In the letter, President Daivd Corkins talked about the rise in the S&P 500 and the Russell 2000. He also talked about the Federal Reserve's accomodative policy, the improvements in the housing market, employment and manufacturing.
Letter To Partners:
Dear Shareholder,
During the year ending June 30, 2014, the S&P 500 and the Russell 2500 (small and medium sized companies) returned over 24.6% and 25.5%, respectively. Continued accommodative Fed policy, along with improvements in housing, employment and manufacturing were all supportive macro-economic factors that drove an overall increase in earnings and valuation for the indices.
The current low interest rate environment and the longer-term trends of globalization and technology-enhanced productivity form a powerful recipe for cash-flow generation and capital markets activity. In addition to helping drive strong U.S. equity market returns over the past few years, these market forces are contributing to positive capital flows into equities, increased corporate debt and equity issuance – and a healthy pickup in merger and acquisition activity (M&A). M&A has traditionally been a barometer of overall CEO confidence, and, according to Bloomberg, the dollar value of global M&A during the first half of 2014 increased 89% over the same period a year ago, suggesting investors are not alone in their sanguine view of the future.
While optimism abounds for the market as a whole, it is worth a reminder that the stock market is not the economy. Underlying economic data may not be as robust as stock prices would suggest. First half 2014 U.S. GDP growth is set to come in around 1% (2% annualized) and significant slack remains in the labor market. Reforms and deleveraging in Europe create the specter of deflation in the region and widespread geopolitical tensions remain at the top of the list of overall global risks.
At Arrowpoint and the Meridian Funds (Trades, Portfolio), we are not economic prognosticators, nor traders; our value-add is fundamental research first and foremost. We seek to combine attractive asymmetric risk/reward investments within a risk-managed equity portfolio. The intended outcome is to preserve capital in volatile market environments without sacrificing upside participation in up markets.
As our first year as Investment Adviser to the Meridian Fund family comes to a close, we are excited about enhancements that have been made to the client service side of the business. This includes the establishment of quarterly commentaries and a new website with substantially improved data and functionality. Please visit us at www.meridianfund.com or Arrowpoint Partners at www.ap-am.com for more information on our strategies.
On behalf of all the Meridian and Arrowpoint team members, thank you for your continued trust, confidence and investment in the Meridian Fund family.
Respectfully,
David Corkins
President
Meridian Contrarin Fund portfolio performance
On September 5, 2013, we began managing the Meridian Growth Fund. It is our distinct honor to take the helm of this venerable fund, which was founded by Richard Aster nearly 30 years ago. Through rigorous fundamental research, disciplined portfolio construction and a focus on managing risk before reward, we hope to expand upon Meridian Growth Fund's legacy. We will use the same process and philosophy that served us well managing another mutual fund for 7 years. Namely, our investment philosophy is centered on four key tenets:
Employ fundamental research to identify high-quality growth businesses with predictable and recurring revenues, high returns on invested capital and attractive risk-reward profiles. Build a durable portfolio that first and foremost protects capital in tough, turbulent markets and secondarily keeps up with the broader market in bull market environments. Always think about risk before reward. Almost 30 years of combined experience in small- and mid-cap markets have taught us the importance of sidestepping the landmines and pitfalls that trip up many other investors. Protect and grow your hard-earned savings. To this end, we believe strongly that it's important that we eat our own cooking; we plan to allocate a significant percentage of our own net worth to Meridian Growth Fund.Performance Overview In our opinion, this disciplined process combined with decades of experience, extensive resources and a long-term investment horizon are the key ingredients required for consistent outperformance versus our peers and our benchmark. We look forward to many rewarding years stewarding your capital.
The Meridian Growth Fund – Legacy Shares returned 17.31% during the twelve-month period ending June 30, 2014, underperforming its primary benchmark, the Russell 2500 Growth Index, which rose 26.26%. There were several factors that impacted performance during the period.
The first was the portfolio manager transition that occurred on September 6, 2013. Prior to our portfolio management responsibilities, the portfolio underperformed the index by 4.12%. As part of the transition, we repositioned some of the portfolio's holdings to be consistent with our philosophy and process.
The relative underperformance during the second half of the fiscal year ending June 30, 2014 was driven by the low-quality characteristics, such as low returns on capital, low profit margins and often negative earnings per share, of the stocks that performed best early in 2014. This underperformance was partially offset by the strong relative performance (seen in the low downside capture rates) during the market selloff from March to April 2014.
The Meridian Growth Fund seeks to invest in high-quality (defined by overall profitability) and attractively valued stocks, which means the fund may underperform in periods such as the first quarter of this year.
The second period of meaningful relative performance differential was the sell-off from the index's peak in the first week of March through the low in early April. During that time the fund captured just 70% of the market's decline, with the Russell 2500 Growth falling 9.17% and the fund falling 6.46%. This experience is consistent with our goal of capturing less downside than the market in turbulent, volatile environments. By putting risk and downside protection at the forefront of our process, we believe we will be better positioned to deliver strong long-term absolute and relative returns.
The top contributors to performance during the period were Trimble Navigation (TRMB), Sensata Technologies (ST) and Cadence Design Systems (CDS).
Trimble Navigation provides location-based solutions to its customers that enhance their productivity and profitability. The recovery in construction end markets and continued strong demand from the farm economy resulted in strong overall financial results for the company and a strong stock price. We trimmed the position as it began to exceed the upper end of the market cap range that we invest in. Sensata Technologies develops, manufactures and sells sensors and controls. We are attracted to the company's large growth opportunity, which is driven by increased sensor penetration in industries such as automobiles and general industrial opportunities. We find Sensata's business model to be attractive given the stability of its revenues, strong operating leverage and excellent management team. During the period, the company benefited from a rebound in European automobile sales and deployed capital in several small accretive acquisitions. We have been trimming the position modestly as the stock approaches our price target.Meridian Growth Fund performance
Compass Minerals (CMP) is a leading producer of rock salt and specialty potash fertilizer. Its unique collection of resource assets has helped the company generate historically high returns on capital. We invested in Compass as we believed that earnings were due to turn after four years of weak road salt demand driven by mild Northeast winters and production problems at its potash mines. During 2013 the potash industry was rocked by the potential collapse of a European cartel, which led to falling potash prices. Facing significant uncertainty for the future of the potash market, we sold the stock.We continue to remain focused on individual stock selection and portfolio construction that identifies quality companies that we believe are experiencing temporary disruptions to their businesses. These disruptions enable us to buy the businesses at attractive prices and provide the portfolio with what we believe is an attractive risk-reward profile for our shareholders.
Thank you for your continued investment in the Meridian Contrarian Fund.
Jamie England, Larry Cordisco and Jim O'Connor
Total Return Based on a $10,000 investment for the Period Ended June 30, 2014
Past performance is not predictive of future performance. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares and do not reflect the imposition of a 2% redemption fee on shares held 60 days or less to deter market timers. If reflected, the taxes and fees would reduce the performance quoted. Net asset value, investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost.
Read the rest of the Letter to Investors here: http://www.sec.gov/Archives/edgar/data/745467/000119312514330592/d763210dncsr.htm#tx763210_1
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Getty Images Whether it's for child care, lawn work or a host of other chores, millions of Americans hire people and bring them into their homes to do necessary work. But many people don't realize that doing so leaves themselves open to a potential tax liability, nicknamed the nanny tax. Let's take a closer look. 1. You Can Pay Up to Certain Amounts Without Triggering Nanny Tax The nanny tax is designed to ensure that your household employees get credit for their work for purposes of Social Security, Medicare and unemployment benefits. As a result, the rules governing when the Internal Revenue Service collects the nanny tax track the income thresholds for various features of those programs. Specifically, if you pay cash wages of $1,900 or more, then you have to pay Social Security and Medicare taxes of 15.3 percent. You're allowed to withhold half of that amount from what you pay your household employee, just as Social Security and Medicare taxes are withheld from most paychecks. Similarly, if you pay a household employee $1,000 or more in any calendar quarter, then you'll owe 6 percent in federal unemployment tax on up to $7,000 in annual wages. 2. Hiring Kids Under 18 Can Save You a Lot of Trouble The nanny tax can be a huge hassle when you hire household employees, but there are some exceptions even if you pay more than the threshold amounts above. Paying members of your own family lets you take advantage of more lenient rules. If you pay your spouse or your under-21 child to do any household work, then any pay isn't treated as wages subject to the nanny tax. A more common way to avoid the nanny tax is to hire babysitters, lawn-care providers and others under the age of 18. As long as the employee isn't primarily in the business of providing those services -- such as being a student in school at the same time -- then you won't have to pay the nanny tax on those wages even if they exceed the $1,900 limit. However, the unemployment-tax component of the nanny tax isn't subject to the under-18 rule. So if you pay more than $1,000 in a quarter, it doesn't matter that the person is under 18 -- you still have to deal with the tax. 3. Using a Contractor -- Not an Employee -- Can Save You Money The nanny tax only applies to those who qualify as employees as opposed to independent contractors. Although the distinction can be complicated, the primary way to understand when someone is an employee is to focus on the degree of control you have over their work. If you have control not just what type of work is done but also the specific way the worker does it, then you're more likely to have an employee. On the other hand, if you merely say you want a task done but leave the details to the worker, that resembles an independent contractor relationship more closely. In addition, if the worker provides tools and equipment rather than relying on you for them, that's another sign of a contractor relationship. Properly classifying a worker is essential. If your worker isn't an employee, then you don't owe the nanny tax, as the worker is responsible for any self-employment taxes from earnings. But if the IRS disagrees with your characterization, then you can end up having to pay interest and penalties. The nanny tax isn't generally a huge burden financially, but it can come as a surprise if you're not prepared for it. By being aware of when the nanny tax applies, you can take steps to avoid it and save yourself some money as a result. More from Dan Caplinger