Wintergreen Fund, Inc. today released its 2015 Annual Report. The shareholder letter appears below and is also available at http://www.wintergreenfund.com.
Dear Fellow Wintergreen Fund Shareholder,
As we look back on Wintergreen Fund, Inc.’s (NASDAQ: WGRNX, NASDAQ: WGRIX, the “Fund” or “Wintergreen”) first ten years, we are extremely pleased with what we have accomplished. The Fund has sought to act with integrity and to stand up for our shareholders when faced with management teams who we believe have misbehaved. The Fund has remained focused on its long-term, global value investing approach, and has not wavered in an attempt to chase short- term performance. It has clearly been a difficult period to be a true value investor, but we believe that remaining disciplined, while so many others have strayed, offers our shareholders a great opportunity for future success.
The Fund had strong 2015 returns from long-term portfolio holdings Reynolds American Inc. (NYSE: RAI, “Reynolds”), Alphabet, Inc. (NASDAQ: GOOG, NASDAQ: GOOGL), and Altria Group Inc. (NYSE: MO) Securities that underperformed included Franklin Resources, Inc., which was sold during the year, Birchcliff Energy Ltd., and Canadian Natural Resources Ltd. The Fund also utilized forward currency contracts, which had an overall positive impact on performance during the period.
The time is always right to do what is right.
- Martin Luther King, Jr.
Every now and then, controlling shareholders of an excellent business foolishly attempt to enrich themselves at the expense of minority shareholders. At the close of 2014, the Burkard family announced its intention to sell its controlling stake of Sika AG (SIX: SIK) of Switzerland to a French competitor, Cie de Saint-Gobain, which has long coveted this prize of a company. The problem in this proposed deal is that the Burkard family, which conducted negotiations away from Sika’s Board of Directors, would receive a premium in the sale and all other shareholders would not. Now held up in the judicial process due to strong and swift legal action taken by Sika’s Board of Directors, and backed by key minority shareholders, we think this brazen attempt to deprive shareholders of Sika’s full and fair value will fail. Shares of this little-known gem of a company—a maker of high value-added construction materials to satisfy growing demand for stronger, lighter, and more energy- efficient building and automobile structures – have been knocked down to a discount, which we intend to exploit. Out of the range of possible outcomes in the battle for control, we believe the current plan of the Burkard family is the least likely, and when this corporate governance distraction is resolved in the favor of the Board of Directors and minority shareholders, the focus will return to the company’s attractive fundamentals of organic sales growth in both developed and emerging markets, earnings-accretive bolt-on acquisitions, and steady cash flow generation.
Try not to become a man of success, but rather a man of value.
- Albert Einstein
Reynolds has been a core Wintergreen investment for many years. The Reynolds management team utilizes a value formula that consists of wielding pricing power, generating substantial free cash flows, and returning much of that cash through raising dividends and share repurchases. The company acquired the Newport brand via the takeover of Lorillard during 2015, and traded away lower-return assets, for an attractive price. Reynolds’ market share of the U.S. cigarette market has increased from around 25% to 33% with the addition of Newport as of December 31, 2015. According to Reynolds’ management, the deal is accretive on an earnings per share basis in the first 12 months and will have “strong double-digit accretion second year and beyond.” Reynolds may execute a rapid pay-down of debt after the Lorillard deal, which will increase the prospects of accelerating stock buybacks. With our investment in British American Tobacco plc (LSE: BATS, “BAT”), the largest shareholder in Reynolds with ownership of 42% of Reynolds outstanding shares, we should further benefit from the ongoing success of Reynolds. Since BAT has acquired affiliates of some portfolio companies in the past, we would not be surprised to see one day the complete purchase of Reynolds’ shares that BAT doesn’t already own.
I’m mad as hell and I’m not going to take this anymore.
- Network (1976 film), News Anchorman Howard Beale
Many of us who have seen the movie Network have a very clear mental picture of an angry news anchorman yelling an instruction for all of his viewers to get up from their seats, go to their windows, open the window, and shout out to the world that they are mad as hell and not going to take it anymore. Yelling out of the window was a novel approach to vent, but it did not offer any course of action to meet or correct complex issues.
With roots that go back to the early 1900’s, Consolidated-Tomoka Land Co. (NYSE: CTO, “CTO”) is a land company in Volusia County, Florida, that was formed as the remains of a liquidating trust from Baker, Fentress & Co. In 2006, when Wintergreen first invested in CTO, it was and still is a company with approximately 10,500 acres of largely undeveloped land near the famous Daytona International Speedway and Interstate 95, a primary north-south highway. Although CTO has sold off some acreage over the years, and it has improved the quality of its income property portfolio, in our opinion, CTO has largely not taken advantage of or participated in rising land values during the ongoing real estate recovery. We believe CTO’s stock price is significantly undervalued, and the increase in stock price over the years generally tracks the increase in value of the real estate market. Since initiating a position, Wintergreen has encouraged meaningful changes at CTO including the replacement of what we viewed as a flawed management team and the implementation of annual elections for directors through the removal of the staggered board structure which had worked to entrench the previous slate of directors.
During the last decade, while Wintergreen has owned a significant portion of CTO, we think the company has been plagued by management issues, lack of overall vision to design and implement a development plan for the company, and the overarching real estate market that, while it was sour for a few years, provided well-run companies with the opportunity to prepare for the current upswing in the real estate market. We believe this current upswing, combined with favorable interest rates makes it a great time to take action. However, we believe that CTO has again lost its way.
To invigorate and motivate management to re-focus on the best interests of all shareholders, advisory clients of Wintergreen Advisers, as beneficial owners of more than 25% of the outstanding shares of CTO, have initiated a shareholder proposal (the “Wintergreen Proposal”) for the 2016 annual meeting of CTO shareholders. The Wintergreen Proposal is for CTO, in order to capitalize upon the revitalized real estate market in Daytona Beach and Volusia County, to hire an independent advisor to evaluate ways to maximize shareholder value through the sale of CTO or the liquidation of CTO’s assets. We believe numerous CTO shareholders are supportive of event-driven value creation for this company. As we have discussed with current CTO management, we believe that continuation of the status quo at the company is not an acceptable option. CTO’s Board of Directors, in response to the Wintergreen Proposal, and in advance of the shareholder meeting, has hired independent advisor Deutsche Bank to assist in this evaluation. While it is too early to tell how this process will proceed, Wintergreen Advisers will attend the upcoming shareholder meeting and continue its active participation in this investment.
At Wintergreen, we believe that these are times of opportunity. Our confidence comes from truly understanding the businesses that we own: we view our portfolio as a collection of significantly undervalued resilient businesses. Our portfolio is comprised of high quality securities that in most cases have very little borrowing, and most with exceptional management teams that are working for all long-term shareholders.
When a portfolio holding falls short of these criteria we are not hesitant to take action. That said, we are enthusiastic about the future at Wintergreen, and never lose sight of our investors’ perspective, because we are heavily invested in the Fund and have our own money invested side by side with you. We take our responsibility to our shareholders very seriously and appreciate your investment. Please check our website, www.wintergreenfund.com, for additional news and information throughout the year.
David J. Winters, CFA
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by visiting the Fund’s website at www.wintergreenfund.com. Please read the prospectus and summary prospectus carefully before you invest.
The Fund is subject to several risks, any of which could cause an investor to lose money. Please review the prospectus for a complete discussion of the Fund’s risks which include, but are not limited to, the following: possible loss of principal amount invested, stock market risk, interest rate risk, income risk, credit risk, currency risk, and foreign/emerging market risk. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Short sale risk is the risk that the Fund will incur an unlimited loss if the price of a security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security. In light of these risks, the Fund may not be suitable for all investors.
For the period ending December 31, 2015, the Fund’s Top Ten Equity Holdings were: Reynolds American Inc., 12.4%; Consolidated-Tomoka Land Co., 9.3%; British American Tobacco plc, 8.5%; Compagnie Financiere Richemont SA (SIX: CFR), 6.5%; Altria Group Inc., 6.3%; Nestlé SA, Reg (SIX: NESN), 6.2%; Swatch Group AG* (SIX: UHR, SIX: UHRN), 4.8%; Alphabet Inc.**, 4.7%; Canadian Natural Resources Ltd. (TMX: CNQ), 4.7%; Sun Hung Kai Properties Ltd. (HKEx: 0016), 4.2%. *Includes Swatch Group AG Bearer and Registered shares. **Includes Alphabet Inc. Class A and Class C shares.
The views contained in this Shareholder Letter are those of the Fund’s portfolio manager as of December 31, 2015, and may not reflect his views on the date this report is first published or anytime thereafter. The preceding examples of specific investments are included to illustrate the Fund’s investment process and strategy. There can be no assurance that such investments will remain represented in the Fund’s portfolios. Holdings and allocations are subject to risks and to change. The views described herein do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security.
Foreside Fund Services, LLC, distributor.
Bryant Park Financial Communications
Richard Mahony, 917-257-6811
Bill McBride, 917-239-6726