Toshiba and Transocean). Below is a brief summary of the new investment and detailed explanations for our sales in the quarter.

DBS Group During the quarter, we sold the Fund’s equity position in Singapore-based DBS Group (legacy holding purchased at 1Q12 inception). DBS is the largest bank in Southeast Asia, by assets, and the observation that Singapore may be transforming into the Switzerland of Asia seems to be widely held as the company’s stock price has reached our estimate of fair value. We saw better risk-reward in Banco Santander investment. Telefonaktiebolaget L.M. Ericsson During the quarter, we sold the Fund’s position in Ericsson (legacy holding purchased at 1Q12 inception) as we no longer held a well-founded differentiated view on the business or earnings power and lacked sufficient visibility on the competitive dynamics of the telecom equipment industry. Ericsson’s core business may have stabilized (more rationale pricing and industry consolidation), but hardware is becoming more commoditized, the software business is threatened by the cloud and growth opportunities face increasing competition from multi-national players (HP, IBM, etc...).

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Texas Instruments Incorporated During the quarter, we sold the Fund’s position in Texas Instruments (legacy holding purchased at 1Q12 inception). While we continue to view Texas Instruments as a good company, our view seems to be commonplace as the original thesis of a transition to higher margin embedded and analog chips has largely played out (45% in ’06 to 80% currently). The company was a strong contributor to the Fund. Toshiba Corporation During the quarter, we sold the Fund’s position in Toshiba (legacy holding purchased at 1Q12 inception) as we see more optimal investments in the portfolio with similar attributes and exposures (Samsung Electronics and Cameco Corporation). Toshiba generates a majority of its earnings from the Semiconductor division where the company holds a #2 global market share in NAND memory (behind Samsung) and from the Power Systems division through its majority ownership of Westinghouse Electric Company LLC, the global leader in the design, construction and maintenance of nuclear power plants. Transocean Ltd. During the quarter, we made the difficult decision to realize a loss on the Funds investment in Transocean. Following an in-depth sale review and discussions with many industry players at a recent investment conference, we have determined that the offshore drilling industry fundamentals continue to deteriorate and no signs of improvement exist through at least the end of 2016. We entered this investment with eyes wide open to the capital intensive, cyclical nature of the business but we underestimated the increasing supply-demand imbalance and the vulnerability of the contract backlog. Offshore drilling demand has disappeared regardless of the day-rate being offered, every market is oversupplied for at least the next two years and contracts are beginning to be renegotiated or cancelled by customers. The sanctity of a drilling contract is paramount to the investment case. Transocean's fleet renewal, operational improvements and management changes that initially intrigued us have been derailed by devastating cyclical headwinds. While we wish we came to this conclusion two quarters ago, we find some solace in the fact that we did not contribute new capital to the position as the stock price spiraled downward and instead added to what we view as better positioned companies within the energy sector. While industry consolidation is a potential outcome, we will observe from the sideline and focus our mindshare elsewhere. CONCLUSION As always, we continue to focus our time on gaining a deeper understanding of businesses and industries and searching for new opportunities in what we believe to be good or improving companies where we have a well-founded differentiated view of the business or its earnings power. We wish you all an enjoyable spring and look forward to communicating with you again this summer. Warm regards, Greg and Alberto

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Aristotle/Saul Global Opportunities Fund (Class I) Performance Update March 31, 2015

Total Return First Quarter 2015 1- Year Annualized Since

Inception (3/30/12) Gross/Net

Expense Ratio At NAV Before Taxes 1.32% -6.59% 4.32% 2.54% / 1.15%Performance data quoted here represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information quoted. To obtain performance information current to the most recent month‐end please call 1‐888‐661‐6691. The Fund’s advisor has contractually agreed to waive certain fees and/or absorb expenses, through April 30, 2015, to the extent that the total annual operating expenses do not exceed 1.10% of average daily net assets of the Fund. The Fund’s advisor may seek reimbursement from the Fund for waived fees and/or expenses paid for three years from the date of the waiver or payment. Without these reductions, the Fund’s performance would have been lower. A redemption fee of 1.00% will be imposed on redemptions of shares within 30 days of purchase. Disclosures: The views in this letter were as of the date stated and may not necessarily reflect the same views on the date this letter is first published or any time thereafter. These views are intended to help shareholders in understanding the Fund’s investment methodology and do not constitute investment advice. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. You should not assume that any of the securities transactions, sectors or holdings discussed in this report are or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This is not a recommendation to buy or sell a particular security. All recommendations for the last 12 months are available upon request. An investment in the Fund is subject to risks and you could lose money on your investment in the Fund. The principal risks of investing in the Fund include, but are not limited to, investing in foreign securities, emerging markets, short sales, derivatives, below investment grade bonds, convertible securities, and ETFs. Foreign securities have additional risks including currency rate changes, political and economic instability, lack of comprehensive company information, less market liquidity, less efficient trading markets, and differing auditing controls and legal standards. Investments in emerging markets involve even greater risks. The use of short sales and ETFs may cause the Fund to have higher expenses than those of other equity funds. Short sales are speculative transactions and involve special risks, including a greater reliance on the investment team's ability to accurately anticipate the future value of a security. The Fund’s losses are potentially unlimited in a short sale transaction. The Fund’s use of short sales and futures contracts leverages the Fund’s portfolio. The Fund’s use of leverage can make the Fund more volatile and magnify the effect of any losses. There is no assurance that a leveraging strategy will be successful. The Fund may invest in derivatives which can be highly volatile, illiquid, difficult to value, and changes in the value of a derivative may not correlate with the underlying securities or other securities held directly by the Fund. Such risks include gains or losses which, as a result of leverage, can be substantially greater than the derivatives' original cost. There is also a possibility that derivatives may not perform as intended which can reduce opportunity for gain or result in losses by offsetting positive returns in other securities the Fund owns.

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Definitions:

• The MSCI All Country World Index (ACWI) captures large and mid cap representation across 23 Developed Markets and 21 Emerging Markets countries. With over 2,400 constituents, the index covers approximately 85% of the global investable equity opportunity set.

• The S&P 500® Index is the Standard & Poor's Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

• The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets countries in Europe. With 436 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

• The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

• The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

• The Brent Forward Dated index is designed to track the performance of the Brent crude market, based on the closest contract expirations. Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.

• The CRB Spot Index is the Credit Research Bureau (CRB) Spot Price Market Index. The Spot Market Price Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity.

• Gold Spot, Platinum Spot and Copper Spot are a commonly used standards for the value of an ounce of gold, platinum, and copper (respectively) based on the price paid for the precious metal based upon immediate delivery.

• Treasuries are negotiable debt obligations of the U.S. government secured by its full faith and credit and issued at various schedules and maturities.

• The Federal Funds rate is the interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. The federal funds rate is the most sensitive indicator of the direction of interest rates, since it is set daily by the market.

The volatility (beta) of the account may be greater or less than the benchmarks. An investor cannot invest directly in these indices. Effective January 17, 2014, Aristotle/Saul Opportunity Fund has been renamed Aristotle/Saul Global Opportunities Fund. In addition, the Fund’s investment strategy has been updated. Portfolio composition will change due to ongoing management of the Fund. References to specific securities or sectors should not be construed as recommendations by the Fund, its Advisor or Distributor. As of March 31, 2015, the Fund held the following positions as a percent of total net assets: adidas AG (ADR) 0.91%; adidas AG 1.32%; AES Corp 1.33%; Arch Coal Inc 8.000% due 1-15-19 1.25%; Arch Coal Inc 7.000% due 6-15-19 0.27%; Arch Coal Inc 9.875% due 6-15-19 0.43%; Apple Inc 0.00%; Banco Santander SA 2.04%; Bank of America Corp 1.66%; Cameco Corp 2.07%; Canadian Natural Resources 2.43%; Centamin plc 1.51%; Compass Group plc 1.95%; Centerra Gold Inc 1.46%; Continental Resources Inc 1.39%; Daiichi Sankyo Co (ADR) 0.40%; Daiichi Sankyo Co 1.16%; Dassault Systemes SA 2.08%; DBS Group Holdings (ADR) 0.00%; DBS Group Holdings 0.00%; Diageo plc (ADR) 2.28%; Dundee Precious Metals Inc 1.56%; eBay Inc 2.09%; EMC Corp 1.83%; Ericsson (ADR) 0.00%; Erste Group Bank 1.42%; ETFs Platinum Trust 1.46%; Givaudan 1.39%; Goodrich Petroleum Corp 8.875% due 3-15-19 0.45%; IAMGOLD Corp 6.750% due 10-1-20 2.01%; ITC Holdings Corp 1.82%; KDDI Corp 1.97%; Kinross Gold Corp 1.18%; Kurita Water Industries Ltd 2.65%; Lennar Corp 2.31%; Medtronic 1.99%; Microsoft Corp 1.88%; Mitsubishi UFJ Financial Group 1.56%; Mondelez International 1.97%; MS&AD Insurance Group Holdings 2.19%; National Fuel Gas Co 1.83%; Newcrest Mining Ltd (ADR) 0.20%; Newcrest Mining Ltd 2.94%; Nike Inc 0.00%; Oracle Corp 1.47%; Oshkosh Corp 2.03%; Peyto Exploration & Development Corp 1.88%; Royal Dutch Shell plc 3.0%; Samsung Electronics – preferred 2.99%; Stock Spirits Group plc 1.43%; Texas Instruments 0.00%; Toray Industries 1.95%; Toshiba Corp 0.00%; Toto Ltd 1.80%; Toyo Suisan Kaisha Ltd 2.54%; Transocean Ltd 0.00%; Unilever N V 2.93%; Uranium Participation Corp 1.73%; Vallourec SA 0.80%; and Walgreens Boots Alliance Inc 2.32%. Portfolio composition will change due to ongoing management of the Fund. References to specific securities or sectors should not be construed as recommendations by the Fund, its Advisor or Distributor.

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Please consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus or summary prospectus that contains this and other information about the Fund is available by calling 1-888-661-6691 or by visiting aristotlefunds.com and should be read carefully prior to investing. The Aristotle/Saul Global Opportunities Fund is distributed by IMST Distributors, LLC.

1q15 aristotle/saul global opportunities fund · 1q15 shareholder letter for more information,...

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