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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09000
---------------------------------------------
Oak Value Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
3100 Tower Boulevard, Suite 700 Durham, North Carolina 27707
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(Address of principal executive offices) (Zip code)
Larry D. Coats, Jr.
Oak Value Capital Management, Inc. 3100 Tower Blvd., Suite 700 Durham, NC 27707
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (919) 419-1900
----------------------------
Date of fiscal year end: June 30, 2003
-----------------------------
Date of reporting period: June 30, 2003
-----------------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT
June 30, 2003
[LOGO]
OAK VALUE FUND
WWW.OAKVALUEFUND.COM
LETTER TO SHAREHOLDERS August 15, 2003
================================================================================
To Our Shareholders:
The tagline "how do you spell relief?" from an old commercial comes to mind when
considering market activity and the Oak Value Fund (the "Fund") performance
since our semi-annual letter in December 2002. At that time, we had just closed
out the worst calendar year performance since the Fund's inception, and things
got somewhat worse as price declines continued in early 2003. So we aren't quite
sure how to commit to paper the practically audible collective sigh breathed by
investors during the past few months as the situation has improved dramatically.
Neither "R-O-L-A-I-D-S" nor "Phew!" quite does it justice, but if you own stocks
and haven't been in a coma since last year some time, you probably know what we
mean.
All major stock indices recorded double digit positive results in the three
months ended in June, as an improved environment for equity prices broadly
accompanied the cessation of full scale military activity in Iraq. The Fund
fully participated in the market rally that moved stock prices significantly off
of their mid-March lows through the end of the June quarter that closed out the
Fund's fiscal year. Courtesy of that sizable move upward the Fund posted a
mildly positive +2.7% return for the fiscal year ended June 30. This represents
the first return to positive trailing twelve month results in over a year, when
the bear market's effects significantly impacted returns in mid-late calendar
2002. At this juncture as indicated in the table below, the Fund is ahead of its
S&P 500 performance benchmark for all time periods, most importantly for the
longer time periods which we believe represent the relevant time horizons for
Fund shareholders.
--------------------------------------------------------------
Average Annual Returns
for the Periods Ended 6/30/03
--------------------------------------------------------------
Oak Value
Fund S&P 500
Three Months 26.1% 15.4%
--------------------------------------------------------------
One Year 2.7% 0.3%
--------------------------------------------------------------
Three Years 1.7% -11.2%
--------------------------------------------------------------
Five Years 0.7% -1.6%
--------------------------------------------------------------
Ten Years 12.4% 10.0%
--------------------------------------------------------------
Since Inception 12.3% 10.0%
--------------------------------------------------------------
Inception is 1/18/93. Average annualized return shown for all
periods longer than one year.
--------------------------------------------------------------
The extreme stock price volatility lately experienced (it was especially
pronounced since roughly mid-way through calendar 2002) in our view represents
prima facie evidence of the distinction between price and value that is inherent
in investing. For truly long term investors, dramatic price adjustments like
those recently witnessed stand as a testament to the folly of market timing and
of taking cues about the value of a business from the behavior of its stock
price. Tracking the progress of an operating business is clearly more difficult
and subjective than getting a price quote, but accepting the validity of the
latter as a reflection of value on any given day (say, in March of 2000 or again
in March of this year) can clearly be hazardous to your wealth. In our view, the
stock prices recently posted and those of the lows a scant few months ago cannot
both be right in reflecting value.
1
To be sure, our estimates of intrinsic value for the few companies we select for
inclusion in the Fund portfolio are not validated by improved sentiment or
changing stock prices, especially over such a short time frame. We remain
confident that where our analysis is appropriate, value will ultimately be
realized. Shifting sentiment and the price changes that often accompany it
merely provide a mechanism to measure and periodically monetize those
assessments in a portfolio context.
Having said all that, we certainly welcome the recent improvement in portfolio
pricing. It sure does feel good to post sizable positive results - the best
single quarter in the Fund's now ten year history. The Fund passed the important
decade milestone in January of this year at a challenging time in the market.
Despite the extreme volatility of the past five years, longer term (ten year and
since inception) results are ironically positioned squarely in the range of both
our expectations and long term equity market returns, as well as comfortably
ahead of the unmanaged benchmark. Our efforts have met our original goals during
the Fund's first ten years of operation and, while past performance is no
guarantee of future results, we have no plans to vary our method of pursuing
that outcome in the future. Our ongoing goal is to invest shareholders' capital
in such a way that results both to 1) achieve a reasonable positive absolute
return on that capital over a long time horizon (greater than five years) and 2)
outperform the broad market, net of fees, over a similar time frame.
With recent results now on the books, "heigh-ho, heigh-ho, it's back to work we
go." Our commitment to understanding the value of the underlying businesses of
portfolio companies' held by the Fund remains both our focus and the largest
determinant of our long term investment success. While on one end of the risk
spectrum money market funds currently struggle to eke out a yield sufficient to
cover their fees, a large number of stocks remain priced, in our view, at
valuations that offer negligible upside and even less downside protection to
investors. It is an interesting, and admittedly somewhat stressful, time to be
an investor. We are certain that we have not seen the end of significant
financial market volatility, and thus remain focused on the select few companies
where we find both compelling opportunity and downside protection against
erosion of real economic value over time.
The current economic backdrop is characterized by economic activity that remains
subdued, sales and profit growth that are hard to find, interest rates which
offer investors little return, aggregate market valuations that appear
historically lofty (often for low quality businesses), and high stock price
volatility. Against that context, we have confidence in the business profile and
growth prospects of current Fund portfolio holdings, and in our disciplined
approach to identifying new investment opportunities that meet our prospective
return and safety criteria. We will provide additional portfolio detail in the
Management Discussion and Analysis that follows.
We continue to advise Fund shareholders to maintain both modest return
expectations and cautious optimism about the Fund's investment
2
portfolio. While some of the immediate worries about the economy and the
geopolitical environment have abated with the end of the formal Iraq conflict,
new concerns can be counted on to replace those. Quarterly and calendar-to-date
2003 results are currently well above reasonable long term return expectations.
Some of that is the periodic upside we count on to compensate for past periods
of sub-par results. However, we also anticipate that some of the recent run of
performance will be offset by future below-average or negative interim postings
that will move long term results into the more modest range of 8-12% positive
return expectations that we believe are reasonable. (We of course provide no
guarantees with respect to prospective returns.) On average and over the long
term, we expect a commitment to our time-tested investment principles to grow
capital, though even that outcome is not a certain endeavor, and certainly not
achievable in each and every part of a market cycle.
We'd like to take this opportunity to thank you for your patience and continued
support, especially during the times when your Fund account market values likely
made that patience a fully taxed virtue. We are appreciative of the commitment
from our long term shareholders and hope to reward that patience over time with
returns that are both respectable in the absolute and competitive with
alternatives. We remain committed to the same business evaluation and stock
selection processes that have served our shareholders well over time and welcome
any questions or comments you may have. Please feel free to write us at 3100
Tower Boulevard, Suite 700, Durham, NC 27707, or email to info@oakvalue.com.
IMPORTANT POST - JUNE 30, 2003 INFORMATION:
We note with deep sadness an important event that occurred just after the June
30 close of the Fund's fiscal year. As many of you already know, George Brumley,
III, co-manager to the Oak Value Fund, and eleven other members of his family
were killed on Saturday evening, July 19 in a plane crash in Kenya, Africa. They
were traveling on vacation when their charter flight crashed on Mount Kenya.
In light of this significant event, we thought it was important to let you know
that there have been and will continue to be experienced hands at the helm of
the Fund as we move through and beyond the recent difficult circumstances. David
Carr and George shared the co-manager title and responsibilities for the Fund
starting back in 1995, not long after the Fund's 1993 launch when David was the
sole manager. As a practical matter, David became the sole manager of the Fund
as of July 19 for a brief period of time. Subsequently, we recently added
Matthew F. Sauer and Larry D. Coats, Jr., two experienced partners at Oak Value
Capital Management, Inc. ("Oak Value"), to serve as co-managers of the Fund with
David going forward.
Importantly, we aren't breaking any new ground in this regard; the three of us
have been working together doing company research and making investment
decisions for nearly a decade. Matt is a Senior Vice President and Director of
Research, and Larry recently assumed the role of President and CEO at Oak Value
and
3
both have been members of Oak Value's Investment Committee for nearly a decade.
Matt and Larry are and have been important members of Oak Value's management and
investment teams for many years and have a lot to do with the success we have
historically achieved. We have had a very effective team approach in place at
Oak Value that has been impacting the decisions we have implemented at the Fund
for some time. We have worked together as a team under the formal structure of
Oak Value's Investment Committee for a significant period of time.
We have prepared a correspondence that provides details about the challenging
but manageable process we have followed in making adjustments to our
organization to maintain and sustain it in its focus on our clients and Fund
shareholders. It is available on the Fund's website at www.oakvaluefund.com, by
request from us at 800-680-4199, email at info@oakvalue.com, or via "snail mail"
at Oak Value Capital Management, Inc., 3100 Tower Boulevard, Suite 700, Durham,
NC 27707.
George was a leader, mentor, good friend and an exceptional person of boundless
energy and enthusiasm, and we are shocked and saddened by his sudden passing
along with his wife Julia and their family. Those of you that knew George know
that he was an outstanding human being and a respected professional. George was
a good longtime manager and colleague, but he was first and foremost a very dear
friend. He was deeply committed to his family, his business, his clients, and
Oak Value Fund shareholders.
While we will miss George from a personal perspective more than any other, we
will most certainly miss his contributions to our investment approach.
Fortunately, together we developed an investment team that has compiled an
impressive track record of performance. We remain committed to the tradition
that has generated that record. George was a person of passion and influence,
and his spirit of character, integrity, diligence, energy, and enthusiasm and
his respect for rational principles of investing underpin our organization.
Those traits will continue to define our approach at the Oak Value Fund.
/s/ David R. Carr, Jr.
David R. Carr, Jr., Co-Manager
/s/ Larry D. Coats, Jr.
Larry D. Coats, Jr., Co-Manager
/s/ Matthew F. Sauer
Matthew F. Sauer, Co-Manager
Note: Please see the IMPORTANT INFORMATION section of this report on page 15 for
disclosure that applies to both this letter and the Management Discussion and
Analysis that follows.
4
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
INTRODUCTION AND PORTFOLIO CONTEXT
2Q 2003 EQUITY RETURNS EASE ON DOWN THE ROAD
All major stock indices recorded positive double digit results in 2003's second
calendar quarter, as an improved environment for equity prices moved stocks
upward across the spectrum of company size, quality, "style" and trading
exchange. The small and mid-cap S&P indices and the Equal Weighted S&P 500
outperformed the conventional S&P 500 index (where larger companies are given
more weight) by several percentage points, indicating broad rather than narrow
participation in price improvement.
Lingering concerns that had weighed heavily on investor psychology diminished
enough to pave the way for a broad rally in stock prices that was as sharp as it
was unanticipated. The shift in sentiment was evidenced by the flow of funds
back into stock mutual funds. What began as a trickle of a few hundred million
dollars in March, after many months of net redemptions, swelled to billions in
net purchases in each succeeding month of the second quarter.
The initial success of coalition military activity in Iraq occurred early in the
quarter and tilted sentiment to the positive on the geopolitical front for the
first time in a good while. Economic indicators remain weak to mixed, though the
stimuli of dual interest rate and tax cuts also seem to have buoyed investor
expectations for long term improvement in jobs, sales and profits.
As longtime readers know, we are skeptical of the usefulness of judgments or
pronouncements about the level of the stock market and even more suspicious of
investor sentiment as a predictor of future returns. We observe that while some
of the immediate worries about the economy and the geopolitical environment have
abated with the end of the formal Iraq conflict, new concerns will arise to
replace them in the mind of a mercurial investing populace.
TOTAL RETURN - THREE MONTHS ENDED JUNE 30, 2003
[BAR CHART]
26.1% 21.0% 19.9% 18.8% 16.8% 12.2% 15.4% 13.1%
---------------------------------------------------------------------------
Oak NASDAQ S&P S&P/ Lipper S&P/ S&P Dow
Value Small Barra Average Barra 500 Jones
Fund Cap 600 Value US Growth
Equity
Fund
5
PORTFOLIO UPDATE
"OZ NEVER DID GIVE NOTHIN' TO THE TIN MAN THAT HE DIDN'T, DIDN'T ALREADY HAVE."
- - America
We have not implemented dramatic portfolio changes in response to recent market
fluctuations in an attempt to sidestep temporary losses, nor have we latched on
to recently hot stocks to boost short term performance. The Fund's portfolio
turnover was under 30% during its fiscal year ended June 30, 2003 compared to an
investment management industry that regularly reports well over 100% on average,
and hedge funds, which with their more aggressive strategies and shorter
measurement horizons are almost certainly integer multiples of that.
We largely stayed the course with the existing positions we had established,
based on our assessment that their underlying businesses were performing well at
a time when stock prices were not reflecting their long term value, presenting
what we believed to be sizable prospective return opportunities. At various
points during the past twelve months, particularly in March 2003, we had
publicized our conviction that price levels in the Fund portfolio were planted
firmly in irrationally undervalued territory. For some number of months now, we
have maintained the view that against an improved context (i.e. a better
economy, less skepticism of company financial results, an improved geopolitical
situation), the same companies would likely be seen - and valued - differently.
Against the backdrop of just such an improved outlook, the Fund portfolio
participated meaningfully in the March-June 2003 stock market rally that moved
prices significantly off of their early spring lows. Portfolio performance over
that time period lifted the Fund's fiscal year result into positive territory,
compensating for the price deterioration that occurred in the summer of 2002 and
early 2003. The recent improvement is attributable to more than a rising "market
effect," as roughly two thirds of the companies held in the Fund posted
quarterly percentage gains that exceeded that of the S&P 500 from March through
June, some dramatically so. Viewed from a Business Category perspective, the
Fund gained ground in every segment during 2003's second calendar quarter, with
all but three portfolio companies posting double digit returns for the quarter.
Comcast and Partner Re posted single digit price changes for the quarter and
AFLAC was the only portfolio holding to decline.
--------------------------------------------------------------
Average Annual Returns
for the Periods Ended 6/30/03
--------------------------------------------------------------
Oak Value
Fund S&P 500
Three Months 26.1% 15.4%
--------------------------------------------------------------
One Year 2.7% 0.3%
--------------------------------------------------------------
Three Years 1.7% -11.2%
--------------------------------------------------------------
Five Years 0.7% -1.6%
--------------------------------------------------------------
Ten Years 12.4% 10.0%
--------------------------------------------------------------
Since Inception 12.3% 10.0%
--------------------------------------------------------------
Inception is 1/18/93. Average annualized return shown for all
periods longer than one year.
--------------------------------------------------------------
The improvement on both a relative and absolute basis was largely, though not
exclusively, generated by positions that had hampered the Fund's performance,
particularly during the July to September 2002 period that opened the Fund's
just-finished fiscal year ended in
6
-----------------------------------------------
BUSINESS CATEGORY ALLOCATIONS
[BAR CHART]
-----------------------------------------------
6/30/2003 12/31/2002
--------- ----------
Cash & Equivalents 8.20% 2.00%
Consumer Related 10.75% 10.00%
Diversified 16.42% 17.00%
Finance Related 10.85% 12.00%
Health Care 3.51% 9.00%
Insurance 8.85% 11.00%
Marketing Services 4.04% 4.00%
Media 16.46% 17.00%
Technology 10.02% 9.00%
Telecom 10.90% 9.00%
June. The meeting of expected financial and operating milestones coupled with
improved investor confidence helped regain a portion of the previous price
declines that occurred in companies such as Charter Communications, Cendant,
Constellation Brands, and AOL Time Warner. These were generally the best
performers during the June 2003 quarter, resulting from a combination of sizable
portfolio commitments and substantial positive price performance. Interpublic
Group, Ambac, and Waters also contributed meaningfully to performance in the
closing months of the Fund's fiscal year.
Of course we aren't yet in celebratory mode, mindful that we aren't necessarily
out of the woods (or is it the enchanted forest?) in terms of stock price
volatility. We are encouraged by the return to positive results for the trailing
fiscal year, though we recognize that generally, with the exception of
shareholder accounts with over five years of history with the Oak Value Fund,
price improvement through June has largely been making up for lost ground rather
than significantly growing capital, the desired outcome for which we strive.
Over longer time horizons, we certainly continue to strive for annualized
results that are significantly higher in absolute terms than the barely positive
offerings of the past few years of bear market influenced results. We cannot
control the market of course, but continue to believe that if we find good
businesses and maintain focus on tracking their progress, reasonable returns on
capital will be available to those who acquired them with price discipline
firmly in mind.
In that regard, it has been satisfying to witness meaningful recent stock price
appreciation in several portfolio positions where we had maintained that their
ongoing progress and long term business values were inconsistent with quoted
stock prices. Particularly for Fund portfolio companies that have spent time in
the investor/media "doghouse" for alleged sins that in our view range from
substantive but manageable to spurious, stock price behavior in our view from
April to June of this year began to more closely track rationality as opposed to
negative emotions. Recent price appreciation has helped to mitigate paper losses
for several portfolio positions with which we had remained patient.
Overall, the portfolio businesses that have largely improved Fund performance
are essentially the same ones that had cost the Fund performance previously.
They remain in our view
7
much as they were when their stock prices were significantly lower and investors
were avoiding them like the plague. Absent a change in facts and circumstances,
they would in our view also be the same if their stock prices retreated to March
2003 levels tomorrow (we're thinking and hoping not, however). What has shifted
is how investors feel about these and other companies, and about the world at
large, and therefore the price tag they are willing to attach to businesses via
recent stock prices. In our opinion, what we had to say in the past about their
competitive advantages and compelling investment characteristics is as valid
today as when their stock prices were being assailed.
The world is dynamic rather than static of course, and some changes of substance
have occurred that arguably have moved individual intrinsic values around some.
AOL Time Warner and Interpublic have sold assets, reduced debt, and generally
improved their capital structure. Cendant is using its prodigious cash flow to
buy back debt and stock. Charter's liquidity position has improved substantively
since March. Regardless of what has happened to stock prices along the way, we
consider the most important issue to be that these companies maintain healthy
underlying businesses that are producing cash to support both existing
operations and the balance sheet de-leveraging that has become so popular with
investors (and in Charter's case was much needed) in the wake of 2002's credit
crunch. Happy as we may be to report it, we don't believe recent stock price
appreciation has provided these companies anything that they did not already
possess.
PORTFOLIO OUTLOOK
"AS FOR YOU, MY FINE FRIEND, YOU ARE A VICTIM OF DISORGANIZED THINKING. YOU ARE
UNDER THE UNFORTUNATE DELUSION THAT SIMPLY BECAUSE YOU RUN AWAY FROM DANGER, YOU
HAVE NO COURAGE. YOU'RE CONFUSING COURAGE WITH WISDOM." - Wizard of Oz to the
(formerly) Cowardly Lion
Risk cannot be avoided in investing; it must rather be managed, often by
selection of which risks to confront or embrace, and which to avoid. It is in
this regard that we find relevant insight in the above quote that might
otherwise seem unrelated to financial affairs. Sizable price declines in many
stocks led many investors to embrace the wisdom of fleeing the scene, i.e.,
selling stocks as prices fell earlier this year until the outcome "appeared
clearer." It required no small measure of conviction to stay the course in a
number of portfolio positions given their plunging share prices over the past
year.
We read someplace recently that shrewd investors make most of their money in
tough markets; they just don't know it at the time. The good news about bear
markets is that they typically offer selective but sizable prospective returns
for patient investors. Those willing and able to bear the burden of immediate
risk in security price, traded off against the chance for long term gains, have
often been rewarded handsomely. The bad news is that the wait usually doesn't
feel terribly comfortable. While price declines persist, current price
quotations can seem painfully real compared to an uncertain outcome.
8
- --------------------------------------------------------------------------------------------------
TOP TEN HOLDINGS
AS OF JUNE 30, 2003
- --------------------------------------------------------------------------------------------------
COMPANY PRIMARY BUSINESS S&P SECTOR
- --------------------------------------------------------------------------------------------------
Ambac Financial Group Financial Guarantee Insurance Financials
- --------------------------------------------------------------------------------------------------
AOL Time Warner Entertainment Media Consumer Discretionary
- --------------------------------------------------------------------------------------------------
Berkshire Hathaway Reinsurance and Capital Allocation Financials
- --------------------------------------------------------------------------------------------------
Cendant Travel, Hospitality, and Mortgage Finance Industrials
- --------------------------------------------------------------------------------------------------
Charter Communications Entertainment and Information Services Consumer Discretionary
- --------------------------------------------------------------------------------------------------
Comcast Entertainment and Information Services Consumer Discretionary
- --------------------------------------------------------------------------------------------------
Constellation Brands Wine, Beer & Spirits Production/Distribution Consumer Staples
- --------------------------------------------------------------------------------------------------
Dow Jones Newspaper Publishing & Information Consumer Discretionary
- --------------------------------------------------------------------------------------------------
E. W. Scripps Newspaper Publishing & Entertainment Consumer Discretionary
- --------------------------------------------------------------------------------------------------
XL Capital Property & Casualty Insurance/Reinsurance Financials
- --------------------------------------------------------------------------------------------------
The sizable gulf that we had contended stood between portfolios' quoted market
prices and intrinsic value has narrowed substantively in what can fairly be
described as a sea change in valuation over the span of a few weeks that closed
out the Fund's latest fiscal year. Fortitude has lately been rewarded with
sizable portfolio appreciation, though having lived through that time period, we
certainly wouldn't call it the "easy money" phase. At times it seemed like the
refrain from "If I Only Had A Brain" was an undertone during discussions we held
earlier this year about holdings in then much underwater positions.
We currently find ourselves at an interesting juncture. Given the recent gains
in the Fund's portfolio, there are clearly fewer and smaller bargains available
now than there were this past winter or last summer and fall. Nonetheless,
because several portfolio positions entered the recent upswing at extremely
depressed stock price levels relative to their intrinsic values, they remain at
discounts to our estimates of their value even after sizable percentage gains.
Price appreciation alone (from a low base) is no more justification to sell in
our view than was the converse three months ago. Though we trimmed a few
positions where the price/value gap has narrowed, we are by and large staying
the course with current portfolio weightings and have even managed to
selectively add to them on interim downside volatility. We did exit one position
(Scientific Atlanta, see discussion in the PORTFOLIO ACTIVITY section below)
where the short term increase in its stock price moved it inside our estimated
range of the intrinsic value of the business, but even there, price change was
not the sole motivating factor.
Overall, we remain cautiously optimistic about current portfolio positions,
while paying close attention to the business progress that will most influence
their ultimate value. We are also working diligently in researching new
potential investments, though overall market appreciation has made finding a
current entry price a somewhat more challenging exercise. We will continue to
build our knowledge about a few select businesses and remain disciplined about
the acquisition price discount we consider attractive. Historically, the work of
building that knowledge base has proven its eventual value in the form of
portfolio actions we ultimately take.
9
WE WERE JUST THINKING
Far from ignoring the essence of the Wizard's "discretion is the better part of
valor" admonition to the lion, we are keeping it planted quite firmly in mind as
the investment landscape continues to shift. Sizable positive returns of the
past few months are a welcome change, but we all know such short term results
can turn on a dime. Few commentators, rightly we think, are prepared to label
the most significant concerns of the past few years as "problems solved."
Uncertainty about terrorism's cost, varying degrees of political and
geopolitical unrest and to some degree economic cyclicality are permanent
fixtures of the investment landscape that will ebb and flow as major and minor
concerns over time. We definitely aren't in Kansas anymore, in terms of a
predictable, familiar societal backdrop, if we ever were there to start with. We
certainly don't think all of the risk of equity investing is gone because we've
had one good quarter, and the world hasn't magically just gotten better
overnight. In spite of a bear market, some investors' irrational exuberance
remains, at least judging by anecdotes of nosebleed valuation measures for the
NASDAQ Index as a whole, as well as for a handful of technology and other
companies.
In our estimation, there are a few important macro level factors that are worth
noting and thinking about. The investment landscape remains characterized by a
tepid economy, sales and profit growth are difficult for companies to generate,
interest rates offer investors little return, and reported market valuations
appear historically lofty, often for what are rather low quality businesses. We
continue to observe selected (but still persistent and occasionally sizable)
examples of asset mis-valuation as well as financial characterizations that are
not fully reflective of economic reality but have meaningful implications for
equity owners (i.e., stock options and post-retirement liability accounting).
The ability of bad management to do serious damage to equity investors is, in
our recent observation, worse than we had feared (and we were pretty pessimistic
on that front to start with). Finally, we suspect that in the wake of large
portfolio losses and shortfalls of both corporate accounting and accountability,
investor mistrust is unlikely to fade into the background because of a few short
weeks of stock market profits.
Concurrently, we resist the temptation to seek the "safety" of the sidelines as
often advised by an ever-fickle media. In the wake of the second quarter's
strong returns, a cautionary refrain making the rounds is that "stocks" (so
often glibly spoken of in the press as if they were just one giant monolithic
index fund entity - doesn't Vanguard just wish!) are overvalued based on high
reported aggregate or individual P/E ratios or based on a recent percentage gain
being "ahead of itself." We don't care to defend the valuation of the whole
stock market, nor even of many of its constituents that are not also portfolio
holdings. Many may be overvalued, but we have found that such broad concerns are
often grounded in misguided logic, and oversimplifications are often parroted
without much scrutiny. As such, they represent "dangers" better faced with
knowledge, insight and judgment rather
10
than fled from. To offer just two simple caveats to such trite concerns over P/E
ratios, we point out that competing investments (interest rates on fixed income
investments) offer their lowest returns in a generation, and that P/E ratios are
at their highest at two points - price peaks and earnings troughs.
Additionally, we reiterate that "the market" doesn't much matter. Over time,
equity shareholders usually benefit from the progress made by superior
businesses, purchased at reasonable prices, and there are nearly always good
businesses available to the disciplined investor. Assets purchased between 10
and 15 times their earnings offer "earnings yields" between 6.5% and 10%, with
the potential (not a guarantee of course) for growth if the franchise is
defensible, often on a tax deferred basis until sale. We think we have found a
few such examples over the years and even of late, despite a sharply rising
market. Where available, such opportunities currently offer considerable
advantage over and above available investment alternatives.
There are of course no guarantees in the investment business. Having solid
principles, along with maintaining discipline and diligence in applying them,
can mitigate, but not eliminate, risk. We feel comfortable pursuing a strategy
of selecting a few businesses that we believe can sustain and grow their value
over long periods of time. In the short run, price is influenced by future
hopes, current fears, and general unrest. Over the long term, stock prices have
shown a history of ultimately tracking and reflecting business value, which is
determined by sales and cash production. Timing, opportunity cost, interest
rates, inflation, investment structure, management and stewardship of capital,
and many other factors all matter. But none is so fundamental or matters as much
as the basic building block of cash flow. That's where we will continue to focus
our research effort. Our confidence remains that where our analysis is
appropriate value will ultimately be realized, despite the periods of interim
paper losses caused by price volatility, a market factor which we are reasonably
sure has not been banished. Of course that's just our opinion.
PORTFOLIO ACTIVITY
Portfolio activity continued to be relatively muted during the first half of
calendar 2003, as summarized in the table below. Including the sole addition of
Ross Stores this past calendar quarter, we added four new companies to the Fund
portfolio over the twelve months ended in June. For the same period, we
eliminated portfolio exposure to eight positions. In the eighteen months since
the beginning of 2002, we initiated positions in eight new companies and
currently maintain weightings in six of those eight.
Our portfolio actions in the Fund are not of course determined by some grand
plan for either number of companies owned, added, or eliminated. We also do not
target a specific percentage level of portfolio turnover. Rather, we are
motivated to trade opportunistically, reacting to the price-value relationships
as they vary over time in the relatively few companies in which we currently or
prospectively choose to maintain positions on behalf of the Fund.
During the second quarter 2003, we added one new and eliminated two prior
portfolio positions.
11
--------------------------------------
Calendar 2003
Purchase / Sale Activity
--------------------------------------
PURCHASED Ross Stores
--------------------------------------
SOLD Household International
Schering Plough
Scientific Atlanta
Tupperware
--------------------------------------
PURCHASES
Occasionally, we find good business niches and attractive valuation in the
specialty retail area, and recently added Ross Stores, the second largest
off-price specialty retailer in the country, to the Fund portfolio. In our view,
continued difficulties for traditional department store retailers, clothing
producers' desire for sales volume, and consumers' price-conscious behavior
combine to support Ross' niche strategic positioning in offering a broad
selection of branded merchandise at value prices. Their current limited
geographic footprint presents growth opportunities that when combined with their
traditionally attractive store economics represents to us a compelling
investment opportunity at a reasonable entry price (roughly ten times expected
earnings). We categorize Ross as an undervalued company relative to its
reasonable prospects, and expect increased store count plus organic growth to
contribute to growing sales and earnings.
SALES
We sold the Fund's position in Schering Plough during 2003's calendar first
quarter. The company had experienced several business setbacks during the course
of ownership in the Fund, including greater than expected competition for their
hepatitis therapy, a disappointing transition of their next generation allergy
franchise, a potential slowdown in the roll out of their new cholesterol
reducing compound, and management turnover.
One or more of these negative outcomes may have been surmountable; all of them
combined to create an adjusted financial and risk profile for the company. In
the context of our evaluation of its changing circumstances, we concluded that
even the recent price to which Schering Plough's shares had been reduced left us
with an inadequate margin of safety to warrant continued capital commitment.
When we (occasionally) reach such a conclusion in an evaluation of an existing
portfolio business, there has clearly been a change relative to our original
investment assumptions and thesis, and we sell.
We also eliminated the Fund's position in Household International in February,
as the closing date of its acquisition transaction by HSBC drew nearer. Value
may accrue going forward in the combined business, and HSBC is a fine company,
but it is not the one we set out to own for shareholders.
We also eliminated positions in both Tupperware and Scientific Atlanta during
the second calendar quarter. Tupperware has struggled to generate growth in its
sales or earnings, even after allowing for the effects of a slow economy. Shifts
to sales channels beyond their traditional direct sales method (retail presence
via Target, mall kiosks, and the internet) have not
12
contributed to improved financial results. We have great respect for
Tupperware's products and brand name, but have concluded that their challenges
in meaningfully growing sales and profits are likely to continue. We also sold
the Fund's position in Scientific Atlanta, the cable equipment and set-top box
maker. While our optimism for the cable television business remains high, we
have come to view the equipment suppliers' strategic placement relative to their
large (increasingly concentrated, and becoming more so) cable customers and
their competitors/substitutes as a less attractive long term position in the
industry value chain. (As many of our shareholders well know, cable companies
have been under pressure to deliver on the promise of their business investments
by generating cash flow. Their three major costs are programming, equipment, and
labor. The suppliers of the first two of those items are likely to get squeezed
harder in a consolidated cable landscape, even as the unit volume of digital
boxes expands over time. Additionally, integration of box features into new
television products remains a longer term risk.) Significant second quarter
stock price appreciation provided an opportunity for us to sell Scientific
Atlanta positions at prices more reflective of intrinsic value and well above
the market-panic-lows of a few short months ago.
FYI
We recently posted our latest thoughts on portfolio holding Berkshire Hathaway
on the Fund's website (www.oakvaluefund.com) in the wake of our pilgrimage to
the Berkshire annual meeting. We have been receiving favorable feedback about
this year's installment (Forget Cars, Storms, Sharks, and Even the `Real Thing,'
at Berkshire Hathaway, Cash is King!) from various circles and thank those of
you who have given us your comments. We encourage you to read it if you have not
yet had the opportunity and we of course welcome your comments.
We began a practice some time ago of publishing a portfolio commentary for the
two calendar quarters (March and September) when we do not publish a full annual
(June) or semi-annual (December) Fund report. In order to help reduce Fund
expenses, our practice is to deliver these interim portfolio commentaries only
as part of another mailing we are already doing. We consider these quarterly
summaries to be among our best communication vehicles for sharing our thoughts
about portfolio progress, positioning, and activity, and encourage shareholders
to read them. Copies of these commentaries can be obtained by calling us at
1-800-622-2474, and are available on our website (www.oakvaluefund.com) in both
a current and archived area for older versions. We also make available a
portfolio commentary for the June and December time periods (which is
substantially similar to information which is ultimately included in the annual
and semi-annual reports) via distribution on the website or by calling us.
CONCLUSION
After more than three plus years of a grinding bear market, it could accurately
be said that a fair number of companies had stock prices residing
13
this past March in a virtual Munchkinland. As we recall the story of the Wizard
of Oz, the journey on the yellow brick road began with great fanfare from that
diminutive borough, though a fair number of obstacles remained before a safe
return to Kansas. Looking beyond the "feel-good" bounce of the general market
rally, we remain committed to the business evaluation and stock selection
processes that we believe have served Fund shareholders well over time.
We have confidence in the business profile and growth prospects of current Fund
portfolio holdings against a backdrop where economic activity remains subdued
and profitability and growth are increasingly difficult for companies to achieve
broadly. For several of the portfolio positions most recently driving improved
results, we are enthused about price improvement that we believed was a high
probability at some point (though it remains far from inevitable). We recognize
that in many cases, there is more than a fair share of ground to make up between
former low stock prices and our original entry price targets and intrinsic value
estimates.
Quarterly and to-date calendar 2003 results are currently well above reasonable
long term equity market return expectations. Some of that is the periodic upside
we count on to compensate for past periods of sub-par results in a fashion that
every equity investor should be prepared for. However, we also anticipate that
some of the recent positive performance will be offset by future below-average
or negative interim postings that will move long term results into the more
modest range of 8-12% positive return expectations that we believe is reasonable
and prudent. The purchase of quality businesses - those with some meaningful
advantages relative to competitors that enables long term growth - at prices
discounted from their long term value, and run by able and honest management for
shareholders, remains, in our opinion, a worthwhile investment exercise with
opportunities for attractive returns relative to alternative uses of capital.
Understanding the value of good businesses, with good management, purchased at
attractive prices will, we believe, remain the largest determinant of long term
investment success for the Oak Value Fund and its shareholders.
A NOTE OF THANKS...
We at Oak Value would like to take this opportunity to thank you for your
patience and continued support, especially during the times when shareholder
account values likely made that patience a fully taxed virtue. We are
appreciative of the commitment from our long term shareholders and hope to
reward that patience over time with returns that are both respectable in the
absolute and competitive with alternative uses of capital. Future market
environments are likely to challenge us all again, and losses, both paper and
real, are certain to remain part and parcel of being an equity investor. Our
commitment therefore, remains with the same business evaluation and stock
selection processes that have served Fund shareholders well over time and we
welcome any questions or comments you may have. We are appreciative of your
commitment to those principles as well. Please feel free to get in touch with us
- - call, write, or
14
email. Bonnie Stephens, our Shareholder Relations Manager, will be sure we
answer your questions and address your concerns. She can be reached at
800-680-4199, via email at bps@oakvalue.com, or through "snail mail" at 3100
Tower Boulevard, Suite 700, Durham, NC 27707.
As always, thanks for your continued support.
.....AND ONE OF DEEP SADNESS
"AS FOR YOU, MY GALVANIZED FRIEND, YOU WANT A HEART. YOU DON'T KNOW HOW LUCKY
YOU ARE NOT TO HAVE ONE. HEARTS WILL NEVER BE PRACTICAL UNTIL THEY CAN BE MADE
UNBREAKABLE." - Wizard of Oz to the Tin Man
IN MEMORY OF
GEORGE W. BRUMLEY, III
1960-2003
IMPORTANT INFORMATION
Authorized for distribution only if preceded or accompanied by a prospectus.
Where shown or quoted, recent company returns (for example calendar quarter or
trailing twelve months) are stock price changes only, and reflect neither
dividends nor any fees associated with an investment in the Oak Value Fund (the
"Fund"). This Management Discussion and the Letter to Shareholders seek to
describe the Fund managers' current views of the market and to highlight
selected activity in the Fund. Any discussion of specific securities is intended
to help shareholders understand the Fund's investment style, and should not be
regarded as a recommendation of any security. Displays detailing a summary of
holdings (e.g., best and worst stocks, business category distribution, etc.) are
based on the Fund's holdings on June 30, 2003 or held during the second quarter
of 2003.
We do not attempt to address specifically how individual shareholders have
fared, since shareholders also receive account statements showing their holdings
and transactions. Information concerning the performance of the Fund and our
recommendations over the last year are available upon request. Past performance
is no indication of future performance. You should not assume that future
recommendations will be as profitable or will equal the performance of past
recommendations.
Statements referring to future actions or events, such as the future financial
performance or ongoing business strategies of the companies in which the Fund
invests, are based on the current expectations and projections about future
events provided by various sources, including company management. These
statements are not guarantees of future performance, and actual events and
results may differ materially from those discussed herein. References to
securities purchased or held are only as of the date of this communication to
shareholders. Although the Fund's investment adviser focuses on long-term
investments, holdings are subject to change.
This Management Discussion and the Letter to Shareholders may include
statistical and other factual information obtained from third-party sources. We
believe those sources to be accurate and reliable; however, we
15
are not responsible for errors by them on which we reasonably rely. In addition,
our comments are influenced by our analysis of information from a wide variety
of sources and may contain syntheses, synopses, or excerpts of ideas from
written or oral viewpoints provided to us by investment, industry, press and
other public sources about various economic, political, central bank, and other
suspected influences on investment markets.
Although our comments focus on the most recent calendar quarter and year, we use
this perspective only because it reflects industry convention. The Fund and its
investment adviser do not subscribe to the notion that three-month calendar
periods or other short-term periods are either appropriate for making judgments
or useful in setting long-term expectations for returns from our, or any other,
investment strategy. The Fund and its investment adviser do not subscribe to any
particular viewpoint about causes and effects of events in the broad capital
markets, other than that they are not predictable in advance. Specifically,
nothing contained in the Management Discussion and the Letter to Shareholders
should be construed as a forecast of overall market movements, either in the
short or long term.
Any hyperlinks and/or references to other web sites contained in this material
are provided for your convenience and information. We do not assume any
responsibility or liability for any information accessed via links to or
referenced in third party web sites. The existence of these links and references
is not an endorsement, approval or verification by us of any content available
on any third party site. In providing access to other web sites, we are not
recommending the purchase or sale of the stock issued by any company, nor are we
endorsing products or services made available by the sponsor of any third party
web site.
Any performance data quoted represents past performance and the investment
return and principal value of an investment in the Fund will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Average Annual Total Returns for the Fund for periods ended
06/30/03: One Year = +2.65%, Five Years = +0.70%, Ten Years = +12.44%, Since
Inception (1/18/93) = +12.26%.
For more information about the Fund, including objectives, strategies, risks,
charges and expenses, please obtain a copy of the Fund's prospectus which is
available at ww.oakvaluefund.com or by calling 1-800-622-2474.
Oak Value Fund is distributed by
Ultimus Fund Distributors, LLC
16
OAK VALUE FUND
PERFORMANCE INFORMATION
================================================================================
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE OAK VALUE FUND AND STANDARD & POOR'S 500 INDEX
[GRAPH OMITTED]
OAK VALUE FUND S&P 500 INDEX
-------------- -------------
6/93 10,360 10,452
12/93 12,205 10,970
6/94 11,818 10,599
12/94 12,021 11,115
6/95 13,333 13,362
12/95 15,487 15,292
6/96 17,205 16,836
12/96 19,976 18,803
6/97 24,019 22,679
12/97 27,507 25,076
6/98 32,319 29,518
12/98 32,713 32,242
6/99 34,516 36,238
12/99 31,691 39,027
6/00 31,787 38,861
12/00 37,449 35,473
6/01 39,200 33,098
12/01 37,273 31,258
6/02 32,611 27,144
12/02 28,201 24,349
6/03 32,311 26,033
----------------------------------------------
OAK VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS(A)
AS OF JUNE 30, 2003
1 Year 5 Years 10 Years
2.65% 0.70% 12.44%
----------------------------------------------
Past performance is not predictive of future performance.
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR-TO-
DATE SINCE
2003 INCEPTION*
CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR CALENDAR (AS OF (AS OF
1993* 1994 1995 1996 1997 1998 1999 2000 2001 2002 6/30/03)(B) 6/30/03)
- ------------------------------------------------------------------------------------------------------------------------------------
Oak Value
Fund 22.04% -1.54% 28.89% 28.99% 37.70% 18.93% -3.12% 18.17% -0.47% -24.34% 18.70% 234.74%
S&P 500
Index 9.60% 1.32% 37.58% 22.96% 33.36% 28.58% 21.04% -9.12% -11.90% -22.10% 11.76% 171.88%
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIODS ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
ONE THREE FIVE TEN SINCE
YEAR YEARS YEARS YEARS INCEPTION*
- --------------------------------------------------------------------------------
Oak Value Fund ............. 2.65% 1.74% 0.70% 12.44% 12.26%
S&P 500 Index .............. 0.25% -11.20% -1.61% 10.04% 10.04%
- --------------------------------------------------------------------------------
* Inception date of the Oak Value Fund was January 18, 1993.
(A) The returns shown do not reflect the deduction of taxes a shareholder would
pay on Fund distributions or the redemption of Fund shares.
(B) Not annualized.
17
OAK VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2003
================================================================================
ASSETS
Investments in securities:
At cost ................................................ $ 252,874,867
==============
At market value (Note 1) ............................... $ 284,859,381
Cash ........................................................ 67,116
Receivable for capital shares sold .......................... 1,115,637
Dividends receivable ........................................ 94,314
--------------
TOTAL ASSETS ........................................... 286,136,448
--------------
LIABILITIES
Payable for securities purchased ............................ 10,595,831
Payable for capital shares redeemed ......................... 2,750,802
Accrued investment advisory fees (Note 3) ................... 184,838
Other accrued expenses ...................................... 23,414
--------------
TOTAL LIABILITIES ...................................... 13,554,885
--------------
NET ASSETS .................................................. $ 272,581,563
==============
Net assets consist of:
Paid-in capital ............................................. $ 250,206,663
Accumulated net realized losses from security transactions .. (9,609,614)
Net unrealized appreciation on investments .................. 31,984,514
--------------
Net assets .................................................. $ 272,581,563
==============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) ................ 10,654,584
==============
Net asset value, offering price and
redemption price per share (Note 1) ....................... $ 25.58
==============
See accompanying notes to financial statements.
18
OAK VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003
================================================================================
INVESTMENT INCOME
Dividends .............................................. $ 2,358,024
Interest ............................................... 14,083
--------------
TOTAL INVESTMENT INCOME ........................... 2,372,107
--------------
EXPENSES
Investment advisory fees (Note 3) ...................... 2,078,807
Shareholder services and transfer agent fees (Note 3) .. 407,277
Professional fees ...................................... 136,278
Trustees' fees and expenses ............................ 113,939
Administration fees (Note 3) ........................... 94,702
Custodian fees ......................................... 77,626
Fund accounting fees (Note 3) .......................... 46,192
Insurance expense ...................................... 40,345
Printing fees .......................................... 37,759
Registration fees ...................................... 34,189
Other expenses ......................................... 67,305
--------------
TOTAL EXPENSES .................................... 3,134,419
--------------
NET INVESTMENT LOSS ......................................... (762,312)
--------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized losses from security transactions ......... (8,599,400)
Net change in unrealized appreciation/
depreciation on investments .......................... 12,178,162
--------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS ............ 3,578,762
--------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................. $ 2,816,450
==============
See accompanying notes to financial statements.
19
OAK VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
====================================================================================================
YEAR YEAR
ENDED ENDED
JUNE 30, JUNE 30,
2003 2002
- ----------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment loss ...................................... $ (762,312) $ (1,123,066)
Net realized gains (losses) from security transactions ... (8,599,400) 7,323,048
Net change in unrealized appreciation/
depreciation on investments ............................ 12,178,162 (64,317,938)
-------------- --------------
Net increase (decrease) in net assets from operations .... 2,816,450 (58,117,956)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains from security transactions ....... -- (7,323,620)
-------------- --------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ................................ 101,301,189 91,689,838
Net asset value of shares issued in reinvestment
of distributions to shareholders ....................... -- 7,148,844
Cost of shares redeemed .................................. (111,271,746) (100,066,353)
-------------- --------------
Net decrease in net assets from capital share transactions (9,970,557) (1,227,671)
-------------- --------------
NET DECREASE IN NET ASSETS .................................... (7,154,107) (66,669,247)
NET ASSETS:
Beginning of year ........................................ 279,735,670 346,404,917
-------------- --------------
End of year .............................................. $ 272,581,563 $ 279,735,670
============== ==============
SUMMARY OF CAPITAL SHARE ACTIVITY:
Shares sold .............................................. 4,427,573 3,273,670
Shares issued in reinvestment of distributions
to shareholders ........................................ -- 280,135
Shares redeemed .......................................... (5,000,009) (3,594,574)
-------------- --------------
Net decrease in shares outstanding ....................... (572,436) (40,769)
Shares outstanding, beginning of year .................... 11,227,020 11,267,789
-------------- --------------
Shares outstanding, end of year .......................... 10,654,584 11,227,020
============== ==============
See accompanying notes to financial statements.
20
OAK VALUE FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
====================================================================================================================
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Net asset value beginning of year .... $ 24.92 $ 30.74 $ 25.13 $ 27.96 $ 27.04
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss) .... (0.07) (0.10) (0.03) 0.11 0.07
Net realized and unrealized gains
(losses) on investments ....... 0.73 (5.05) 5.88 (1.48) 1.76
---------- ---------- ---------- ---------- ----------
Total from investment operations ..... 0.66 (5.15) 5.85 (1.37) 1.83
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment income ...... -- -- -- (0.11) (0.07)
From net realized gains from
security transactions ......... -- (0.67) (0.24) (1.30) (0.81)
In excess of net realized gains . -- -- -- (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Total distributions .................. -- (0.67) (0.24) (1.46) (0.91)
---------- ---------- ---------- ---------- ----------
Net asset value at end of year ....... $ 25.58 $ 24.92 $ 30.74 $ 25.13 $ 27.96
========== ========== ========== ========== ==========
Total return ......................... 2.65% (16.81%) 23.32% (7.91%) 6.80%
========== ========== ========== ========== ==========
Net assets at end of year (000's) .... $ 272,582 $ 279,736 $ 346,405 $ 280,833 $ 624,773
========== ========== ========== ========== ==========
Ratio of net expenses to average
net assets(a) ...................... 1.36% 1.23% 1.22% 1.13% 1.10%
Ratio of net investment income
(loss) to average net assets ....... (0.33%) (0.36%) (0.12%) 0.28% 0.27%
Portfolio turnover rate .............. 28% 63% 52% 22% 38%
(a) Absent the use of earnings credits on cash balances, the ratios of expenses
to average net assets would have been 1.24%, 1.23% and 1.14% for the years
ended June 30, 2002, June 30, 2001 and June 30, 2000.
See accompanying notes to financial statements.
21
OAK VALUE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2003
================================================================================
SHARES COMMON STOCKS -- 92.4% VALUE
- --------------------------------------------------------------------------------
CONSUMER RELATED -- 10.8%
451,300 Constellation Brands, Inc. - Class A (a) .. $ 14,170,820
121,575 Ross Stores, Inc. ......................... 5,196,116
250,250 Zale Corp. (a) ............................ 10,010,000
--------------
29,376,936
--------------
DIVERSIFIED -- 16.5%
115 Berkshire Hathaway, Inc. - Class A (a) .... 8,337,500
8,654 Berkshire Hathaway, Inc. - Class B (a) .... 21,029,220
850,150 Cendant Corp. (a) ......................... 15,574,748
--------------
44,941,468
--------------
FINANCE RELATED -- 10.6%
194,725 Ambac Financial Group, Inc. ............... 12,900,531
209,600 Certegy, Inc. (a) ......................... 5,816,400
388,800 Equifax, Inc. ............................. 10,108,800
--------------
28,825,731
--------------
HEALTHCARE -- 3.5%
158,605 Merck & Co., Inc. ......................... 9,603,533
--------------
INSURANCE -- 8.9%
102,975 AFLAC, Inc. ............................... 3,166,481
185,000 PartnerRe, Ltd. ........................... 9,455,350
139,825 XL Capital Ltd. - Class A ................. 11,605,475
--------------
24,227,306
--------------
MARKETING SERVICES -- 4.0%
826,125 Interpublic Group Cos., Inc. .............. 11,053,553
--------------
MEDIA -- 16.8%
857,425 AOL Time Warner, Inc. (a) ................. 13,795,968
270,125 Dow Jones & Co., Inc. ..................... 11,623,479
128,985 E.W. Scripps Co. (The) - Class A .......... 11,443,549
460,000 Walt Disney Co. (The) ..................... 9,085,000
--------------
45,947,996
--------------
TECHNOLOGY -- 10.1%
76,850 Diebold, Inc. ............................. 3,323,763
333,075 Hewlett-Packard Co. ....................... 7,094,497
480,700 IMS Health, Inc. .......................... 8,647,793
287,275 Waters Corp. (a) .......................... 8,368,321
--------------
27,434,374
--------------
TELECOMMUNICATIONS -- 11.2%
3,010,125 Charter Communications, Inc. - Class A (a) 11,950,196
641,975 Comcast Corp. - Class A Special (a) ....... 18,508,139
--------------
30,458,335
--------------
TOTAL COMMON STOCKS (Cost $219,884,718) ... $ 251,869,232
--------------
22
OAK VALUE FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
================================================================================
PAR U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.1% VALUE
- --------------------------------------------------------------------------------
$ 24,893,000 Federal Home Loan Bank, discount note,
due 7/1/03 (Cost $24,893,000) ........... $ 24,893,000
--------------
================================================================================
SHARES CASH EQUIVALENTS -- 3.0% VALUE
- --------------------------------------------------------------------------------
8,097,149 First American Government Obligations Fund -
Class S (Cost $8,097,149) ............... $ 8,097,149
--------------
TOTAL INVESTMENTS AT VALUE -- 104.5%
(Cost $252,874,867) ....................... $ 284,859,381
LIABILITIES IN EXCESS OF OTHER ASSETS -- (4.5%) (12,277,818)
--------------
NET ASSETS -- 100.0% ...................... $ 272,581,563
==============
(a) Non-income producing security.
See accompanying notes to financial statements.
23
OAK VALUE FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Oak Value Fund (the "Fund") is a diversified series of shares of Oak Value
Trust (the "Trust"). The Trust, registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
was organized as a Massachusetts business trust on March 3, 1995. The Fund began
operations on January 18, 1993 as a series of the Albemarle Investment Trust.
The Fund's investment objective is to seek capital appreciation primarily
through investments in equity securities, consisting of common and preferred
stocks and securities convertible into common stocks traded in domestic and
foreign markets.
The following is a summary of the Fund's significant accounting policies:
SECURITIES VALUATION -- The Fund's portfolio securities are valued as of the
close of business of the regular session of the principal exchange where the
security is traded. Securities which are traded over-the-counter are valued at
the last sales price, if available, otherwise, at the last quoted bid price.
Securities traded on a national stock exchange are valued based upon the closing
price on the principal exchange where the security is traded. In the event that
market quotations are not readily available, securities are valued at fair value
as determined in accordance with procedures adopted in good faith by the Board
of Trustees. The fair value of securities with remaining maturities of 60 days
or less has been determined in good faith by the Board of Trustees to be
represented by amotized cost value, absent unusual circumstances.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements from
financial institutions such as banks and broker-dealers that the Trust's
investment adviser deems creditworthy under the guidelines approved by the Board
of Trustees, subject to the seller's agreement to repurchase such securities at
a mutually agreed-upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller, under a repurchase agreement, is required to
maintain the value of collateral held pursuant to the agreement at not less than
the repurchase price (including accrued interest).
SHARE VALUATION -- The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding. The offering price and redemption price per share
of the Fund is equal to the net asset value per share.
INVESTMENT INCOME -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date.
DISTRIBUTIONS TO SHAREHOLDERS -- Dividends arising from net investment income,
if any, are declared and paid semi-annually to shareholders of the Fund. Net
realized short-term capital gains, if any, may be distributed throughout the
year and net realized long-term capital gains, if any, are distributed at least
once each year. The amount of distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from accounting principles generally accepted in
the United States. These "book/tax" differences are either temporary or
permanent in nature and are primarily due to losses deferred due to wash sales.
SECURITY TRANSACTIONS -- Security transactions are accounted for on trade date.
Cost of securities sold is determined on a specific identification basis.
ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
24
FEDERAL INCOME TAX -- It is the Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which the Fund so
qualifies and distributes at least 90% of its taxable net income, the Fund (but
not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
The tax character of distributions paid during the year ended June 30, 2002 was
long-term capital gains. There were no distributions during the year ended June
30, 2003.
The following information is computed on a tax basis for each item as of June
30, 2003:
- --------------------------------------------------------------------------------
Cost of portfolio investments .............................. $ 252,884,903
==============
Gross unrealized appreciation .............................. $ 54,300,323
Gross unrealized depreciation .............................. (22,325,845)
--------------
Net unrealized appreciation ................................ $ 31,974,478
--------------
Capital loss carryforwards ................................. (1,025,302)
Post-October losses ........................................ (8,574,276)
--------------
Total distributable earnings ............................... $ 22,374,900
==============
- --------------------------------------------------------------------------------
As of June 30, 2003, the Fund had a capital loss carryforward of $1,025,302
which expires June 30, 2011. In addition, the Fund had net realized capital
losses of $8,574,276 during the period November 1, 2002 through June 30, 2003,
which are treated for federal income tax purposes as arising during the Fund's
tax year ending June 30, 2004. The capital loss carryforward and "post-October"
losses may be utilized in future years to offset net realized capital gains, if
any, prior to distributing such gains to shareholders.
RECLASSIFICATION OF CAPITAL ACCOUNTS - For the year ended June 30, 2003, the
Fund reclassified its net investment loss of $762,312 against paid-in-capital on
the Statement of Assets and Liabilities. This reclassification, the result of
permanent differences between the financial statement and income tax reporting
requirements, has no effect on the Fund's net assets or net asset value per
share.
2. INVESTMENT TRANSACTIONS
During the year ended June 30, 2003, cost of purchases and proceeds from sales
and maturities of investment securities, other than short-term investments,
amounted to $64,345,485 and $80,862,085, respectively.
3. TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed by Oak Value Capital Management, Inc. (the
"Adviser") under the terms of an Investment Advisory Agreement. Under the
Investment Advisory Agreement, the Fund pays the Adviser a fee, which is
computed and accrued daily and paid monthly, at an annual rate of 0.90% of the
Fund's average daily net assets. Certain trustees and officers of the Trust are
also officers of the Adviser or of Ultimus Fund Solutions, LLC, the Fund's
administrator, transfer agent and fund accounting services agent. Such trustees
and officers receive no direct payments or fees from the Trust for serving as
officers.
ADMINISTRATION, TRANSFER AGENCY AND FUND ACCOUNTING AGREEMENTS -- During the
year ended June 30, 2003, BISYS Fund Services Ohio, Inc. (BISYS) served as the
administrator, transfer agent and fund accounting services agent for the Trust.
25
Under the terms of the Administration Agreement with the Trust, BISYS supplied
non-investment related statistical and research data, internal regulatory
compliance services and executive and administrative services for the Fund.
BISYS supervised the preparation of tax returns, reports to shareholders of the
Fund, reports to and filings with the Securities and Exchange Commission and
state securities commissions, and materials for meetings of the Board of
Trustees. For these services, BISYS received a monthly fee based on the Fund's
average daily net assets. Accordingly, during the year ended June 30, 2003,
BISYS was paid $94,702 for administrative services.
Under the terms of the Transfer Agency Agreement with the Trust, BISYS
maintained the records of each shareholder's account, answered shareholders'
inquiries concerning their accounts, processed purchases and redemptions of the
Fund's shares, acted as dividend and distribution disbursing agent and performed
other shareholder service functions. For these services, BISYS received a
monthly fee based on the number of shareholder accounts in the Fund. In
addition, the Fund reimbursed BISYS for out-of-pocket expenses including, but
not limited to, postage and supplies. Accordingly, during the year ended June
30, 2003, BISYS was paid $201,244 for transfer agent fees.
Under the terms of the Fund Accounting Agreement with the Trust, BISYS
calculated the daily net asset value per share and maintained the financial
books and records of the Fund. For these services, BISYS received a monthly fee
based on the Fund's average daily net assets. In addition, the Fund paid certain
out-of-pocket expenses incurred by BISYS in obtaining valuations for the Fund's
portfolio securities. Accordingly, during the year ended June 30, 2003, BISYS
was paid $46,192 for fund accounting services.
Effective July 1, 2003, the Administration, Transfer Agency, and Fund Accounting
Agreements with BISYS were terminated and similar agreements were entered into
with Ultimus Fund Solutions, LLC.
4. BANK LINE OF CREDIT
The Fund has an unsecured $25,000,000 bank line of credit. Borrowings under this
arrangement bear interest at a rate determined by the bank at the time of
borrowing. During the year ended June 30, 2003, the Fund had no outstanding
borrowings under the line of credit.
26
INDEPENDENT AUDITORS' REPORT
================================================================================
To the Shareholders and Board of Trustees
of the Oak Value Fund of the Oak Value Trust:
We have audited the accompanying statement of assets and liabilities of the Oak
Value Fund, (the "Fund"), a series of the Oak Value Trust, including the
schedule of investments, as of June 30, 2003, and the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the two years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the periods ended June 30, 2001, June 30, 2000, and June 30, 1999
were audited by other auditors whose report, dated August 3, 2001, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2003, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Oak Value Fund as of June 30, 2003, the results of its operations for the year
then ended, and the changes in its net assets and financial highlights for each
of the two years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 8, 2003
27
TRUSTEES AND OFFICERS
================================================================================
OFFICERS AND INTERESTED TRUSTEES. The table below sets forth certain information
about each of the Trust's Interested Trustees, as well as its executive
officers.
- -----------------------------------------------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Position(s) Office; Term in Fund Directorships1
Held with Served in Principal Occupation(s) Complex Held by
Name, Address, and Age Trust Office During Past 5 Years Overseen Trustee
- -----------------------------------------------------------------------------------------------------------------------
Larry D. Coats, Jr.* President Indefinite; For more than the past five 1 None
3100 Tower Blvd. Since: years, Mr. Coats has been
Suite. 700 July 2003 Executive Vice President
Durham, NC 27707 and Portfolio Manager with
Age: 43 Oak Value Capital
Management, Inc.
- -----------------------------------------------------------------------------------------------------------------------
Matthew F. Sauer* Trustee and Indefinite; For more than the past five 1 None
3100 Tower Blvd. Vice President Since: years, Mr. Sauer has been
Suite 700 February 2002 Senior Vice President, Director
Durham, NC 27707 of Research and Portfolio
Age: 41 Manager with Oak Value
Capital Management, Inc.
- -----------------------------------------------------------------------------------------------------------------------
Robert G. Dorsey Vice President Indefinite; Managing Director of Ultimus 1 None
135 Merchant Street Since: Fund Solutions, LLC and
Suite 230 July 2003 Ultimus Fund Distributors,
Cincinnati, OH 45246 LLC; prior to March 1999,
Age: 46 President of Countrywide
Fund Services, Inc.
- -----------------------------------------------------------------------------------------------------------------------
Mark J. Seger Treasurer Indefinite; Managing Director of Ultimus 1 None
135 Merchant Street Since: Fund Solutions, LLC and
Suite 230 July 2003 Ultimus Fund Distributors,
Cincinnati, OH 45246 LLC; prior to March 1999, First
Age: 41 Vice President of Countrywide
Fund Services, Inc.
- -----------------------------------------------------------------------------------------------------------------------
John F. Splain Secretary Indefinite; Managing Director of Ultimus 1 None
135 Merchant Street Since: Fund Solutions, LLC and
Suite 230 July 2003 Ultimus Fund Distributors,
Cincinnati, OH 45246 LLC; prior to March 1999, First
Age: 46 Vice President and Secretary
of Countrywide Fund
Services, Inc. and affiliated
companies.
- -----------------------------------------------------------------------------------------------------------------------
* Messrs. Coats and Sauer may each be deemed to be an "interested person," as
defined by the 1940 Act, because of their employment with Oak Value Capital
Management, Inc., the investment adviser to the Trust.
1 Directorships held in (1) any other investment companies registered under the
1940 Act, (2) any company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or (3) any company subject to the requirements of Section 15(d) of the
Exchange Act.
28
INDEPENDENT TRUSTEES. The following table sets forth certain information about
the Trust's Independent Trustees.
- -----------------------------------------------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Position(s) Office; Term in Fund Directorships1
Held with Served in Principal Occupation(s) Complex Held by
Name, Address, and Age Trust Office During Past 5 Years Overseen Trustee
- -----------------------------------------------------------------------------------------------------------------------
C. Russell Bryan Trustee Indefinite; Director of Brookwood 1 None
112 Tryon Plaza Since: Associates, L.L.C. (an invest-
Suite 1500 May 1995 ment banking firm); prior to
Charlotte, NC 28284 April 1999, Principal with
Age: 43 NationsBanc Montgomery
Securities, Inc. (an investment
banking firm).
- -----------------------------------------------------------------------------------------------------------------------
John M. Day Trustee Indefinite; For more than the past five 1 None
5151 Glenwood Ave. Since: years, Mr. Day has been
Raleigh, NC 27612 May 1995 Managing Partner, Maynard
Age: 49 Capital Partners (an
investment firm).
- -----------------------------------------------------------------------------------------------------------------------
Joseph T. Jordan, Jr. Trustee Indefinite; For more than the past five 1 None
1816 Front Street Since: years, Mr. Jordan has served
Suite 320 May 1995 as the President of Practice
Durham, NC 27705 Management Services, Inc. (a
Age: 57 medical practice management
firm).
- -----------------------------------------------------------------------------------------------------------------------
Charles T. Manatt, Esq. Trustee Indefinite; Founder, Manatt, Phelps & 1 None
1501 M Street, NW Since: Phillips, L.L.P. (a law firm);
Suite 700 February 2002 from 1999-2001, served as
Washington, DC 20005 U.S. Ambassador to the
Age: 67 Dominican Republic.
- -----------------------------------------------------------------------------------------------------------------------
1 Directorships held in (1) any other investment companies registered under the
1940 Act, (2) any company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or (3) any company subject to the requirements of Section 15(d) of the
Exchange Act.
The Statement of Additional Information ("SAI") includes additional information
about the Trust's directors and officers. To obtain a copy of the SAI, without
charge, call (800) 622-2474.
29
OAK VALUE FUND
INVESTMENT ADVISER
Oak Value Capital Management, Inc.
3100 Tower Boulevard, Suite 700
Durham, North Carolina 27707
1-800-680-4199
www.oakvaluefund.com
ADMINISTRATOR
Ultimus Fund Solutions, LLC
135 Merchant Street, Suite 230
Cincinnati, Ohio 45246
INDEPENDENT AUDITORS
Deloitte & Touche LLP
155 East Broad Street
Columbus, Ohio 43215
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
BOARD OF TRUSTEES
C. Russell Bryan
John M. Day
Joseph T. Jordan, Jr.
Charles T. Manatt
Matthew F. Sauer
OFFICERS
Larry D. Coats, Jr., President
Matthew F. Sauer, Vice President
Robert G. Dorsey, Vice President
Mark J. Seger, Treasurer
John F. Splain, Secretary
This report is for the information of the shareholders of the Oak Value Fund. It
may not be distributed to prospective investors unless it is preceded or
accompanied by the current fund prospectus.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge
upon request by calling toll-free 1-800-622-2474, or on the Securities and
Exchange Commission's website at http://sec.gov.
ITEM 2. CODE OF ETHICS.
Not required
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required
ITEMS 5-6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not required
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial officer
have concluded that the registrant's disclosure controls and procedures (as
defined in Rule 301-2(c) under the Investment Company Act of 1940) are effective
based on their evaluation of these controls and procedures as of a date within
90 days of the filing date of this report.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2 under the Act (17
CFR 270.30a-2): Attached hereto
Exhibit 99.CERT Certifications pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Oak Value Trust
-------------------------------------------------------------------
By (Signature and Title)* /s/ Larry D. Coats, Jr.
-----------------------------------------------------
Larry D. Coats, Jr., President
Date August 29, 2003
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Larry D. Coats, Jr.
-----------------------------------------------------
Larry D. Coats, Jr., President
Date August 29, 2003
-------------------------
By (Signature and Title)* /s/ Mark J. Seger
-----------------------------------------------------
Mark J. Seger, Treasurer
Date August 29, 2003
-------------------------
* Print the name and title of each signing officer under his or her signature.