QSV is proud to note that its Quality Value Smallcap Strategy has attained a three-year track record as of June 30, 2020 with performance that outpaced both relevant indexes. Additional information and since-inception performance for each of the strategies may be found at www.qsvequityinvestors.com.

QSV Strategy Performance

After a positive start in 2020, markets experienced a long-awaited correction during March. Each correction in history is different, but this time is quite unlike the last, the financial crisis of 2008, due to its combination of the COVID-19 pandemic, Saudi/Russia oil trade wars, supply and demand shocks and the swift fall marked by days of sharp volatility. While monetary and fiscal stimulus levers have been pulled and there may be more such levers to activate, stemming the pandemic itself and the protecting the health of our people must be addressed in order to fully restart the markets and the economy.

During the quarter, the three QSV Equity Investors strategies performed to our expectations, protecting clients’ and our own assets from the full impact of the drop experienced by their respective benchmarks. This downside protection reflects QSV insistence on holding high quality businesses purchased at reasonable valuations. Performance was further aided by reductions we made among the cyclical holdings of the strategies during late 2019.

The QSV Quality Value Smallcap Strategy produced a return before fees of (26.11%) and net of fees of (26.30%), outperforming the Russell 2000 Value and Russell 2000 Indexes returns of (35.66%) and (30.61%), respectively.  Security selection detracted from performance in the Consumer Defensive and Technology sectors while adding value in all other sectors for the quarter.

Quality Value Smallcap Top Contributors

 The top contributors to performance for the quarter, Simulations Plus, Inc. (SLP) and Emergent Biosolutions, Inc. (EBS), each had tailwinds provided by their work in solving the COVID-19 crisis.

Simulations Plus produces software and provides consulting analytics for use in drug discovery. SLP is approaching a 20% market share of the pharmaceutical, biotechnology, and generic companies that would be potential users of its software and consulting services. During the quarter, SLP introduced its StrategiesPlus COVID-19 ACT Program to aid researchers in their fight against the global coronavirus pandemic. This program is designed to help speed pharmaceutical research and accelerate the process of regulatory approval, contributing to resolving the COVID-19 pandemic.

Emergent BioSolutions Inc. is a leading maker of vaccines and other products that address public health threats. The company is a leading biodefense contractor, driven by sales of anthrax and smallpox vaccines and other biodefense product offerings. In mid-March, EBS announced that it has entered into a collaboration agreement with Novavax, Inc. to support the development of a vaccine candidate to protect against COVID-19. Emergent BioSolutions has started preparations for this program and anticipates that the COVID-19 vaccine candidate can be used in a phase I study within the next four months.

Quality Value Smallcap Top Detractors

 Top detractors from performance were Allied Motion Technologies, Inc. (AMOT) and Oil States International, Inc. (OIS).

Allied Motion Technologies fell during the quarter on fears of slower growth in its end markets that include automotive, industrial, medical, aerospace and defense. The company is a leading provider of motion control products to both original equipment manufacturers and end users. QSV believes that AMOT is in the early innings of a growth trajectory based on its new strategy targeting multi-product motion solutions, rather than just components, complemented by accretive acquisitions. Such an acquisition was made during the quarter with the purchase of Dynamic Controls, a subsidiary of Invacare Corporation. AMOT delivers high single digit Returns on Invested Capital and it shares are currently at a significant discount to QSV estimate of fair value.

Buffeted by the combination of the Saudi/Russia price war, COVID-19 demand destruction and the likelihood of exploration and production companies cutting budgets, shares of Oil States International fell sharply during the quarter. Risks to the business include its leverage to the number of new wells completed in the U.S. and the sensitivity of its end markets to volatile energy prices. While keenly aware of those risks, QSV recognizes that the barriers to entry for competitors are high, supporting the high margin, market-leading products OIS supplies through its Well Site Services, Downhole Technologies and Offshore/Manufactured Products divisions. We took advantage of the weakness in share price to add to OIS.

Quality Value Smallcap Additions

QSV took advantage of the Q1 2020 sell-off by adding a new position in Watts Water Tech Inc. (WTS), a high-quality cyclical provider of safety, energy efficiency, and water conservation products.  Also added was Core Laboratories (CLB), which we had sold late in 2019 as we reduced our cyclical exposure, and department store operator Kohl’s Corp. (KSS). Kohl’s stores are currently closed due to COVID-19 and its business faces many challenges, but KSS is one of the few retailers to deliver positive free cash flow and has been buying back 4-5% of its stock each year. We believe it will benefit as competitors struggle during the downturn.

The QSV Quality Value Midcap Strategy produced a return before fees of (21.50%) and net of fees of (21.69%), outperforming the Russell Mid Cap Value and Russell Mid Cap Indexes returns of (31.71%) and (27.07%), respectively.  Security selection detracted from performance in the Energy and Consumer Defensive sectors while adding value in all other sectors for the quarter.

Quality Value Midcap Top Contributors

 Top contributors to performance for the quarter were MSCI, Inc. (MSCI) and Masimo Corporation (MASI).

The rise in indexing of investment portfolios has created a booming business for providers of the indexes, themselves, including MSCI.  Asset-based fees from its index business continue to be a driver of revenue growth.  The company benefits from a strong brand and high switching costs, as many ETFs, mutual funds and hedge funds use MSCI indexes.  This represents a steep challenge for rivals that is unlikely to be surmounted. Additionally, MSCI offers Environmental, Social and Governance ratings that stand as an impressive source of growth.  MSCI currently has strong operating margins of 42% and Returns on Invested Capital of 21%.

Masimo Corporation is a medical technology company that develops, manufactures and markets a range of non-invasive patient monitoring technologies. The company benefits from a narrow moat supported by switching costs for its clients. MASI is currently active in efforts to tackle the COVID-19 crisis and has adapted its SafetyNet technology to provide secure cloud-based solutions to monitor and report the temperature, respiration rate, and oxygen saturation of home-based COVID-19 patients to patient surveillance platforms. MASI generates strong financial performance as reflected in Returns on Invested Capital of 20%.

Quality Value Midcap Top Detractors

 Leading detractors from performance during the quarter were Oil States International, Inc. (OIS), which was discussed above, and Euronet Worldwide, International (EEFT).

While classified as a Technology company, EuroNet Worldwide shares fell along with their financial services clientele during the quarter. EEFT is a leading provider of electronic payment and transaction processing solutions for financial institutions, retailers, service providers and individuals, operating through its EFT Processing, Epay and Money Transfer segments. Sentiment shifted against EEFT during the quarter as transaction volumes, particularly in money transfer, are sensitive to economic conditions and employment levels. QSV sees ownership of EEFT as attractive, given the strong operating performance of the company and a share price that is significantly below our view of fair value.

Quality Value Midcap Additions

QSV took advantage of the downturn to add Southwest Airlines (LUV), a higher quality cyclical company, to the Quality Value Midcap strategy. We also added Fair Isaac International (FICO), the ubiquitous provider of the FICO Score, the standard measure of consumer credit risk and provider of analytics software and tools used across multiple industries to manage risk, fight fraud and build profitable customer relationships. As in the Quality Value Smallcap Strategy, we added positions in Core Laboratories (CLB) and Kohl’s Corp. (KSS) and added to existing positions that had been hardest hit, including Vail Resorts (MTN). While heavily impacted by the correction, these are resilient businesses that we believe have the financial strength and durable competitive advantages to persist and add value for our clients.

BQV Select Value Strategy

 The QSV Select Value Strategy produced a return before fees of (21.14%) and net of fees of (21.34%), outperforming the Russell 2500 Value and Russell 2500 Indexes returns of (34.64%) and (29.72%), respectively.  Security selection detracted from performance in the Consumer Defensive sector, while adding value in all other sectors for the quarter.

Select Value Top Contributors

 As in the Quality Value Midcap strategy, the leading contributors to performance for the Select Value strategy during the quarter were MSCI, Inc. and Masimo Corporation, both of which were discussed above.

Select Value Top Detractors

Leading detractors from performance during the quarter were Euronet Worldwide, which was discussed above, and First Defiance Financial Corporation (FDEF).

Shares of First Defiance fell during the quarter along with its small bank peers. FDEF offers traditional banking services as well as property, casualty, life and group health insurance products to its clientele in Ohio, Michigan and Indiana. FDEF has a record as a solid, dependable financial institution capable of delivering better-than-peer profitability metrics. Cash has generally been used to pay dividends and buy back shares. During the quarter, FDEF completed the acquisition of its peer, Ohio-based United Community Financial Corp.

Select Value Additions

As in the Quality Value Midcap Strategy, QSV took advantage of the downturn to add Southwest Airlines (LUV) to the Select Value strategy. As in the Quality Value Smallcap and Midcap Strategies, we added positions in Core Laboratories (CLB) and Kohl’s Corp. (KSS).

Focused on the Long Term

When traveling through a market correction, experience in times of crisis matters. The QSV team has invested together for over twenty years. Deep experience and investing through many market cycles do not let us see into the future, but it does give us the wisdom to stand by our convictions and appreciate the range of potential outcomes that exist. In the best case, we are back to business in the U.S. within a matter of weeks, full employment resumes and the economy is back to normal in a few months. In the worst case, unemployment rises significantly, demand shocks persist, and we wade through a deep recession.

Regardless of when the COVID-19 crisis is contained, there is no way that our lives will resume as if this had never happened. Nor will companies conduct their business precisely as they did in the past. Viewing the changing world through this lens, we remain confident that our emphasis on quality businesses offers an excellent array of solutions for investors in small and mid-cap equities. Businesses that possess strong balance sheets, stable and growing cash flows and high returns on invested capital are best positioned to adapt to these challenging times, and to endure and generate wealth for our clients.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors.  Gross returns are calculated net of trading fees.  All dividends are assumed to be reinvested.  The returns of the BQV Midcap Strategy are compared to the historical performance of the Russell Midcap Indices as they are widely used benchmarks for mid capitalization securities.  The returns of the BQV Smallcap Strategy are compared to the historical performance of the Russell 2000 Indices as they are widely used benchmarks for small capitalization securities. The returns of the QSV Select Value Strategy are compared to the historical performance of the Russell 2500 Indices as they are widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors (BEM) should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices.  Market conditions vary between the BEM products and these indices.  Furthermore, these indices do not include any transaction costs, Investors fees and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss. ​

​

QSV Equity Investors, LLC is a registered investment advisor.  For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov​

The long running bull market was punctuated by a sharp correction in major U.S. markets last week, with uncertainty caused by the increasing spread of the COVID-19 outbreak. As often happens in such corrections, investors appeared to broadly sell risk assets in the early days followed by a more discriminate selling that hit stocks of lower quality businesses with greater impact.

What we believe:

Stocks entered 2020 at relatively high valuations and in the early weeks of the New Year headed higher still. Many investors were in search of a trigger to sell what was becoming an overbought market. Uncertainty brought about by the COVID-19 outbreak served as that trigger, causing some investors to head to the higher ground of U.S. Treasuries and other safe harbors. We face both a public health crisis and one that impacts the economy and the markets.

While it is difficult to say how the COVID-19 outbreak of 2020 will impact the global economy, we know that markets and supply chains are more global than they were in the SARS outbreak in 2003. China stands as the world’s largest exporter of merchandise and is firmly integrated into the global supply chain. U.S. small capitalization companies were more insulated during previous outbreaks than today; both the supply chains and demand from end markets for products of smaller companies will be impacted by our current crisis.

The Federal Reserve has limited ammunition to counter shocks such as the COVID-19 outbreak, but we believe there is a good chance it will cut rates to stimulate growth in the economy and calm investors. Chairman Jerome Powell issued a statement to reassure investors on Friday noting the “evolving risk” that exists to economic activity and how the Fed would “act as appropriate to support the economy.”

Where we maintain our focus:

QSV remains concentrated on its beliefs that company fundamentals matter and quality businesses serve long term investors well. Many well-known companies have already issued guidance that near-term sales results will be impacted by disruptions due to the COVID-19 and more announcements of this type will follow in the coming weeks. High quality and low-quality businesses alike will be impacted in the near term, yet high quality companies have advantages that benefit them in challenging environments like the one we face today.

QSV continually monitors the business performance of its holdings; current market disruptions make that due diligence more critical. Squarely in the middle of the present challenges are QSV holdings in the technology sector such as Skyworks Solutions, Inc. (SWKS) and HollySys Automation Technologies (HOLI).

Skyworks, a key holding in the QSV Quality Value Midcap Strategy, is a leading developer and manufacturer of semiconductor chips for the mobile product industry and is a prime beneficiary of megatrends such as the 5G rollout, the internet of things and mobility. Risks include its heavy exposure to client Apple and intense competition in the radio frequency chip market, yet the company’s high returns on invested capital, absence of debt and reasonable stock valuation all stand as buffers to these threats as well as the near term disruptions from COVID-19.

HollySys, a Beijing-based holding in the QSV Quality Value Smallcap Strategy, is one of the major suppliers of process control systems and high-speed railway signaling systems in China and is benefitting from the long-term upcycle in China’s demand for industrial automation. Competitive advantages that include technology patents, brand recognition and its vast service network help to support mid-teens returns on invested capital. We believe these attributes and the reasonable valuation of HollySys stock make it a compelling holding.

The objective of QSV Equity Investors is to reward clients with performance that is above our benchmarks and peers over a full market cycle with less volatility, offering a smoother ride toward achieving each client’s investment goals. A key ingredient to providing this smoother ride is downside protection; falling less than the broader market in times such as we are currently experiencing. QSV discusses this in its white paper Volatility – A Key Hurdle in Building Long-Term Wealth and we have been successful in doing this, to-date, as is reflected in the up market and down-market capture data below.

We are confident that companies possessing strong balance sheets and high returns on invested capital supported by durable competitive advantages will provide the stability desired in the portfolios of long-term investors. Valuation – what we pay for shares in each company we own – plays a critical role in constructing portfolios of these businesses and is an important step in the QSV investment process.

While the market correction has been swift and the near-term is uncertain, we have seen each of the three QSV Quality strategies outperform to-date through Friday, February 28. Additionally, each strategy has bettered its respective benchmark for the first two months of 2020. Please visit www.qsvequityinvestment.com for additional information on QSV Equity Investors, its management team and our strategies.

Disclaimer:

 Up Market Capture and Down-Market Capture are calculated relative to the primary index for each strategy and is calculated from the inception date of each strategy. QSV Quality Value Smallcap Strategy is calculated against the Russell 2000 Value Index and its inception date was June 30, 2017. QSV Quality Value Midcap Strategy is calculated against the Russell Mid Cap Value Index and its inception date was June 30, 2016. QSV Select Value Strategy is calculated against the Russell 2500 Value Index and its inception date was July 6, 2017.

An investment with QSV Equity Investors (BEM) should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices.  Market conditions vary between the BEM products and these indices.  Furthermore, these indices do not include any transaction costs, management fees, and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss. ​

​QSV Equity Investors, LLC is a registered investment advisor.  For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov​

Stocks and other risk assets rallied into the year-end, aided by the Federal Reserve’s third cut in interest rates, diminished trade war fears, strong labor markets and resilient consumers. The rally lifted stocks broadly, and particularly lifted those of lower-quality, less profitable and more leveraged businesses, producing headwinds for the quality-biased QSV strategies. 2019 began with U.S. equities at reasonable valuations and, as a result of tepid earnings growth during the year, ended at more fully valued levels. Accordingly, the team at QSV Equity Management feels that selectivity and an emphasis on stable, quality companies purchased at reasonable valuations will be increasingly important in the year ahead.

QSV Strategy Performance

The QSV Quality Value Midcap Strategy produced a return before fees of 7.02% for the quarter, leading the Russell Mid Cap Value Index return of 6.02% while slightly lagging the Russell Mid Cap Index return of 7.05%. Security selection helped performance in the Financials and Real Estate sectors and detracted from performance in the Technology and Industrials sectors.

Quality Value Midcap Top Contributors

Skyworks Solutions, Inc. (SWKS) was the leading contributor to performance during the quarter as shares rose in recognition of strong operating performance, the anticipation of improved U.S.-China relations and growth prospects in the build-out of 5G networks. Skyworks is a leading supplier of radio frequency components to smartphone makers and other electronics manufacturers and benefits from the move to 5G as well as the need for its radio frequency chips in high-end 4G handsets. The company produces operating margins of 28% and Returns on Invested Capital of 21%.

Tiffany & Company (TIF) shares rose in anticipation of the company’s acquisition by LVMH. QSV has held shares of Tiffany since the inception of the Quality Value Midcap strategy due to the company’s strong aspirational brand and the pricing power it commands. With the share price reflecting its upcoming acquisition, QSV sold its position in Tiffany.

Quality Value Midcap Top Detractors

Energy services firm Core Laboratories (CLB) detracted from performance after management cut its Q4 2019 guidance, provided Q1 2020 guidance below the consensus and slashed its quarterly dividend to $0.25 from $0.55 starting in Q1 2020. These moves were in response to a sharper-than-expected slowdown in U.S. land activity during the fourth quarter, as well as slower-than-expected business from clients for large international and offshore projects in its Reservoir Description segment. While we agree with management’s decision to cut its dividend and preserve its balance sheet, it is unclear where we are in the current energy cycle or when we can expect to see CLB return to normalized levels of profitability. While we believe CLB to be a high-quality company, QSV decided to exit its position in the company during the quarter in favor of more attractive alternatives.

Self-storage provider Extra Space Storage (EXR) modestly detracted from performance. EXR is an excellent operator with 1500 properties in 38 states. Its size and scale give the company a significant cost advantage and market presence relative to its competitors. Shares fell in reaction to discounting that the company is doing to combat competitors’ supply in certain markets and the “arms race” that will result. While this discounting and the company’s increased marketing costs will impact net operating income in the near-term, we see EXR as well positioned to weather the challenges.

The QSV Quality Value Smallcap Strategy produced a return before fees of 5.24%, lagging both the Russell 2000 Value and Russell 2000 Indexes returns of 8.49% and 9.94%, respectively. Security selection detracted from performance in the Healthcare and Technology sectors, where biotechnology and semiconductor holdings in the indexes soared during the risk-on environment of the quarter.

Quality Value Smallcap Top Contributors

Allied Motion Technologies (AMOT) shares rose during the quarter as earnings growth exceeded analysts’ estimates. AMOT is a leading provider of motion control solutions to end markets including automotive, medical, aerospace and defense customers. Growth areas AMOT is targeting include robotics, material handling, and factory automation as it takes share and outgrows the broader motion control industry. QSV believes share of AMOT to be significantly discounted to the company’s fair value.

UFP Technologies (UFPT) shares increased as sales and income rose significantly over the prior year’s results, exceeding expectations. UFPT provides the supply-chain link between producers of raw foams, plastics, composites and natural fiber materials, as the company engineers and manufactures custom packaging, component and product solutions for the medical, automotive, aerospace, defense, industrial, electronics and consumer markets. The company benefits from high switching costs, primarily in its medical products division where it offers custom packaging solutions to medical device manufacturers.

Quality Value Smallcap Top Detractors

Ebix, Inc. (EBIX) shares detracted from performance as the company reported earnings below consensus estimates due to lower margins during the quarter. EBIX supplies on-demand infrastructure exchanges to the insurance, financial, and health care industries globally. Competitive advantages include high switching costs and high renewal rates in its legacy software business. The company has a 20+ year track record of creating shareholder value, heavy insider ownership, aggressive share repurchases, consistently strong capital allocation and a CEO taking his compensation in stock. With a growing business in India, EBIX also offers a pure play opportunity on the country through its U.S. listed shares.

Core Laboratories (CLB) Commentary on CLB is provided above.

The QSV Select Value Strategy produced a return before fees of 5.91%, lagging the returns of 7.06% and 8.52% for the Russell 2500 Value and Russell 2500 Indexes, respectively. Stock selection in the Financials and Real Estate sectors aided returns, while selection in the Technology and Consumer Defensives sectors detracted.

Select Value Top Contributors

Badger Meter, Inc. (BMI) is one of the largest water meter companies in the U.S. and competes effectively against much larger diversified companies in the international arena. BMI’s two largest competitors in the U.S. generate less than 15% of annual revenue from their water meter businesses. We expect that BMI’s market will continue to grow as countries replace old meters and install meters for the first time. Business performance has been strong, and the company has increased ROIC from 5% in 2001 to its current level of 12%.

The rise in indexing of investment portfolios has created a booming business for providers of the indexes, themselves, including MSCI, Inc. (MSCI). Asset-based fees have been a leading driver of revenue growth over the past several years as the extended bull market has unlocked the leverage potential of its index business. The company benefits from a strong brand and high switching costs, as many ETFs, mutual funds and hedge funds use MSCI indexes. This represents a steep challenge for rivals that is unlikely to be surmounted. Additionally, MSCI offers Environmental, Social and Governance ratings that stand as an impressive source of growth. MSCI currently has strong operating margins of 42% and ROIC of 21%.

Select Value Top Detractors

Core Laboratories (CLB) Commentary on CLB is provided above.

J&J Snack Foods Corp. (JJSF) shares were down modestly during the quarter as earnings missed consensus estimates and margins declined. QSV continues to see the company as a compelling opportunity, delivering 12% ROIC and selling at a reasonable valuation. JJSF is a leader and innovator in the snack food industry, providing affordable branded niche snack foods and beverages to foodservice and retail supermarket outlet. Strong brands stand as a competitive advantage for JJSF and include Superpretzel, Bavarian Bakery, ICEE and Slush Puppie frozen beverages and Minute Maid frozen juice bars. JJSF has a 75% market share in soft pretzels at food service locations and a 90% share in retail supermarkets. Cash is used for dividends and share buybacks, but primarily for tuck in acquisitions. The company announced a 15% increase in its dividend in December 2019.

Outlook

Looking into 2020, there are many positives to consider including a global economy that seems to be on solid footing, a strong and supportive U.S. consumer and a strong labor market providing opportunities and earnings power for our workers. Points of concern in the economy and markets can be found, as well, including geopolitical tensions, U.S. trade and rising protectionism, weak global manufacturing, high levels of public and corporate debt, full asset valuations and muted expectations for investment returns. Adding to these concerns will be U.S. election year rhetoric and the likely volatility it will create.

Considering both positive and negative factors is inherent to QSV’s investment philosophy and seems very appropriate, given the current state of the economy, the market cycle and asset valuations. As we invest alongside our clients, we are confident doing so in quality business purchased at reasonable valuations. Selectivity is key. Our mission is to deliver a smoother ride in good markets and bad, offering participation in rising markets and smaller drawdowns when markets turn negative. QSV does this through deliberate analysis and long-term investment in companies exhibiting strong balance sheets, stable and growing cash flows and returns on invested capital well in excess of their costs of capital. We invite you to join us.

Disclaimer:

Returns are for the respective composites of QSV Equity Management. Gross returns are calculated net of trading fees. Net returns are calculated assuming the maximum advisory fee of 100bps is applied. All dividends are assumed to be reinvested. The returns of the BQV Midcap Strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the BQV Smallcap Strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Select Value Strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Management (BEM) should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the BEM products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss. QSV Equity Management, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov

The quarter ending September 30 saw modest returns in U.S. mid-cap stocks while returns of small cap indexes were slightly negative. The quarter included a brief, yet sharp, period in September where value stocks outperformed their growth counterparts, leading many to wonder whether the long-awaited leadership of value stocks might be at hand. We remain in one of the longest economic cycles without a recession, yet investors appear complacent about risks that include the trade war between U.S. and China, tensions in Iran, the Middle East and Russia, negative interest rates for significant segments of the credit market and slowing global growth. While a positive outlook by investors can be beneficial, a realistic look at these risks and an understanding that the easy money has been made is in order. That sense of realism has led QSV to lower its exposure to cyclical businesses and sell certain holdings where share prices had exceeded our estimates of intrinsic value.

The QSV Quality Value Midcap Strategy produced a return, before fees, of .69% for Q3 2019, lagging the Russell Mid Cap Value Index return of 1.22% while slightly ahead of the Russell Mid Cap Index return of .48%. Security selection added value in the Technology sector but detracted from performance in the Consumer Staples and Industrials sectors. An underweight in Real Estate companies also detracted.

Quality Value Midcap Top Contributors

The leading contributors to performance of the BEM Quality Value Midcap Strategy during the quarter were J&J Snack Foods Corporation and Tyler Technologies.

J&J Snack Foods (JJSF) is a leader and innovator in the snack food industry, providing affordable branded niche snack foods and beverages to foodservice and retail supermarket outlets. Its competitive advantage, in QSV’s view, is its branded food products such as Superpretzel, Bavarian Bakery and other soft pretzels, Icee and Slush Puppie frozen beverages and Minute Maid frozen juice bars. JJSF has a 75% market share in soft pretzels at food service locations and a 90% share in retail supermarkets.

Tyler Technologies (TYL) provides integrated technology and management solutions and services for public sector with a focus on local governments. Tyler’s Enterprise Software segment provides municipaland county governments and schools with software systems to meet their information technology and automation needs for mission-critical back-office functions such as financial management, courts and justice processes. Its Appraisal and Tax segment provides systems and software that automate the appraisal and assessment of real and personal property, as well as property appraisal outsourcing services for local governments and taxing authorities. High switching costs stand as Tyler’s competitive advantage; its business model is envious with recurring revenue growing 4-5% a year through pricing, a 98% customer retention rate and incremental margins in its subscription business of over 70%. While no business is truly recession proof, Tyler’s business model is likely as close as they come.

Quality Value Midcap Top Detractors

The leading detractors to performance of the BEM Quality Value Midcap Strategy during the quarter were Fluor Corporation and Cimarex Energy.

Fluor Corporation (FLR) Fluor is one of the world’s largest engineering, procurement, construction and maintenance companies, working with clients to design, construct and maintain their capital projects. Shares of Flour fell during the quarter after the company announced the results of its strategic review. Fluor plans to sell its government segment and construction equipment rental business Ameco, reduce overhead by $100 million, and cut the quarterly dividend to $0.10 from $0.21 per share. After consideration, QSV exited its position in Fluor as our investment thesis for the company had changed. Fluor had mispriced several contracts resulting in significant cost overruns which we believe will take several quarters to run off. QSV deployed the proceeds into other holdings showing share price weakness during the quarter.

Cimarex Energy (XEC) is an independent oil and gas exploration and production company with principal operations in the Permian Basin and Mid-Continent areas of the U.S. QSV believes XEC management to be good allocators of capital and has owned the company with the expectation of significant near-term cash flow growth supported by its superior assets, strong production growth and minimally levered balance sheet. Unfortunately, XEC was a victim of the energy cycle, with takeaway capacity out of the Permian Basin and natural gas differentials leading to a higher than expected rate of cash burn. A desire by QSV to reduce the exposure of the portfolio to cyclical holdings prompted us to sell our position in Cimarex, but this holding may be revisited in the future.

The QSV Quality Value Smallcap Strategy produced a return, before fees, of 3.34% for Q3 2019, well ahead of the (.58)% and (2.40)% returns, respectively, that were delivered by the Russell 2000 Value and Russell 2000 Indexes. Company selection helped performance, particularly in the Healthcare, Industrials and Energy sectors. An underweight in Real Estate companies detracted from returns. 

Quality Value Smallcap Top Contributors

Top contributors to the performance of the BEM Quality Value Smallcap Strategy were Cambrex Corporation and Computer Services, Inc. 

Cambrex Corporation (CBM) is a biotechnology company focused on developing and commercializing new and generic therapeutics. The company supplies its products and services worldwide to innovator and generic pharmaceutical companies. Cambrex’s portfolio growth strategy has a focus on the later stages of the clinical trial process. It also works to secure long-term supply agreements to produce active pharmaceutical ingredients and intermediates for newly approved drug products. Shares rose over 40% during the quarter following an announcement that Cambrex would be acquired by Permira, a global private equity firm that has made significant investments in the pharma services space.

Computer Services, Inc. (CSVI) is an “under the radar” provider of financial technology solutions and regulatory compliance software to banks, financial institutions and a variety of other industries nationwide. High switching costs in the heavily regulated markets served by CSVI result in high contract renewal rates of over 90%. Contracts between CSVI and many of its customers have long durations. As an example, customers of its NuPoint banking platform have average contracts extending eight years.Business performance has been consistently high, with returns on equity and returns on invested capital in excess of 20%. Record sales of the company’s core products, expansion into new geographic markets and higher cross-sales have boosted recent results.

Quality Value Smallcap Top Detractor

The greatest detractors to performance of the BEM Quality Value Smallcap Strategy during the quarter were MGP Ingredients, Inc. and Oil States.

MGP Ingredients, Inc. (MGPI) is a producer and supplier of premium distilled spirits and specialty wheat protein and starch food ingredients. MGPI was the leading detractor to performance in the quarter as shares fell 26% on the news of its quarterly results. Sales of aged, premium whiskey products were well below expectations. While this report was disappointing, QSV continues to hold MGPI and like it longterm as it expands its distribution channels and achieves distillery economies of scale. MGPI’s whiskeyheavy spirits mix has been growing around 7% which is about 2% higher than the industry average resulting in average returns on invested capital of 20%. Shares are trading at a significant discount to QSV estimate of fair value.

Oil States International, Inc. (OIS) provides specialty products and services to the drilling, completion, subsea, production and infrastructure sectors of the oil and gas industry. Oil State has three main divisions: Well Site Services, Downhole Technologies and Offshore/Manufactured Products, representing 43%, 22% and 35% of revenues, respectively. In its Downhole Technologies division, GEODynamics is a market leader in the sale of perforating charges, the explosives used to prepare the well for hydraulic fracturing. Due to the nature of the business, barriers to entry are high, which supports high margin products. A risk to the business is that the segment is levered to the number of new wells completed in the U.S.; overall the end markets of OIS are subject to volatile energy prices.

The QSV Select Value Strategy holds 30-50 small and mid-cap businesses in which our team has the highest conviction. The Strategy produced a return, before fees, of 1.75% for Q3 2019, exceeding the.13% and (1.28)% returns of the Russell 2500 Value and Russell 2500 Indexes, respectively. Company selection was a strong contributor to results, most notably in the Healthcare sector. Like QSV’s other strategies, the low relative weight to Real Estate companies detracted from returns.

Select Value Top Contributors

Top contributors to the performance of the BEM Select Value Strategy during the quarter were Cambrex Corporation (CBM) and J&J Snack Foods (JJSF), each of which is discussed above.

Select Value Top Detractors

The greatest detractors to performance of the BEM Select Value Strategy during the quarter were MGP Ingredients, Inc. (MGPI) and Cimarex Energy (XEC), each of which is discussed above. 

QSV Outlook

QSV seeks to add value for our investors over a full market cycle by playing strong defense when markets become volatile and participating in rising markets. While overused, the quote attributed to legendary coach Bear Bryant that “offense sells tickets, but defense wins championships” is one we take to heart each day, as we assess the potential for losses within our portfolio holdings. Quality businesses, purchased and owned at discounts to intrinsic value, help QSV play defense for our clients’ portfolios and our personal funds that we invest alongside them. Quality, represented by strong returns on invested capital supported by durable competitive advantages, also provides an element of offense. It generates strong and growing cash flows and stable and growing earnings. Quality is the foundation for returns on capital that capable leaders can reinvest into projects that earn yields in excess of the capital costs of the enterprise.

The QSV team believes that we are entering the sweet spot of the business cycle for our style of quality value investing. Late in the business cycle, we would expect more volatility; quality tends to shine when volatility is high as investors seek the stability these businesses offer. We are grateful to our clients and invite other like-minded investors to contact us if we may be of service.

Disclaimer:

Returns are for the respective composites of QSV Equity Management. Gross returns are calculated net of trading fees. All dividends are assumed to be reinvested. The returns of the BQV Midcap Strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities. The returns of the BQV Smallcap Strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Select Value Strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors (BEM) should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary between the BEM products and these indices. Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies and positions that are not included in these indices.

 No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov

Following the wild gyrations of the equity markets in late 2018 and first quarter of 2019, returns were
more modest during the quarter ending June 30, 2019. Each of the QSV Equity Investors strategies
exceeded its primary and secondary indexes during the quarter and we are pleased to note that the BEM
Quality Value Midcap strategy marked its three-year anniversary on June 30 with competitive
performance. More information including since-inception performance for each of the strategies may be
found at www.qsvequityinvestors.com.

QSV Strategy Performance

The QSV Quality Value Midcap Strategy produced a return, before fees, of 5.76% for Q2 2019,
exceeding both the Russell Mid Cap Value Index return of 3.19% and the Russell Mid Cap Index return of
4.13%. Notably, the Strategy’s three-year annualized performance of 12.76%, before fees, also surpassed
the returns of 8.96% and 12.15% for the Russell Midcap Value Index and Russell Midcap Index,
respectively. Security selection added value in several sectors; most impactful were holdings in Consumer
Discretionary, Materials, Financial Services and Technology.

Quality Value Midcap Top Contributors

The leading contributors to performance of the BEM Quality Value Midcap Strategy during the quarter
were Total System Services and Copart.

Total System Services (TSS) is a leader in payment processing services to banks and other financial
institutions. QSV believes the company benefits from high switching costs, with large price reductions
being necessary to incentivize a customer to change to one of its competitors and sustainability of growth
driven by a continued move to card payments. Its leadership position was heightened during the quarter
with the announcement of an all-stock “merger of equals” with competitor Global Payments (GPN). It is
anticipated that the merger will quickly be accretive, with mid-single-digit growth in earnings in 2020 and
low double-digit earnings growth in 2021 and thereafter.

Copart, Inc. (CPRT) is the largest player in the automotive salvage market duopoly, providing auction and
related services to approximately 40% of the North American market. Service revenues are generated
from fees earned from consignors (insurance companies and charities, primarily) and buyers (including
salvage yards, rebuilders, remanufacturers and scrap recyclers). Growth opportunities include the
expansion by CPRT into non-U.S. markets, including the U.K, where the company is the leading salvage
auctioneer, Brazil, Germany and the U.A.E. CPRT has a long history of generating real economic returns,
supported by its competitive moats, and delivers a robust 25% return on invested capital.

Quality Value Midcap Top Detractors

The leading detractors to performance of the BEM Quality Value Midcap Strategy during the quarter were
Core Laboratories and Waters Corporation.

Core Laboratories (CLB) is an oil-services company that helps oil and gas companies better understand
how to improve production levels and economics with core and reservoir analysis. The strategy of CLB is
to focus on high end energetics segment of the market (50% of CLB’s revenue in in its Production
Enhancement segment in 2018) while ceding share in the standard perforating gun market. Competitive
advantages include its intangible assets (patents, proprietary technology and human capital) and network
effects (multi-client reservoir studies). The cyclicality of the oil services business is a primary risk; that risk
was highlighted in the second quarter and impacted the stock price of CLB as worries heighted over
possible global economic slowdowns driven by potential tariffs and trade wars. QSV believes the
competitive advantages of CLB to be sound and shares are currently well below our estimate of fair value.

Waters Corporation (WAT) is a leading supplier of analytical instrumentation and consumable products
to pharmaceutical, life science, biochemical, industrial, academic and government customers. WAT
designs, manufactures, sells and services liquid chromatography equipment (70% of the business) where
it has a market leading position. It has a #3 position in the Mass Spectrometry market (20% of revenues)
and a #1 position in thermal analysis (10% of revenues). A large installed base of customers and high
switching costs stand as its primary competitive advantages. QSV believes these to be sustainable due
to the long upgrade cycles and superior technology of WAT. Capital spending by large pharmaceutical
companies is the greatest risk to WAT and recent political rhetoric has rattled many investors conviction
in health care stocks.

The QSV Quality Value Smallcap Strategy produced a return, before fees, of 4.48%, well ahead of the
1.37% and 2.10% returns, respectively, that were delivered by the Russell 2000 Value and Russell 2000
Indexes. Company selection helped performance, particularly in the Healthcare, Consumer Discretionary
and Technology sectors.

Quality Value Smallcap Top Contributors

Top contributors to the performance of the BEM Quality Value Smallcap Strategy were Computer Services,
Inc. and UniFirst Corporation.

Computer Services, Inc. (CSVI) is an “under the radar” provider of financial technology solutions and
regulatory compliance software to banks, financial institutions and a variety of other industries
nationwide. High switching costs in the heavily regulated markets served by CSVI result in high contract
renewal rates of over 90%. Contracts between CSVI and many of its customers have long durations. As
an example, customers of its NuPoint banking platform have average contracts extending eight years.
Business performance has been consistently high, with returns on equity and returns on invested capital
in excess of 20%. Record sales of the company’s core products, expansion into new geographic markets
and higher cross-sales have boosted recent results.

UniFirst (UNF) was founded in 1936 and is the second largest provider of rental uniforms in North
America, with a 6% market share. UNF will design, launder, service and deliver a customized garment to
a specific employee on a weekly basis and has a specialty uniform business handling nuclear and clean
room garments. Other services include servicing first aid cabinets and providing cleaning supplies. In
addition to its scale advantage, UNF management points to its corporate values, which include customer
focus, respect for others and a commitment to quality, as its source of competitive advantage. Returns
on invested capital stand at 8% and shares trade at a discount to QSV’s fair value.

Quality Value Smallcap Top Detractors

The greatest detractors to performance of the BEM Quality Value Smallcap Strategy during the quarter
were Kingstone Companies and Hollysys Automation Technologies.

Kingstone Companies (KINS) is the holding company for Kingstone Insurance Company, a provider of
property and casualty insurance to individuals and small businesses. The company has operated for over
125 years and has consistently earned an underwriting profit each year, including 2012 when results were
impacted by Hurricane Sandy. Risks to the business include such catastrophic events and its business
results and financial condition may vary significantly. Shares fell in the second quarter as the company
announced losses from multiple winter catastrophe events and the results of a claims review process that
resulted in a reserve charge. While impactful to financial results in the near term, these reserve charges
will strengthen the company’s balance sheet. Returns on invested capital are 10% and shares are
currently at a significant discount to QSV’s view of fair value.

Hollysys Automation Technologies (HOLI) is a leading supplier of process control systems for high-speed
railway signaling systems in China where 76% of the company’s sales are derived. Divisions of the business
are Industrial Automation, Rail Transportation and Mechanical and Electrical Solutions. HOLI is benefitting
from the long-term upcycle in China’s demand for industrial automation and its competitive advantages
include technology patents, brand recognition and its vast servicing network. A primary risk to the
company, a slowdown in Chinese growth, was highlighted in the most recent quarter, as fears of trade
wars rose. QSV continues to see a compelling opportunity, with HOLI producing strong free cash flows,
returns on invested capital of 13% and shares selling at a significant discount to fair value.

The QSV Select Value Strategy produced a return, before fees, of 6.72% for the second quarter,
exceeding the 1.90% and 2.96% returns of the Russell 2500 Value and Russell 2500 Indexes, respectively.
Company selection was a strong contributor to results, particularly within the Healthcare, Materials and
Consumer Discretionary sectors.

Select Value Top Contributors

Top contributors to the performance of the BEM Select Value Strategy during the quarter were Total
System Services and Broadridge Financial Solutions, Inc.

Total System Services (TSS) was discussed above in commentary for the BEM Quality Value Midcap
Strategy.

Broadridge Financial (BR) offers products for investor communications, securities technology and
operations outsourcing and is a critical intermediary between issuers and investors in the U.S. proxy
system. BR’s proxy voting service processes 95% of all publicly traded U.S. companies, as well as mutual
funds and ETFs, when those companies are held in “street name” and 72% of the shares voted outside the
U.S. Its Investor Communications Services (ICS) segment handles approximately two billion investor
communications annually. BR has considerable scale and its primary competitive advantage is high
switching cost sustained through recurring revenues that equal 60% of income. BR deploys cash for
buybacks, dividends and acquisitions; most recently the company announced the $300 million purchase
of RPM Technologies, a leading Canadian provider of wealth management software solutions and services.
Risks to the company include the regulation of fees the company may charge by industry overseers NYSE,
SEC and FINRA.

Select Value Top Detractors

The greatest detractors to performance of the BEM Select Value Strategy during the quarter were Core
Laboratories and MGP Ingredients, Inc.

Core Laboratories (CLB) was discussed above in commentary for the BEM Quality Value Midcap Strategy.

We cited MGP Ingredients, Inc. (MGPI) as a top contributor to performance of the BEM Select Value
Strategy in Q1 2019. Shares fell in this top 10 holding during Q2 2019, resulting in it being the second
greatest detractor to performance. MGPI is a manufacturer and distributor of food, beverage, specialty
wheat protein, and starch food ingredients, operating through two segments, Distillery Products and
Ingredient Solutions. MGPI’s alcohol products (whiskey, rye, bourbon, vodka) are produced for the
premium beverage market. MGPI’s whiskey-heavy spirits mix has been growing around 7% which is about
2% higher than the industry average resulting in average returns on invested capital of 20%. QSV
continues to hold MGPI and like it long-term as it expands its distribution channels, achieves distillery
economies of scale, and demonstrates continued success with its own brands of premium bourbon and
rye products. Risks include the lumpy nature of premium beverage sales and the costs of commodity
inputs to its products, such as corn and wheat flour. Shares are currently at a significant discount to
QSV’s estimate of fair value.

QSV’s Outlook

QSV offers no prediction on the direction of the markets over the coming quarter or year. Our team
does focus its efforts on building high conviction portfolios of quality businesses as we seek to reward
clients with performance that is above our benchmarks and peers over a full market cycle with less
volatility. We believe this is the best way to help clients meet their financial goals and for us to do the
same with our personal assets managed along-side. As we begin the third quarter of 2019, news sources
remind us that we are now in the longest (121 months!) economic expansion in U.S. history. Those same
sources report daily on the erratic behavior of short-term traders as they digest the latest news on tariffs,
trade wars, Fed policy and political machinations. Block out the noise. Focus on stable, quality companies
purchased at reasonable valuations. This remains our advice. We are grateful to our clients and invite
other like-minded investors to contact us if we may be of service.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors. Gross returns are calculated
net of trading fees. All dividends are assumed to be reinvested. The returns of the BQV Midcap Strategy
are compared to the historical performance of the Russell Midcap Indices as they are a widely used
benchmarks for mid capitalization securities. The returns of the BQV Smallcap Strategy are compared to
the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small
capitalization securities. The returns of the QSV Select Value Strategy are compared to the historical
performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization
securities. An investment with QSV Equity Investors (BEM) should not be construed as an
investment in a program that seeks to replicate, or correlate with, these indices. Market conditions vary
between the BEM products and these indices. Furthermore, these indices do not include any transaction
costs, management fees and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies
and positions that are not included in these indices.

No client or potential client should assume that any information presented should be construed as
personalized investment advice. Personalized investment advice can only be rendered after engagement
of the firm for services, execution of the required documentation, and receipt of required disclosures.
Investing carries risk of loss.

QSV Equity Investors, LLC is a registered investment advisor. For additional information about the
firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov

Jeff Kautz and Randy Hughes co-founded QSV Equity Investors in 2016. More important
to their clients may be the fact that they have invested together for over twenty years.
Previously, the two worked together at Perkins Investment Management, a subsidiary of Janus
Henderson Group, where Jeff held roles including Portfolio Manager, CEO and Chief Investment
Officer and Randy held the roles of Director of Research and Analytics and Equity Analyst.
Assets under management during Kautz’ and Hughes’ tenures at Perkins grew from $30 million
to over $20 billion at the peak.

Q: Jeff, you and Randy have invested together for more than 20 years, including your time
at Perkins. What qualities do you insist on building into the culture of your new firm, QSV 
Equity Investors?

A: (Kautz) Randy and I have worked in small, entrepreneurial firms and in large, publicly
traded companies. We believe the culture we are creating at QSV, a small, employee-owned
firm, is the best approach to align ourselves with the interests of our clients. We invest
significant sums of our own liquid investments alongside those of our clients and we focus our
efforts each day on building portfolios of quality businesses to meet the investment needs of
those clients. We love what we do and we’re here for the long term, without pressure to
deliver short-term business or investment results.

Q: Talk about your investment philosophy and process.

A: (Hughes) QSV Equity Investors holds an investment philosophy grounded in four
core beliefs. First, we believe that many small-cap companies are underfollowed by the
marketplace resulting in overlooked investment opportunities while mid-cap companies, albeit
more established than small caps, offer better prospects for growth than large-caps especially
when purchased at reasonable valuations. Second, we believe that investors often overpay for
stocks of low-quality, high-beta companies, overlooking opportunities in more stable, higher-
quality businesses. Third, we know that compounding is powerful; investors will build lasting
wealth through a strategy that protects during down markets and participates in rising markets.
Finally, we understand that patience is essential to investing success, but hard in practice.

A: (Kautz) QSV employs a research and screening process that includes four distinct steps:

1. QSV begins by charting the ratio of Enterprise Value to Invested Capital relative to the
Return on Invested Capital (ROIC) for a universe of 3000 small and mid-cap stocks. This is
done with the theory that an investor should be willing to pay more for a business that
earns high returns on invested capital. QSV considers those businesses whose stocks
appear to be undervalued and excludes those businesses that appear overvalued in this
analysis.

2. Next, we employ quantitative analysis that, we believe, is one way that QSV
differentiates itself from competitors. The team rates stocks in its universe according to
its proprietary Quality Rankings Model, using factors including leverage, interest
coverage, stable and growing cash flows and stable and growing Returns on Invested
Capital.

3. After ranking businesses using the Quality Rankings Model, QSV does considerable
qualitative analysis, focusing on those stocks that rank in the top two quintiles of its
universe. QSV believes strongly that high returns on capital are maintained and
defended through proven, durable competitive advantages, such as economies of scale,
strong intangible assets, high switching costs, network effects and cost advantages.
QSV professionals use a combination of proprietary research, third-party research,
regulatory filings and other publicly available company information to assess the
durability of competitive advantages for each business.

4. Strong quantitative scores from the Quality Rankings Model and durable competitive
advantages may result in a portfolio of well-performing, high-quality businesses, but
QSV strongly believes that valuation plays a vital role in successful investing. Team
members have used many valuation tools in their history of working together, but believe
that a calculation of economic profit considers the capital allocation decisions made by
business management and allows QSV to answer its primary question: “Does the
company create wealth for investors over time?”

Q: Has your process changed since your tenure at Perkins? If so, how?

A: (Hughes) At Perkins we always owned companies that had strong balance sheets, but
cheap valuation was the primary and foremost consideration. We were buying cheap companies
that had problems with the hope those problems would get fixed over time. At QSV, It’s not
enough to sift through cheap stocks in search of a good business; we want to begin with good,
high-quality businesses, supported by durable competitive advantages, and then have the
patience to invest in them when the market gives us the opportunity to buy at a discount to the
future economic profits that the company will produce. Warren Buffet always says that It’s far
better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Q: Your process focuses on quality companies and downside protection. Tell us about how
you feel these priorities work together?

A: (Hughes) Investing in quality businesses and our emphasis on downside protection work
together, without a doubt. There are many examples we could give, including looking into the
performance of businesses ranked by our own proprietary Quality Rankings. A quick answer,
though, is to look at the performance of the Russell 3000 Defensive index (to represent high
quality companies) versus the performance of the Russell 3000 Dynamic index (to represent
low quality companies). Between February 2007 and the end of March 2019, the high-quality
companies represented here dropped 3.3% in down markets, outperforming low quality
companies that fell, on average, 5.1%. Importantly, high quality companies, as represented by
the Russell 3000 Defensive index, have also outperformed lower quality (Russell 3000 Dynamic
index) companies over a full market cycle, with less risk. Indexes and quality measures aside,
we also believe we can mitigate risk through careful attention to valuation; only buying quality
businesses when we believe they are trading at discounts to the economic profits of those
companies.

Q: As a small team, how do you make portfolio decisions?

A: (Kautz) First a comment on the “small team” dynamic at QSV: Randy and I have worked
together for more than twenty years. We are a small team, yet the experience we each have in
researching and investing in small and mid-cap companies and the experience we have investing
together is significant. Investing is a craft where you can learn and get better over time and we
believe we have. We make decisions together, with full agreement, or we pursue other
opportunities where we can reach consensus.

Q: Where should an investor position your strategies in their portfolios?

A: (Hughes)We insist on owning quality businesses and seek to buy their stocks at a
discount. We are value investors. That said, we are not deep discount value managers and,
due to our conviction in the businesses, some of the stocks we own may trend toward the
growth style over the time we own them. It’s fair to consider us as a relative value manager
and we can serve as the “QSV” in a client’s portfolio that also holds a more aggressive growth
manager. We also can serve as a complement to a deep discount manager on the value side of
the menu.

Q: What else should investors know about you and QSV?

A: (Kautz) We enjoy working together and love what we do. The independent, employee-
owned structure of our firm permits us to be patient and take the long view, both with respect
to our investment portfolios and with our business decisions. We know that our clients have
many options when they seek out investment firms and we’re grateful to work for them.

Disclaimer

No client or potential client should assume that any information presented should be construed
as personalized investment advice. Personalized investment advice can only be rendered after
engagement of the firm for services, execution of the required documentation, and receipt of
required disclosures. Investing carries risk of loss.

QSV Equity Investors, LLC is a registered investment advisor. For additional information
about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov

Russell US Stability IndexesTM are style-based benchmarks that offer more detail and specificity
for investors, and adds a third dimension to the Russell US Style Indexes, independent from other
definitions of style (i.e. growth and value). The indexes measure a portion of the market based
on the sensitivity to economic cycles, credit cycles, and market volatility, referred to as stability.
Stability is measured at the company level in terms of volatility (price and earnings), leverage,
and return on assets. The more stable half of the index is called the Defensive Index® and the
less stable half is called the Dynamic Index®.

Market Overview

U.S. equity returns rebounded sharply in the first quarter of 2019.  Growth stocks outperformed value stocks and smaller companies generally outperformed the stocks of large-cap companies.  Within every equity style and size, low-quality stocks, as ranked by Standard & Poor’s Quality Rankings, sharply outperformed high-quality stocks.  An important step in the QSV Equity Investors investment process is our Quality Rankings model.  This proprietary tool considers factors including financial leverage, interest coverage, stable and growing earnings, high operating margins, and stable and growing returns on invested capital.  QSV’s proprietary rankings show a similar underperformance by high-quality stocks in the first quarter, following significant out performance by high-quality stocks in the downdraft of Q4 2018. 

According to our Quality Rankings, high quality stocks underperformed low quality stocks by 3.93% during the quarter.  It should be noted that high-quality stocks outperformed low-quality stocks by 5.72% during the Q42018 market selloff.   During the entire 6 months (9/30/2018 – 3/31/2019) high-quality outperformed low-quality stocks by a positive 5.24% on average, based upon QSV’s Quality Rankings model, demonstrating the importance of owning high quality companies this late in the business cycle.    

QSV Strategy Performance

After producing strong outperformance in the market’s late 2018 downturn, QSV delivered strong absolute returns in the first quarter of 2019, yet each of its strategies lagged its respective indexes.  More information including since-inception performance for each of the strategies may be found at www.qsvequityinvestors.com.

A cornerstone of QSV’s investment philosophy is its insistence on investing our own and our clients’ capital in the stocks of high-quality businesses, as defined by high returns on invested capital (ROIC) sustained through proven and durable competitive advantages.  Further, we will only invest in those businesses after a careful assessment of the downside risk, believing that the combination of quality and reasonable valuations maximizes compounding of wealth and provides a smoother ride through full market cycles.

The QSV Quality Midcap Strategy produced a return, before fees, of 13.7% in the first quarter of 2019.  While attractive on an absolute basis, this performance lagged the returns of 16.5% and 14.4% of its benchmarks, the Russell Midcap Index and Russell Midcap Value index, respectively. 

Quality Midcap Top Contributors

QSV holding Xilinx, Inc. (XLNX) was the top contributor to performance during the quarter.  Xilinx is a leading provider of programmable logic devices (PLD) to clients in the data storage, military, industrial, automotive and wireless industries.  Familiarity with the tools and software necessary to program the company’s devices lead to high customer switching costs, a distinct competitive advantage.  Xilinx, being one of the only two PLD players in the industry, exhibits strong ROIC of 16% and high operating margins of 30% plus.  QSV has recently trimmed the holding into strength, but it continues to remain a core holding as we see 5G wireless product growth continuing for several more years.

QSV holding MSCI Inc. (MSCI) was also a top contributor to performance.  MSCI, Inc. engages in the provision of investment decision support tools, including indices, portfolio risk and performance analytics, and corporate governance products and services.   MSCI was added as a new portfolio position during the 2018 year-end market selloff.  Asset-based fees have been a leading driver of revenue growth over the past several years as the extended bull market has unlocked the leverage potential of its index business. We believe MSCI has strong competitive advantages due to its well-known MSCI branded products which ETF, mutual fund, and hedge fund managers utilize to benchmark their investment performance.  Once a manager has decided on a specific index, it typically does not swap it out for an alternative.  This creates significant switching costs and generates recurring subscription-based revenues evidenced by ROIC of 12% and operating margins north of 40%.  We believe these competitive advantages are sustainable well into the future and view MSCI as a long-term core position.

Quality Midcap Top Detractors 

Healthcare Services Group, Inc. (HCSG) was the greatest individual detractor to performance during the first quarter of 2019 as many nursing homes (HCSG’S end customers) have run into financial difficulties.  Healthcare Services Group, Inc. provides management, administrative and operating services to the housekeeping and dietary services departments of the healthcare industry. The company services approximately 3,700 nursing homes, 50 hospitals and 50 alternate healthcare delivery sites in 47 states.  While these numbers are significant, the opportunity for growth is compelling; the AHCA estimates that there are about 23,000 long-term and post-acute care facilities (skilled nursing facilities) in the US and outsourcing revenue generated by HCSG and its peers approximates just 11% of the $27 billion long-term care market.  Business performance of Healthcare Services Group is strong, as evidenced by ROIC of 19%.  Taking advantage of the weakness, we added to our position as we believe the company’s shares sell at a significant discount to QSV’s estimate of fair value.   

Integrated Device Technology Inc. (IDTI) was a detractor during the quarter only because it has hovered around its $49 takeout price all while the market rebounded sharply.  IDTI is in the process of being acquired by Renesas Electronics Corp. (TSE: 6723) for $6.3 billion in cash. Under the terms announced in September 2018, shareholders of Integrated Device Technology Inc will receive $49 in cash for each share held, representing a 29.5% premium over the closing stock price of Integrated Device Technology Inc. on August 30, 2018.   IDTI was a significant contributor to performance in 2018 and was eliminated during the first quarter of 2019 as it achieved long-term tax status.  

The QSV Quality Smallcap Strategy produced a return, before fees, of 10.8% in the quarter, lagging the 14.6% and 11.9% returns of its respective benchmarks, the Russell 2000 and Russell 2000 Value. 

Quality Smallcap Top Contributors

Summit Financial Group, Inc. (SMMF) was the greatest individual contributor to performance during the quarter as many of our financials rebounded as fears of margin compression due to a flattening yield curve subsided.  Summit is a $2.2 billion financial holding company headquartered in Moorefield, West Virginia. Summit provides community banking services primarily in the Eastern Panhandle and Southern regions of West Virginia and the Northern, Shenandoah Valley and Southwestern regions of Virginia through its bank subsidiary, Summit Community Bank, Inc., which operates 33 locations.  Summit also operates Summit Insurance Services, LLC, and recently closed the acquisition of West Virginia-based Peoples Bankshares, Inc. on 1/1/19.   We continue to like Summit long-term as it has a strong return on tangible common equity of 16%, a high net interest margin of 3.6%, and trades at a reasonable 1.7x price to tangible common equity.     

Another top contributor in the quarter was John B. Sanfilippo & Son, Inc. (JBSS).  JBSS is one of the largest and most efficient processors of private-label nuts in the U.S.  JBSS retains crop specialists who work hand in hand with select growers helping the company better forecast macro and microeconomic trends in the industry. With this information, JBSS can generate a more effective pricing strategy for walnuts, peanuts and pecans based upon anticipated pricing pressure from farmers.  No competitor has the depth of involvement along the supply chain as JBSS giving it a distinct competitive advantage over competitors.  The Fisher name, its biggest brand, claims considerable brand equity with consumers also giving it a strong advantage over smaller competitors.  We continue to like JBSS as it has grown its returns on invested capital to over 12% and believe this will continue as it expands into healthier snacks such as Orchard Valley Harvest and new product offerings from its recently acquired Squirrel and Southern Style Nuts brands.   

Quality Smallcap Top Detractors

Allied Motion Technologies, Inc. (AMOT), a global provider of motion control products and solutions, was a detractor in the quarter as one-time inventory adjustments at a few major customers hurt results.  We continue to like AMOT as order activity and backlog levels remain strong with a book to bill above 1 during the quarter.   We believe AMOT can increase its returns on invested capital from its current level of 9% as it expands its multi-product motion solutions offerings (rather than just components) by targeting the robotics, material handling, and factory automation industries. QSV recently added to the position at these depressed valuations as we believe its new strategy will bear fruit over time. 

AMN Healthcare Services, Inc. (AMN), a provider of healthcare workforce solutions and staffing services to healthcare facilities, was a detractor in the quarter.  The company operates through the following segments: Nurse and Allied Solutions, Locum Tenens Solutions, and Other Workforce Solutions.   The recent weakness in share price is primarily due to a greater than planned disruption from operating process changes and technology upgrades after it moved its Locums Tenens business to a new technology platform. Its nurse and allied segments have also been weak due to lower utilization rates from a large client.  QSV continues to hold AMN as favorable demographics and a shortage of skilled healthcare workers has driven its Returns on Invested Capital north of 14%.  Nonetheless, AMN remains on QSV watch list as we have been disappointed by some missteps by management.  We have trimmed the position over the last year at higher levels and continue to wait for business improvement before we add to the name. 

The QSV Select Value Strategy produced a return, before fees, of 14.38% in the quarter, lagging the 15.82% return of the Russell 2500 Index, but exceeding the 13.12% return of the Russell 2500 Value Index. 

Select Value Top Contributors

Xilinx, Inc. (XLNX) (discussed above)

MGP Ingredients, Inc. (MGPI), a manufacturer and distributor of food, beverage, specialty wheat protein, and starch food ingredients, was a top contributor to performance in the quarter.  MGPI operates through two segments; Distillery Products and Ingredient Solutions. Its Distillery Products segment consists of food grade alcohol and distillery co-products, such as distillers feed and fuel grade alcohol. The Ingredient Solutions segment produces and distributes wheat starches and wheat proteins. MGPI’s alcohol products (whiskey, rye, bourbon, vodka) are produced for the premium beverage market.  MGPI’s whiskey-heavy spirits mix has been growing around 7% which is about 2% higher than the industry average resulting in average returns on invested capital of 20%.  QSV continues to hold MGPI and like it long-term as it expands its distribution channels, achieves distillery economies of scale, and demonstrates continued success with its own brands of premium bourbon and rye products.    

Select Value Top Detractors

AMN Healthcare Services, Inc. (AMN) (discussed above)

Emergent BioSolutions Inc. (EBS) focuses on protecting and enhancing life by providing specialty products for civilian and military populations that address accidental, intentional and naturally emerging public health threats.   EBS is a leading biodefense contractor, driven by sales of anthrax vaccines and other biodefense product offerings.  The stock was a detractor in the first quarter of 2019 as some follow-on U.S. government contracts were smaller than anticipated.  We recently added to the name and continue to like its leading position in the industry. Its products must get FDA approval which helps to limit new entrants.  In addition, the shelf life for anthrax vaccine is only 4 years resulting in stable recurring revenues.    

QSV’s Outlook

QSV does not attempt to predict the direction of the markets over the coming quarter or year but does focus its efforts on building high conviction portfolios of quality businesses.  Our objective is to reward clients with performance that is above our benchmarks and peers over a full market cycle with less volatility, thereby offering a smoother ride toward achieving each client’s long-term investment goals.  We will note that after a strong period of performance for risk assets, investors should assess their asset allocations and the quality of those assets they own.  We believe that an emphasis on quality businesses coupled with undemanding valuations will support long-term success.  We owe our gratitude to our clients for their commitment to our strategies and remain invested alongside them with substantial portions of our personal, liquid assets.

Disclaimer:

Returns are for the respective composites of QSV Equity Investors.  Gross returns are calculated net of trading fees.  All dividends are assumed to be reinvested.  The returns of the BQV Midcap Strategy are compared to the historical performance of the Russell Midcap Indices as they are a widely used benchmarks for mid capitalization securities.  The returns of the BQV Smallcap Strategy are compared to the historical performance of the Russell 2000 Indices as they are a widely used benchmarks for small capitalization securities. The returns of the QSV Select Value Strategy are compared to the historical performance of the Russell 2500 Indices as they are a widely used benchmarks for SMID capitalization securities. An investment with QSV Equity Investors (BEM) should not be construed as an investment in a program that seeks to replicate, or correlate with, these indices.  Market conditions vary between the BEM products and these indices.  Furthermore, these indices do not include any transaction costs, management fees and other expenses, as do the BEM Products. Lastly, BEM may invest in strategies and positions that are not included in these indices.

 No client or potential client should assume that any information presented should be construed as personalized investment advice. Personalized investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Investing carries risk of loss. ​

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QSV Equity Investors, LLC is a registered investment advisor.  For additional information about the firm and its professionals please visit the SEC’s website at www.adviserinfo.sec.gov​