Steven Scruggs' FPA Queens Road Small Cap Value Fund 3rd-Quarter Commentary

Dear Fellow Shareholders,

The FPA Queens Road Small Cap Value Fund (“Fund”) returned -5.72% in the third quarter of 2022, compared to a -4.61% return for the Russell 2000 Value Index in the same period. For the year-to-date period, through September 30, 2022, the Fund returned -19.65%, compared to -20.65% for the Russell 2000 Value Index. The Fund’s outperformance versus the index during this most recent downturn is in line with our expectations. During times of market weakness, the fund has historically protected capital better than its benchmark and peers. We expect to outperform in down markets and trail somewhat in robust markets as a result of our diligent, disciplined, patient and conservative process.

We think of our investment process as having four pillars:

1. Balance Sheet Strength –Seek companies with strong balance sheets. We are not comfortableowning companies that have significant liabilities (debt, legal, regulatory, pension or something inherent in the business model) that could cause insolvency concerns when there’s an economic, financial, or other type of crisis. We want to make sure we are invested in companies that have staying power.
2. Valuation - Normalize economic earnings over full market cycles. Primarily using free cash flowdiscount valuation models. Demand a margin of safety.
3. Management -Evaluate management’s track record of laying out a long-term strategy andexecuting to achieve their stated objectives.
4. Sector and Industry Analysis - We want to own companies in growing industries with stablecompetitive dynamics and favorable economics. Avoid commodity industries, overly competitive industries, and invest in companies that compete in industries that have long-term growth expectations.

Market Commentary

Virtually all financial assets are down significantly through the third quarter¹. The market selloff was unsparing and hit domestic stocks, international stocks, growth stocks, value stocks, government bonds, corporate bonds and high-yield bonds. The housing market, which has been remarkably strong over the last decade, has turned significantly lower as the Federal Reserve’s commitment to raising short-term rates and stamping out persistent inflation has pushed mortgage rates to highs we haven’t seen since 2002² This spectacular rise in interest rates marks a healthy reversal to the previous cycle when persistently low interest rates and unprecedented central bank liquidity pushed the prices of virtually all financial and real assets higher.

When we buy shares in a company, we never know the real reason that a seller has decided to sell them. Bear markets tend to take on a momentum of their own and people sell because the price is down. Sometimes this is because they have leverage or liquidity issues and are forced to sell. But often it is because they are worried that the price will fall further tomorrow, regardless of their expectations of the underlying value of the investment. This is a behavioral reaction that we have profited from in the past and expect to profit from again.

At its most basic, our process compares a company’s current price to what we expect the business to look like three to five years out. We always want to be aware of near-term headwinds. But generally, it is lower current prices and an expanding discrepancy to a company’s long-term economic earnings that provides us with a margin of safety. We look for quality companies that we are confident will be worth considerably more over that time horizon and we are very comfortable buying from sellers who are afraid that the price will fall further tomorrow.

We believe current valuations are more favorable for value than for growth, and much more favorable for small caps than they are for large caps. The first chart shows that on a forward price to earnings basis, the Russell 2000 Value index trades at a significant discount to the Russell 2000 Growth index, despite the Russell 2000 Growth index significantly underperforming over the last year. The second chart shows that small-and mid-cap stocks (the S&P 600 index) are trading at the largest valuation discount to large cap stocks (the S&P 500 index) since the late 1990’s tech bubble.

For more than 20 years, the FPA Queens Road Small Cap Value Fund has consistently offered investors a better risk-adjusted return experience over rolling 5-year periods – and that’s because of the investment team’s rigorous application of our four core tenets described previously.

With the recent increase in volatility across global equities—and especially domestic small-cap stocks— the FPA Queens Road Small Cap Value team is starting to see an uptick in the number of attractive investment opportunities being considered for inclusion into the portfolio. Naturally, we expect these more attractive valuations to help power potential future returns for patient investors seeking to benefit from the current market opportunity.

Quality and the Four Pillar Process

Last quarter, we talked about our preference for compounders – high-quality franchises with great balance sheets, management teams and industry tailwinds that we hope to own forever.⁵ Compounders don’t usually come cheap, and while we are valuation conscious, we are generally willing to pay a little bit more for higher quality. While the vast majority of financial assets are down year to date, quality compounders have generally held up better.

So, what do we mean by quality? At its most basic, quality means that we have confidence that a company’s earnings and cash flows will be larger in three to five years than they are today. Different investors look at different heuristics or quantitative metrics that can describe quality. High returns on capital, high margins, organic growth, high cash conversion and low debt are all indicative of quality. But at the end of the day, we take a holistic look at our companies, sniff out the risks, seek to remain conservative and judicious, and compare the current price to our confidence in the future. Our four pillars – balance sheet strength, valuation, management, and industry analysis - guide our assessment of quality.

Historically, we believe the quality of the holdings has been a large contributor to the Fund’s outperformance during market downturns. Low leverage allows companies to survive and reinvest during recessions. In our experience, strong management teams can be trusted to shepherd the company through headwinds and find new opportunities. We seek to invest in the companies that have strong competitive positions and that compete in industries with favorable economics and outlooks. In practice, it is never this easy. It is rare to find a company that sits cleanly atop each of the four pillars. And our view of the future is usually hazy at best. But when things get complicated and the future seems uncertain, the four pillars provide a framework for thinking through the next three to five years.

Trailing Twelve Months (TTM) Contributors

• South Jersey Industries (SJI, Financial) shares rose approximately 40% on Feb. 24, 2022, on news thatInfrastructure Investment Funds, a private equity fund managed by JP Morgan Investment Management, would take the company private. The deal is scheduled to close in the fourth quarter of 2022.⁶
• American Equity Investment Life Holding Company (AEL, Financial), a leading writer of fixed index annuities, hascontinued to transition to its AEL 2.0 business model. The plan’s main goals are to diversify the company’s assets into a broader array of investments, including private debt through strategic partnerships, and to increase its use of reinsurance to free up capital. We think this is an interesting, but somewhat aggressive plan. Thus far, the results have been impressive, but we continue to monitor the credit quality of their assets as they move toward achieving their target of having 40% of their portfolio invested in private assets, up from 15.4%.⁷
• Atlas Air Worldwide (AAWW, Financial) is an outsourced air freight carrier that we believe traded on cheap multiples ofearnings and book value compared to peers. In August, the company agreed to be bought by a consortium led by Apollo Capital for $102.50 per share, a 57% premium to the recent share price.⁸
• New Jersey Resource Corporation (NJR, Financial) is a regulated gas utility for Southern New Jersey. The companyhas slowly and we believe prudently diversified into midstream, marketing and services while continuing to grow the core utility. In our view, the current mid-teen earnings multiple and 4% dividend yield are reasonable for NJR’s consistent and growing earnings and dividend stream.
• Livent (LTHM, Financial) is an integrated, low-cost lithium miner and processor that was spun out of FMC Corporationin 2018.⁹ Lithium is an essential component of electric vehicle batteries, is chronically undersupplied and spot Lithium Carbonate continues to hit new highs even as other commodity prices have come down.¹⁰ Livent is currently running at roughly breakeven profitability, but our work suggests they will benefit from rising Lithium prices and credible capacity expansion plans. This is an unusual investment for us - we are generally wary of our ability to forecast commodity markets and we have sized the Livent position commensurately.

Trailing Twelve Months (TTM) Detractors

• PVH Corp (PVH, Financial) owns the Tommy Hilfiger and Calvin Klein brands globally. Two-thirds of the profitabilitycomes from the international segment (where Tommy in particular has a premium positioning), strong same store sales growth and demonstrated pricing power.¹¹ PVH shares are down with other fashion and apparel names as investors worry about consumer health, and its international earnings have been hit by the strong US dollar.
• InterDigital (IDCC, Financial) is a research and development organization that develops and acquires wireless andvideo patents across key technologies. The company has a history of strong financial performance, opportunistically buys back shares and pays a modest dividend. Shares are down with the declining expectations for smartphone volumes and chip demand more generally.
• Synaptics (SYNA, Financial) is a developer of human interface (HMI) hardware and software that has diversified intohigher margin internet-of-things (IoT) products. Synaptics was a large holding for the fund in 2021, and we significantly trimmed the position due to valuation.¹² The shares are back down this year with concerns about consumer technology volumes. We have been incrementally buying back shares at lower prices.
• Concentrix (CNXC, Financial) is a customer experience solutions provider that has expanded from call centers to awider suite of customer engagement products and solutions. We followed the company for years as part of Synnex (it was spun out in December 2020)¹³ and have always been impressed with its consistent growth, customer wins and product expansions. The share price nearly doubled in 2021 following the spin and we believe that this year’s reversal is a response to moderating growth and a valuation that got ahead of itself.
• MasTec (MTZ, Financial) is a specialty engineering, procurement, and construction (EPC) company that buildspipelines, telecom infrastructure and electric utility and renewable transmission and distribution infrastructure. Founders and operators Jorge and Jose Mas own 20% of the company and we believe have done a great job growing MasTec and rolling up smaller competitors at attractive prices.¹⁴ The trailing 12-month performance suffers from timing as expectations for infrastructure stimulus caused the share price to peak at the end of Q2 2021.

Portfolio Positioning

The fund has historically held cash as a residual of the investment process. When we cannot find companies that meet our stringent criteria, we will allow cash to build. Over a long time horizon, we would almost always want to own a diversified collection of quality companies (acquired at reasonable prices) instead of cash. But we weigh this against our reluctance to sacrifice margin of safety and risk permanent impairment of capital. The Fund’s current cash allocation is 10.5%, down from 15.5% at the beginning of 2022.

During the quarter, we were marginal net buyers as we added two new positions, added to certain existing positions while trimming three positions.

Despite the recent volatility, most recently to the downside, we feel better about the long-term prospects for our portfolio than we have in quite some time. We do not make short term predictions on market direction. But the current valuations of the Fund’s holdings, their competitive positions and our expectation ofstrong execution by their management teams give us confidence that over the next 3-5 years, the companies we are invested in will be worth considerably more than they are today.

As always, and as significant co-investors in the fund, we appreciate your trust in us to be good stewards of your investment in the fund. If you would like to discuss performance or our portfolio holdings in greater detail, please let us know.

Respectfully,

Steve Scruggs

Portfolio Manager

October 14, 2022

1. Source: Factset
2. Federal Reserve Economic Data, 10/2022 Release.
3. Chart Source: Yardeni Research. Weekly forward P/E ratios calculated by dividing price by 12-month (52-week) forward consensus expected operating earnings per share. Monthly data through December 2005, weekly thereafter. Source: I/B/E/S data by Refinitiv
4. Chart Source: Yardeni Research. Weekly forward P/E ratios calculated by dividing price 52-week forward consensus expected operating earnings per share. Note: Shaded pink areas are S&P 500 bear market declines of 20% or more. Yellow areas show bull markets. Source: I/B/E/S data by Refinitiv.
5. Prior quarterly commentaries for the FPA Queens Road Small Cap Value Fund can be found at https://fpa.com/funds/fpa-queens-road-small-cap-value-fund-quarterly-commentary-archive
6. Source: Deal press release: https://www.globenewswire.com/en/news-release/2022/02/24/2391259/0/en/South-Jersey-Industries-Inc-Enters-into-Agreement-to-be-Acquired-by-the-Infrastructure-Investments-Fund.html
7. Source: American Equity Investment Life Holding Company Q1 2022 results: https://americanequity.gcs-web.com/news-releases/news-release-details/american-equity-reports-solid-results-line-expectations
8. https://www.atlasairworldwide.com/2022/08/atlas-air-worldwide-to-be-acquired-by-investor-group-led-by-apollo-together-with-j-f-lehman-company-and-hill-city-capital-for-5-2-billion/
9. Livent Corp.:https://ir.livent.com/news/news-details/2018/Livent-Celebrates-IPO-and-First-Day-of-Trading-on-New-York-Stock-Exchange/default.aspx
10. https://www.bloomberg.com/news/articles/2022-09-16/lithium-smashes-new-record-as-supply-struggles-to-feed-ev-growth
11. PVH 2021 annual report: https://pvh.gcs-web.com/static-files/cec07be7-f102-4cbd-926f-2e1520efc94e
12. Synaptics represented 7.2% of the portfolio at its peak on November 30, 2021.
13. Concentrix Completes Spin-Off from SYNNEX: https://www.concentrix.com/press/concentrix-completes-spin-off-from-synnex/
14. MasTec 2021 annual report: https://investors.mastec.com/static-files/fbd5f009-f3fb-4759-838e-bc68f739351c

This Commentary is for informational and discussion purposes only and does not constitute, and should not be construed as, an offer or solicitation for the purchase or sale of any securities, products or services discussed, and neither does it provide investment advice. Any such offer or solicitation shall only be made pursuant t o the Fund’s Prospectus, which supersedes the information contained herein in its entirety. This Commentary does not constitute an investment management agreement or offering circular.

The statements contained herein reflect the opinions and views of the portfolio managers as of the date written, is subject to change without notice, and may be forward-looking and/or based on current expectations, projections, and/or information currently available. Such information may not be accurate over the long-term. These views may differ from other portfolio managers and analysts of the firm as a whole and are not intended to be a forecast of future events, a guarantee of future results or investment advice.

Portfolio composition will change due to ongoing management of the Fund. References to individual securities or sectors are for informational purposes only and should not be construed as recommendations by the Fund, the portfolio manager, the Adviser, the Sub-Adviser or the distributor. It should not be assumed that future investments will be profitable or will equal the performance of the security or sector examples discussed. The portfolio holdings as of the most recent quarter-end may be obtained at www.fpa.com.