Dear Fellow Wintergreen Fund Shareholder,
For the year ended December 31, 2014, the gain of the Standard & Poor’s 500 Composite Index (“S&P”) was striking because of the extremely narrow range of securities that contributed to the performance of the S&P. If you did not own the top 25 gainers, you missed out on over 50% of the S&P’s overall returns. The technology sector contributed an astounding 29% of the return, health care 26%, and financials 19% — overall these 3 sectors contributed over 74% of the S&P’s performance.
During the recent period, Wintergreen Fund, Inc. (the “Fund” or “Wintergreen”) has remained true to its core investment philosophy. The Fund remains concentrated with about 35 positions. We have watched as many other funds have morphed into quasi-index funds, holding hundreds of positions and being slightly overweight or underweight to their benchmark in select cases. We don’t believe that is what the goal of an actively managed mutual fund should be. We will not invest in securities that we don’t have conviction in or jump on the bandwagon only because they are going up. The Fund’s portfolio turnover remained low (13%) in 2014, as we remain long-term investors. We will not try to time stock markets. We continue to rely on our long- standing belief that the following three criteria are the hallmark of good investments:
- First, a business that has good or improving economics, and often generates sales and profits in multiple currencies and jurisdictions;
- Second, a management team that is working for the benefit of all shareholders and not just for its own short-term compensation; and
- Third, the security is available at a compelling price.
During the dot-com mania of the late 90’s, there was a similar period of time when the value investing approach was out of favor. Technology stocks were untouchable; they had wild valuations and went up every day, seemingly with complete disregard to any underlying fundamentals. As you recall, shortly thereafter, the tech bubble collapsed, value returned to favor, and the long-term value approach performed very well. Staying true to our core principals worked then, and we firmly believe our investing process will again return to favor.
During 2014, the Fund’s Institutional Class of shares (NASDAQ: WGRIX) and Investor Class of shares (NASDAQ: WGRNX) had slightly negative returns. The Fund had strong returns from long-term portfolio holdings Reynolds American Inc. (NYSE: RAI), Consolidated-Tomoka Land Co. (NYSE: CTO), and Jardine Matheson Holdings Ltd. (SGX: JM), which was sold during the year. Securities that underperformed included Swatch Group AG (SIX: UHR), Wynn Macau Ltd. (HKEx: 1128), and Galaxy Entertainment Group Ltd (HKEx: 0027). The Fund also utilized forward currency contracts which had an overall positive impact on performance during the period.
If you have an important point to make, don’t try to be subtle or
clever. Use a pile driver.
Hit the point once. Then come back and hit it again. Then hit it a third time — a tremendous whack.
Agitating for change at companies in order to unlock value is often referred to as “activist investing.” Many of the activist investors who have grabbed headlines in recent years often take a short-term focus, such as arguing for the breakup of a company, which may cause the stock to jump in the short-term, but may not necessarily be in the best interest of shareholders over the long-term. Others demand that companies return more cash to shareholders, even when doing so may weaken the company’s balance sheet or prevent it from reinvesting the cash in attractive business opportunities.
Wintergreen’s brand of activism is different. When we become actively involved with a portfolio company, be it through proxy contests, media campaigns, or simply private discussions with management, we focus on helping the company to unlock its intrinsic value over the long-term. We are not looking for a quick run-up in the stock price in order to make a swift exit and move onto our next target. This approach to activism can sometimes take longer to produce tangible results than the barnstorming campaigns which have been in vogue lately, but it meshes perfectly with Wintergreen’s belief in investing for the long-term. Since we often find that the gap between the price at which we purchase a stock and what we believe to be its underlying value is huge, we can afford to have a longer time horizon for realizing that value, while still achieving an attractive annualized return on the investment. We believe this type of activism leads to stronger companies and compelling returns for all long-term shareholders.
An example of this is Consolidated-Tomoka Land Company (“CTO”), of which the Fund owns approximately 21% of the company’s outstanding stock. When Wintergreen first invested in CTO in 2006, the company was comprised of a wonderful asset, 10,500 acres of undervalued land in Daytona Beach, Florida, as well as income-producing properties which generated enough steady cash flow to sustain the company when land sales slowed. The company had benefitted from the long boom in Florida’s housing market, but as time went on, we felt that they were not doing enough to actively grow the value of the company. We engaged in many long conversations with management and encouraged them to become more proactive in unlocking the enormous value of the company. As we continued to press our concerns, management and the board of directors seemed to dig in their heels and insist on doing things as they had always done.
It became clear to us that we would have to take a more active and public role in steering the company in the right direction. Owning valuable assets, such as CTO’s land, is a great advantage for a company, but without the right people running the company, there is little chance of that asset value ever accruing to shareholders. Over the course of three years, Wintergreen Advisers, LLC, the Fund’s Investment Manager, proposed several candidates for election to the board of directors, all of whom were independent from Wintergreen. Four of these candidates became directors, and several of the old guard directors were voted out or resigned. The reinvigorated board evaluated management and the company’s strategy with fresh eyes and came to the conclusion that change was needed. With the support of Wintergreen, the board appointed John Albright as CEO in 2011 and empowered him to bring in his own management team and develop plans to unlock the enormous value of the company’s assets. The board devised an executive compensation plan which closely aligns their pay with long-term value creation for shareholders.
With renewed confidence in the company’s leadership at all levels, Wintergreen gave CTO time and space to revitalize the company. Under guidance from the board, the new management team developed plans to attract new developers to Daytona Beach, from national homebuilders to Trader Joe’s and Tanger Factory Outlet Centers. They have grown and diversified their income property portfolio and increased outreach to potential investors. A deal announced in November 2014, for CTO to sell 1,600 acres of land to Minto Communities is expected to bring 3,000 new households to Daytona Beach, which should further drive demand for CTO’s land. The real estate market in Daytona Beach is bouncing back, and the actions taken by CTO’s management team and board over the past four years have put the company in position to benefit from this rebound.
This progress at CTO has not gone unnoticed by investors. Since the board appointed John Albright as CEO in 2011, CTO shares have risen by 22% annually as of the date of this letter, far outpacing the 16% annual gain for the S&P 500. In 2014, the company sold less than 1% of its land but realized its highest per-share earnings since 2007. That performance combined with the recent disclosure that the company is considering converting to a Real Estate Investment Trust (which has significant tax advantages for the company), has driven the shares up by more than 80% over the past twelve months.
Wintergreen’s involvement with CTO has been a long and often trying experience, but it now stands as a great example of the value we can add by combining long-term investing with our own brand of activism. Wintergreen’s actions at CTO separated the Chairman and CEO positions, gave investors an annual say-on-pay vote (before it became a requirement), and put a strong lineup of directors on CTO’s board. The board in turn hired a very capable management team, which has transformed the company into the profitable and growing enterprise it is today. We believe the best is yet to come for CTO.
There are of course parallels between CTO and our recent public involvement with The Coca-Cola Company (NYSE: KO, “Coca-Cola”), which has been a long-term holding of the Fund. Although Coca-Cola is nearly 500 times larger than CTO in terms of market capitalization, both companies have incredibly valuable historical assets — land from the early 20th century at CTO, and the secret formula for Coke at Coca-Cola. At both companies, it is the job of management with oversight by the board of directors to figure out how to maximize the value of their respective assets for the benefit of shareholders. Both companies have gone through periods of what we believe to be mismanagement — prior to 2011 at CTO, and for the past six years at Coca-Cola. While CTO has righted its ship and is busy growing shareholder value, in our eyes, Coca-Cola has a long way to go to get its house in order.
It has become apparent to us that Coca-Cola’s management and board of directors are more interested in enriching themselves than enriching shareholders. In our view, they have allowed the company, owner of one of the most valuable brands in the world, to wallow in mediocrity and lose its focus on being the global leader in non-alcoholic beverages. They seemingly spend more time defending their wildly excessive compensation plans than they do on running the actual business. But we believe that the company’s problems are fixable, and the rewards for shareholders when those problems are resolved will be significant. We believe Coca-Cola shares trade at a massive discount to their potential value because of the problems caused by the current management and directors. We are working to resolve the issues plaguing Coca-Cola and have confidence that with better management and a focus on its core strengths, Coca-Cola will once again be seen as an icon of global business. It will take time, as it did with CTO, but we think the rewards of fixing Coca-Cola will be worth the wait.
If everyone is thinking alike, then someone isn’t thinking.
-George S. Patton Jr.
Oftentimes, it is not mismanagement that causes companies to trade for sizeable discounts to their intrinsic value, but market sentiment and momentum. Galaxy Entertainment Group Ltd. (“Galaxy”) is a prime example of this phenomenon. Galaxy is one of six gaming license holders in Macau, a small strip of land on the coast of China, and the only place in China where gambling is legal. Gaming revenue for 2014 in Macau was a whopping $44 billion. The company has a strong management team, led by the controlling Lui family, and an underlying business which has historically generated enormous amounts of cash and faces limited competition. No other gaming company in Macau owns more land or has bigger development plans than Galaxy. It is expected to open a property this May on the Cotai Strip that will dramatically increase the size of the company’s operations. Unlike many rapidly expanding companies, Galaxy has $2 billion in net cash on its balance sheet, yet still sustains a return on equity of around 35%.
Given all this, one might reasonably assume that Galaxy trades for a large valuation and has had a great run in the stock market. To the contrary, Galaxy sells for only 13.5x next year’s estimated earnings and its shares have declined by 40% over the past year. Why? Over the past year, the Chinese government has cracked down on corruption, of both the real and perceived variety, and imposed meaningful but temporary austerity measures on the economy. While these actions have negative consequences on Galaxy and other Macau operators in the short-term, they do nothing to change the long-term prospects of gaming in Macau. The Chinese government has taken similar actions before, and business has always bounced back stronger than ever. We believe this time will be the same. But market forces being as they are — endlessly focused on the short-term and unable to see past the headline of the day, especially when it’s negative — Galaxy shares are seemingly priced as if the present conditions will persist in perpetuity. Thankfully, the company’s prudent financing and long-term planning allow it to glide through this lull in growth unscathed, pursuing its expansion plans with a keen eye on the day when growth returns to Macau. For the past year, Galaxy shares have been swimming against the relentless tide of negative sentiment and selling momentum, valued not by the intrinsic value of the business but by the gloomy mood of the market. But we believe the day will come in the not-too- distant future when the tide will turn and investors and momentum driven traders alike will look back longingly at the opportunity to buy shares in a remarkable business such as Galaxy for 13.5x earnings.
Confronted with a challenge to distill the secret of sound investment
into three words,
we venture the motto, Margin of Safety.
You don’t always have to travel halfway around the world to find a compelling deal. Reynolds American Inc., one of the Fund’s largest holdings, agreed to acquire its North Carolina neighbor, Lorillard Inc. (NYSE: LO, “Lorillard”) in mid-July 2014. The acquisition was structured to include a mix of cash and stock, and is expected to close in mid-2015. Typically, when such a deal is announced, the price of the company to be acquired quickly rises to the deal price, leaving little reward to those who buy after the announcement. In Lorillard’s case, however, there was a significant spread between the market price and the deal price. There was (and still is) some concern that the Federal Trade Commission (“FTC”) would block the deal because of competitive concerns. After evaluating the structure of the deal, which was specifically designed with FTC competition concerns in mind, we came to the conclusion that there is a very good chance the acquisition will be completed. While there is a risk that the deal may be blocked by the FTC, we believe that the reward outweighs the risk.
If the deal were to be blocked by the FTC, or not close for some other reason, we believe that Lorillard could buy back a meaningful amount of its shares outstanding, which provides downside protection. In the three and a half years preceding the announced acquisition, Lorillard repurchased an average of about $935 million worth of stock, equivalent to about 5% of their shares outstanding, per year. However, since the deal was announced, Lorillard has suspended its buyback program (but, importantly there has been no suspension of the dividend), allowing cash to build on their balance sheet. As of year-end 2014, Lorillard held over $1.6 billion in cash, enough to repurchase about 7% of its outstanding shares, should the deal not be consummated. Additionally, Lorillard has a significantly higher interest coverage ratio than its peers, potentially allowing the company to borrow money to buy back even more shares. Lorillard’s sizeable cash pile, ability to borrow more, and a shareholder-friendly history give us confidence that even if the deal were not to close, the company would take swift and strong action to support the share price.
When we bought shares of Lorillard in August, the spread between the deal price and the market price was about 10% or 14% on an annualized basis. Add in the 4.4% dividend yield that Lorillard offered and we were being paid over 18% annualized simply to wait for the deal to close. At a time when holding cash and short- term treasuries offers almost zero return, we found this arbitrage opportunity to be very compelling. Like all our portfolio positions, we monitor the Lorillard-Reynolds deal spread daily. When the spread narrows considerably, as it has since the end of December, we would consider reducing the size of our position.
At Wintergreen, each of us is invested side by side with our fellow shareholders. While the past few years have proven to be a difficult period for buy-and-hold value investors, especially those who venture outside the United States, we have conviction that our investment process should deliver satisfying results over time. We believe the Fund is a collection of strong businesses with promising futures. Many of the Fund’s holdings are unloved or overlooked by the market today, but it is precisely for that reason why we remain optimistic about the future.
We appreciate your continued interest and investment in Wintergreen Fund.
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, 2014, the Fund’s Top Ten Equity Holdings were: Reynolds American Inc. (NYSE: RAI), 7.3%; Swatch Group AG* (SIX: UHR, SIX: UHRN), 7.3%; Franklin Resources Inc. (NYSE: BEN), 6.9%; British American Tobacco plc (LSE: BATS), 6.8%; Compagnie Financiere Richemont SA (SIX: CFR), 6.3%; The Coca-Cola Company (NYSE: KO), 5.4%; Canadian Natural Resources Ltd. (TMX: CNQ), 5.1%; Altria Group Inc. (NYSE: MO), 4.7%; Consolidated-Tomoka Land Co. (NYSE: CTO), 4.7%; Nestlé SA, Reg (SIX: NESN), 4.6%. *Includes Swatch Group AG Bearer and Registered shares.
The S&P 500 Index is a broad based unmanaged index representing the performance of 500 widely held common stocks. One cannot invest directly in an index.
The views contained in this report are those of the Fund’s portfolio manager as of December 31, 2014, 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.