Q1 2016 Flash Report

“A dollar picked up in the road is more satisfaction to us than the 99 which we had to work for, and the money won at Faro or in the stock market snuggles into our hearts in the same way.“
— Mark Twain

A WILD START FOR 2016

It was an exciting start to 2016. With the risk-off trade taking center stage during January and February, the microcap sector turned lower, only to rebound strongly during March. For the period ended March 31, 2016, the Micro-Cap Portfolio results are as follows:

Late in 2015 we undertook a complete portfolio review with a rigorous reassessment of each of our holdings. This was designed to be similar to pruning of a perennial garden with some plants needing to be culled in order to make room for more robust growers. We also moved back into a more risk-off position based on our 2016 earnings and economic outlook and our concerns over the potential for increasing volatility. In addition, we tried to harvest some gains and losses in a tax efficient manner to redeploy capital. For the year to-date 2016, the changes seem to be taking root as the portfolio has started the year with a positive contribution relative to the benchmark while doing so with far less volatility.

So, what might distinguish our current microcap holdings from other micro-cap managers as well as the broader market? In reviewing our attribution data, there are several notable thematic items. First, the Uniplan micro-cap holdings have virtually no direct exposure to the energy sector which continues to struggle. In revamping the portfolio, we also worked to reduce our indirect exposure to energy by reducing or eliminating holdings that had material sales exposure to the energy sector.

Our underweight to the financial sector, which represents about 30% of the Russell microcap index vs. our 9% exposure also helped performance. We believe small financial company stocks have underperformed due to broad based concerns over volatility in interest rates and general credit concerns. Our portfolio is historically underweight financial stocks due to the relatively high level of debt leverage that is used on the balance sheets of those companies. This removes them from consideration early in our screening process which seeks to avoid too much debt on company balance sheets.

Stock selection has also been a large contributor to portfolio performance, with selection contributing about 585 bps to our overall portfolio returns for the year-to-date.

The areas where stock selection has made the largest contribution have been in the Health Care and Industrial sectors contributing about +231 bps and +153 bps respectively with these sectors representing about 27% of the overall portfolio. The area where stock selection has been the weakest has been utilities and consumer staples, detracting by about -33 bps and -69 bps respectively; however these sectors have less benchmark and portfolio weighting than the contributing sectors and represent about 11% of the total portfolio.

RECENT PORTFOLIO M&A

2 DEALS YEAR-TO-DATE

As we mentioned in our February Flash Report, the environment seems right for M&A to accelerate within the micro-cap space. This has proven to be during the first quarter.

The first transaction in the microcap portfolio announced was RR Media (RRM), a media services company which provides fixed and mobile satellite broadcasting services to other media companies. RRM agreed to be acquired by European satellite services firm SES for $13.291 in cash; a 53% premium to the prior day’s closing price. The deal is expected to close during Q3 of 2016.

The next transaction to hit the portfolio was announced after the close on April 7. Alliance Fiber Optics (AFOP-OTC), a designer and manufacturer of fiber optic components, announced a definitive merger agreement with Corning Incorporated (GLW-NYSE) in an all-cash deal for $18.50 per share; a premium of 19.5% over the prior days closing price. This was a second derivative play on one of our Top 10 Thematic Macro Plays, the growth of the internet of things that gave us a better understanding of the macro drivers that were supporting a stock like AFOP. They are part of the thematic macro framework in which we try to position the micro-cap portfolio strategy.

This illustrates to us the embedded strategic and financial value of many of the companies in the micro-cap portfolio and the opportunity set available in the nearly 4,000 micro-cap companies that comprise our investable universe which goes largely unnoticed by the buy-side and uncovered by the sell-side research community.

This supports the notion that the investment banking community has not missed the fact that the collective cash on the balance sheet of the American industrial complex has reached an all-time high. As measured by net debt to equity, balance sheet leverage for non-financial companies is currently running at below 15%, a level unseen since the late 1950’s. And, according to Thomson Reuters’ data, companies around the world held almost $11 trillion of cash and equivalents on their balance sheets at the end of 2015; that is more than twice the level of 10 years ago. And, capital expenditure relative to sales is at a 22 year low while the average age of corporate fixed assets and equipment has been stretched to 14 years from pre-crisis norms of about 9 years.

In the large-cap world, some of this money has been returned to shareholders in the form of share buybacks and dividends often times with the encouragement of dissident shareholders and corporate activists. In micro-cap land, there have been very few share repurchases, but dividends and special dividends have become far more widespread. As of March 31, the average dividend yield in the micro-cap portfolio stood at around 2.39% which is an encouraging positive indicator of valuation given the low interest rate environment.

CONCLUSION

With corporate cash at an all-time high, we believe any combination of improved earnings and economic outlook will give buyers the confidence to more vigorously step back into the M&A Market. We anticipate there will be continued volatility during the balance of 2016, as factors such as the global economic outlook and the strong US Dollar continue to cause uncertainties around earnings and economic growth. But, valuations remain attractive for many micro-cap companies and as a contrary indicator, the lack of investor interest in the micro-cap space seems to be nearly universal. We continue to position in new opportunities within the portfolio that appear to have good long term value. Thus, we continue our deployment of portfolio funds with a focus on our thematic framework and increasing the quality of names within the portfolio with dividend yields as an added bonus if available in good quality micro-cap opportunities.

Richard Imperiale
Portfolio Manager

PRODUCT DESCRIPTION

The Uniplan Micro Cap Portfolio is a low-turnover high-conviction micro-cap strategy designed to offer investors a quality alternative to private equity having a similar unlevered return while providing daily liquidity. The core investment thesis is focused on companies with little or no balance sheet leverage trading at a low multiple of cash flow or EBITDA, and/or having meaningful smart money activity in the form of insider buying, or 13G/13D activity.

More details can be found at www.UniplanIC.com

Important Information: 1. Uniplan Investment Counsel is a boutique investment firm, with roots dating back to 1984, that manages a variety of portfolios primarily for US clients. Uniplan maintains a complete list and description of composites that is available upon request. 2. The composite was created August 1, 1999. Performance is calculated in US dollars utilizing a time-weighted total rate of return. Total return for the composite is represented by the asset-weighted returns of the portfolios within the composite. Trade-date valuation is used. 3. Performance is net of all transaction costs and net performance is net of transaction costs and (maximum allowable total) investment management fee, but before any custodial fees (that may be incurred separately by the client). 4. The benchmark for the composite is the Wilshire US Micro Cap Index that represents a float-adjusted, market capitalization-weighted portfolio of all stocks below the 2,500th rank by market capitalization in the Wilshire 5000 at March 31 and December 31 of each year. The index is used to measure small stocks and is adjusted to reflect the reinvestment of dividends, when applicable. It is not possible to invest directly in an index. The index figures do not reflect any deduction for fees, expenses or taxes. 5. The dispersion of annual returns is measured by the standard deviation of asset-weighted portfolio returns represented within the composite for the full year. The standard deviation of the annual returns for the period August 1, 1999 to March 31, 2016 is 17.83% for the composite and 26.06% for the benchmark index. 6. The composite does not have a minimum size criterion for composite membership. All fee-paying discretionary accounts with similar investment objectives are included. Leverage is not used in this composite as a means to generate higher returns. There is one non-fee paying portfolio in the
composite. 7. There have been no changes in the personnel responsible for the management of this composite. 8. The composite contains both traditional and wrap fee portfolios. Uniplan has a flexible and negotiable fee schedule reflecting the differences in size, composition and servicing needs of clients’ accounts. A complete description of investment advisory fees is contained in Uniplan’s Form ADV and is available upon request. 9. Uniplan calculates and reports performance for the portfolios using GIPS standard but we do not claim GIPS Compliance. Individual account performance may vary from the results shown because of differences in inception date, restrictions and other factors. 10. Investors should understand that micro cap stocks are subject to a higher degree of risk than other equity investments due to the small size of the companies and the limited trading volume inherent in micro cap stocks. Past performance is no guarantee of future results.

All investments carry a certain degree of risk, including possible loss of principal. REITs are subject to illiquidity, credit and interest rate risks, as well as risks associated with small- and mid-cap investments. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style. Value style investing presents the risk that the holdings or securities may never reach their full market value because the market fails to recognize what the portfolio management team considers the true business value or because the portfolio management team has misjudged those values. In addition, value style investing may fall out of favor and underperform growth or other style investing during given periods.

Uniplan Investment Counsel, Inc. (Formerly known as Forward Uniplan Advisors) is a registered investment advisor. The views expressed contain certain forward-looking statements. Uniplan Investment Counsel believes these forward-looking statements to be reasonable, although they are forecasts and actual results may be meaningfully different. This material represents an assessment of the market at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular security. Past performance does not guarantee future results. Prices, quotes and other statistics have been obtained from sources we believe to be reliable, but Uniplan Investment Counsel cannot guarantee their accuracy or completeness. All expressions of opinion are subject to change without notice. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of this security. A list of securities purchased and sold in the portfolio during the past year, including the purchase or sale price and the current market price, is available upon request by calling 262-534-3000.