Evergreen Principles

Dear Fellow Partners & Friends,

During the second quarter, the Centerstone Investors Fund (CENTX) continued to benefit from its long-held exposures to European equities and currencies, as well as its gold-related investments. Throughout much of the year, elevated cash reserves have also helped dampen the volatility that has characterized markets year-to-date . Interest rate adjustments and geopolitical tensions overseas have further complicated investor sentiment. Despite this persistent backdrop of uncertainty, the Investors Fund has found itself—perhaps coincidentally—well-positioned in the current environment.

We have long believed that many outstanding companies exist around the world, often trading at significant discounts compared to their US-listed counterparts.

FOREIGN FOCUS

A defining feature of the fund since inception has been its outsized exposure to foreign equities. We have long believed that many outstanding companies exist around the world, often trading at significant discounts compared to their US-listed counterparts. While such discounts can sometimes reflect deficiencies in business quality, management, or financial strength, most of the fund’s foreign holdings score well on these metrics. As the stock prices of many of these companies have rebounded during this challenging year, it seems global investors may be rediscovering the vast opportunities that exist outside the large US technology sector. If the global economy is indeed fragmenting and “localizing,” it stands to reason that investors would favor companies somewhat insulated from the negative effects of “de-globalization.” In our portfolio, these include companies such as ISS¹, Air Liquide², Eurofins³, and Loomis⁴. Most of our foreign holdings are, to varying degrees, local operators: ISS provides cleaning and related services in Europe and the US; Air Liquide generates the majority of its revenues locally due to the high cost of transporting industrial gases; and Eurofins’ testing and certification services are tailored to the specific countries in which it operates. These are just a few examples of strong, foreign-listed companies that have been well-positioned to weather this year’s challenges—and, not coincidentally, have been among the fund’s better performers.

As noted, the fund has also benefited from its foreign currency exposure. We employ an active currency hedging strategy to protect returns when appropriate, however, only hedge the currencies to which we are exposed, rarely for speculative reasons. This is a defensive tactic, and at times, as has been the case for much of this year, we see no need for such defense and remain unhedged. Consequently, the fund has benefited from its unhedged exposure to foreign equities.

A HEDGE AGAINST UNCERTAINTY

Gold’s role in our portfolio, as long-time investors are familiar with, is straightforward: gold serves as a hedge against uncertainty. Over the years, that uncertainty has manifested as inflation, deflation, currency devaluations, and more. The key point is that we rarely know in advance why gold will move as it does; only in hindsight do we assign reasons. The only real certainty is that uncertainty will persist, and thus, there is always a place for gold in a portfolio.

Gold’s role in our portfolio, as long-time investors are familiar with, is straightforward: gold serves as a hedge against uncertainty.

LEADING ECONOMIC INDICATORS WEAKENING

RESERVE MANAGEMENT

In addition to gold, the fund typically holds reserves in the form of cash or short-duration Treasury notes. With yields around 4%, we believe it is reasonable to maintain a higher cash position while we await greater clarity in the global trading environment. Additionally, with leading economic indicators weakening (as illustrated above), stubborn inflation, elevated valuations and highly concentrated, tech-heavy indices, prudence suggests perhaps holding a bit more cash.

…with leading economic indicators weakening, stubborn inflation, elevated valuations and highly concentrated, tech-heavy indices, prudence suggests perhaps holding a bit more cash.

These days, surprises seem to lurk around every corner, making it challenging to write commentary that does not quickly become outdated. However, some principles remain evergreen: (1) Good businesses, well-capitalized and led by capable management teams, tend to remain good businesses; and (2) the stock prices of such businesses, if purchased at reasonable valuations, tend to appreciate over time. These two simple ideas are the centerstone of our investment philosophy.

…some principles remain evergreen: (1) Good businesses, well-capitalized and led by capable management teams, tend to remain good businesses; and (2) the stock prices of such businesses, if purchased at reasonable valuations, tend to appreciate over time. These two simple ideas are the centerstone of our investment philosophy.

Thank you for your continued trust and support. We hope you have a great summer.

Sincerely,

Abhay Deshpande, CFA
Chief Investment Officer