Q4 2018

Equity markets were down substantially in the fourth quarter and for the year. As a reference, we offer the following:

	2018
Large Cap Stocks (S&P 500 Index)	-4.4%
Lipper Balanced Fund Index	-4.7%
Mid Cap Stocks (Russell Mid Cap Index)	-9.1%
Small Cap Stocks (Russell 2000 Index)	-11.0%
International Stocks (MSCE EAFE Index)	-13.8%
Emerging Market Stocks (MSCI Emerging Markets Index)	-14.6%

We have invested less aggressively throughout the year due to concerns about equity and fixed income valuations, rising interest rates and geopolitical concerns. Our shorter-term convertible bonds served their purpose, by providing downside protection. Our hedged convertible positions were profitable during the year. The largest detractors to fund performance were investments that we believe are more compelling today. These include:

• Allergan (AGN), which we initially invested in through a Mandatory Convertible Preferred security, currently offers a 2% dividend yield, trades at a 9.2 times multiple of next year’s earnings, and has the potential for significant earnings growth.
• General Motors (GM), initially invested in through a Mandatory Convertible Preferred, has been hurt by the potential for a protracted trade war with China and currently offers over a 4% dividend yield and trades at just 6.2 times next year’s earnings.
• MetLife (MET), also a result of the conversion of a Mandatory Convertible Preferred, offers a 4% dividend yield, trades at 8 times next year’s earnings, and we think has significant upside potential.

Portfolio Strategy

The recent decline in equity markets has made valuations generally more attractive, though still not inexpensive. We plan to hold and / or add to the above referenced positions and continue to find investment opportunities in Community Banks. The domestic economy appears strong, but risks associated with geopolitical events, the domestic political environment, and a changing interest rate environment have not abated. We continue to use minimal leverage and position the fund more conservatively than we have in years past.

Q3 2018

Domestic equity markets persisted upward through quarter end, and broader markets had been mixed as follows:

Fixed Income (Bloomberg Barclays US Aggregate Bond Index)	-1.6%
International Stocks (MSCE EAFE Index)	-1.4%
Emerging Market Stocks (MSCI Emerging Markets Index)	-7.7%
Large Cap Stocks (S&P 500 Index)	+10.6%
Lipper Balanced Fund Index	+3.2%
Hedge Funds(HFRI Fund Weighted Composite Index)	+1.4%

We have been positioned less aggressively due to a concern about the valuation of equity and fixed income markets, the impact of a rising interest rate environment on security valuations and geopolitical concerns. This positioning has served us well thus far in October. The ten year US Treasury yield has risen to almost 3.2%, a level not seen since 2011, and the progression of growing trade tensions between the US and China has led to declines in most major markets.

The US Federal Reserve continued to increase its benchmark, short term interest rates (Fed Funds Rate) for the third time in 2018. This brings it up to a range of 2.00% to 2.25%. Market expectations are for one additional increase in December of this year, and three more in 2019.

The ongoing trade dispute between the US and China continued with both sides announcing new tariffs on imported goods from the other country during the third quarter. It appears that a number of consumer goods, including household appliances and clothing, and the automobile industry will be impacted by the tariffs and result in rising consumer prices.There remains continued uncertainty on how the trade dispute between the two countries will ultimately be resolved and this has overshadowed the new trilateral trade agreement with Canada and Mexico.

Portfolio Strategy

We continue to proceed with caution. Equity market performance has been driven by the popular
“FAANG” Stocks: Facebook, Amazon, Apple, Netflix, and Google/Alphabet. These valuations seem to be driven more by optimism than fundamentals (we are liquidating our position in Apple). We are currently finding value in two areas, Community Banks and convertible securities.

One Community Bank we would like to highlight is:

Citizens Community Bancorp, Inc. (CZWI). Citizensis the holding company of Citizens Community Federal N.A., a federally chartered bank based in Wisconsin, with 22 branches in the area. In June, we purchased mandatorily convertible preferred stock in Citizens, which was converted into common stock in late September (now tradeable on NASDAQ). Citizens used the proceeds from the convertible private placement to acquire United Bank (a community bank also located in Wisconsin), which will make Citizens the largest community bank by total assets headquartered in its market.

The recent decline in the equity market is offering opportunities in convertible securities. A number of convertible bonds and convertible preferreds have fallen in price as their underlying equities have declined. We are screening through these now and expect to be adding new positions.

Q2 2018

We are monitoring the interest rate environment and its impact on our investments, in particular our Community Bank positions. In June, the US Federal Reserve increased the Fed Funds rate for the second time this year, to a range of 1.75% to 2.0%. Expectations are for two further increases in 2018, with the next hike coming at its September meeting. As short-term interest rates rise, we are evaluating our banks ability to increase the rates they receive on loans to offset increased interest payments on deposits. We continue to find attractive bank investments and recently took part in a capital raise for Citizens Community Bancorp (CZWI), a Wisconsin bank, used in part to fund an acquisition and in part to build capital for future acquisitions. We anticipate more of these investment opportunities.

We have also recently sold our Financials Sector warrants of JP Morgan (JPM) and Capital One Financial (COF). These were issued in 2008 during the government’s intervention into the financial markets and were subsequently sold to private investors. Both warrants were approaching expiration.

We have increased our investment in Sempra Energy (SRE). Sempra is an energy and infrastructure services holding company with operations in the U.S., Mexico, and South America. We were attracted to Sempra due to its high expected growth rate and low valuation, compared to its peers. SRE has since announced an asset sale plan, which it expects will reduce the “conglomerate” valuation discount. SRE recently issued a second Mandatory Convertible Preferred Security, which we may also take a position in.

Portfolio Strategy

Our concerns over high equity valuations, low credit spreads, andrising interest rate uncertainty, have been compounded by growing geopolitical uncertainty. With tariff threats ratcheting up and a general lack of confidence in political leadership capability, we are less aggressive in our positioning than in past years. We have been net sellers and have reduced the non-financial investments of the portfolio. We continue to find attractive Community Bank investments which we expect to perform well in a rising interest rate environment. We expect to increase this portion of the portfolio.

One bank we are considering adding to is SB Financial Group (SBFG). SB Financial is the holding company for State Bank, a $945m asset bank located in Defiance, Ohio. SBFG has a diversified service offering including mortgage banking, private client services, and agricultural lending. We expect SBFG’s growing loan portfolio, rising earnings, and dividend growth to lead to a higher stock price.

Q1 2018

In March, the US Federal Reserve increased the Fed Funds rate by another quarter of a percent. This brings its benchmark rate up to a range of 1.50% to 1.75% and market expectations are for two or three additional increases in 2018. With interest rates rising, we have been adding to our Community Bank investments, which pay attractive dividends. During the quarter, many of the banks in our portfolio announced dividend increases. While it will take some time for the boards and management teams of our banks to see the full benefit from the recent tax reform, we think lower taxes and higher earnings will provide an additional tailwind to dividend payments this year.

We highlight VSB Bancorp, Inc. (VSBN), a new bank we’ve added to the portfolio. VSBN is the holding company for Victory State Bank, a Staten Island, New York-based Community Bank. Founded in 1997, Victory operates five full service bank branches, with plans to open another in 2018. Victory is also adding new business development officers, which will help to increase total assets from the current $350 million level. Victory has paid 42 consecutive dividends and recently increased the quarterly dividend payment by 25%.

Portfolio Strategy

We continue to proceed with caution, as the equity and fixed income markets face the prospect of higher short and long-term interest rates, higher inflation, and central banks reducing the size of their balance sheets. We anticipate the heightened volatility experienced in the first quarter to persist, albeit not necessarily at these levels. This will present opportunities to add to our portfolio at attractive prices. We think the decline in prices of Real Estate Investment Trusts (REIT’s) has been sharp and may present opportunity.

Heightened volatility will also offer us the opportunity to exit positions at attractive prices. We sold or reduced the size of two equity sensitive investments and will continue to look for similar opportunities. We sold our position in Shutterfly, Inc. (SFLY) Convertible Bonds. We had acquired this security based on the downside protection of the bond, the reasonable yield, the short time to maturity, and potential for
upside. While we did not expect significant growth from the business, Shutterfly generated substantial cash flow and there were multiple events that if came to pass, could drive the stock higher. In January, Shutterfly announced earnings for 2017 that were ahead of what investors were expecting and announced an acquisition that was received favorably. This sent the stock up over 35% and our convertible rose 15%. With only a few months to maturity we took our gains and sold the bond. Similarly, we have further reduced the size of our position in Apple, Inc. (AAPL). The equity offers only a balanced risk / reward profile and it is no longer a top holding. We may reduce the position size further.

Q4 2017

Our goal is to generate equity-like returns over a long-term time period, while taking what we believe to be less risk. Over the past couple years, we’ve taken part in the vast majority of the rise in the equity markets. We’ve used lower leverage than we had in the past, and invested over half the portfolio in convertibles (bonds and preferreds) which are senior in the capital structure. With the S&P 500 up 21.8% in 2017 and equity markets trading at historically high multiples, it appears that the greatest fear of investors today is the fear of missing out. We have positioned the Fund to take part in additional upside while protecting on the downside, focusing on risk-adjusted returns.

We expect the year-end tax reform to boost the earnings of many of the companies that we invest in. The sectors that will benefit the most are those that have domestic earnings subject to the statutory tax rate or hold significant cash overseas. Amongst our investments, the financial sector, and Community Banks in particular, will have higher earnings, which we believe will allow for further dividend growth. Also, we expect Apple (AAPL) to repatriate a portion of its overseas cash, leading to higher dividends or share buybacks.

We continued with our focus on company specific fundamentals and highlight the following:

Bunge Limited (BG):Bunge is a global agribusiness company, with an integrated business involving purchasing, processing, storing, and selling grains and oilseeds. Bunge is well positioned within the industry with its unique geographic and asset footprint, its aggressive cost savings program and recent strategic investments. Recently, interest has grown in Bunge as a potential acquisition target – the company was informally approached by Glencore PLC regarding a potential acquisition and their current standstill agreement could develop into a formal takeover offer. Archer Daniels Midland Co. (ADM) is rumored to have interest as well.We own Bunge’s 4.875% convertible preferred stock which pays a 4.6% yield. This is a balanced investment which allows us to benefit from appreciation in the common stock, but also provides us with downside protection due to the fixed income characteristics of the preferred stock.

We exited our position in Arconic Inc. (ARNC):Arconic(the former downstream operations of Alcoa) is a diversified supplier of aluminum, titanium and nickel products for automotive, aircraft, packaging, construction and other industrial applications. We received Arconic common shares as a result of the conversion of a mandatory convertible preferred stock in October 2017. With the stock trading above what we believe is its fair value we sold the position.

Portfolio Strategy

Despite our general concerns about equity valuations, we are optimistic about the opportunities currently available to us. We have discussed our investments in Community Banks in the past, and have brought this portion up to approximately a quarter of the portfolio. We think there is upside to valuation in addition to the attractive dividend yields.

Our Real Estate investments contributed positively to our 2017 return. We have been cautious of Real Estate valuations, and focused on shorter dated Convertible Bonds, hedged positions, and non-traditional subsectors, such as Cell Towers & Timberland. During 2017, REITs were the second worst performing sector of the S&P 500. The Convertible Bonds have provided downside protection and the hedged positions have been profitable. Many of the REITs that we
had evaluated and passed on are now trading at valuations that look more attractive than they have over the past couple years. We have taken off some of our hedges and expect to add REIT positions to the portfolio.

Our focus on Convertible Securities will serve us well in 2018 as we look to pick our opportunities for upside while controlling our risk. We recently added a new convertible to the portfolio:

Sempra Energy (SRE) – Sempra Energy is an energy services holding company with operations throughout the U.S., Mexico, and other countries in South America. We initiated a position in its 6% mandatory convertible preferred stock which matures in January 2021. The company has high earnings visibility with earnings per share expected to grow at a 10-11% compounded annual growth rate through 2021, twice the expected average growth of the companies in the S&P Utilities Index. This earnings growth is expected to support annual common stock dividend growth of 8-9%, which will benefit the valuation of the convertible security we are invested in through its dividend protection feature.

The fund generates approximately 4% in current yield and we expect capital appreciation to add to the overall portfolio level return.

Q3 2017

The equity markets continue to be valued at relatively high historic multiples and we have positioned the portfolio less aggressively than in the past. With over half the portfolio in Convertible Bonds and Convertible Preferreds, including a 10% hedged position; we have taken part in most of the market upside, with large cap equities up 14.2% (S&P 500) and small cap equities up 10.9% (Russell 2000).

Risk factors outside of fundamental individual security analysis still remain, including North Korea, Iran, Brexit, Federal Reserve new (?) Chairperson, Federal Reserve shrinking its balance sheet, U.S. Tax reform, and of course, President Trump. Despite the heightened level of Geopolitical and Macroeconomic concern, the equity markets trade at historically high valuations and with a historically low level of volatility, signaling complacency. Thus our cautious positioning.

Portfolio Strategy

As mentioned above, we have positioned the portfolio less aggressively than in the past. We continue to look for attractive risk reward opportunities in Convertible Bonds, as well as opportunities in Community Bank investments.

We highlight the following positions:

General Motors (GM): GM was one of our top performers during the quarter and year to date. We originally invested in GM’s Mandatory Convertible Preferred Stock, and have held the equity we received at conversion and acquired a position in GM’s Warrants. General Motors has long suffered from negative investor perception, receiving little credit for its current profitability and reduced leverage. The company recently completed its exit from Europe, which further improved profitability and free cash flow. Recent disclosures by management have highlighted the progress the company has made as it invests in high-return opportunities, including the development of autonomous vehicles. The stock has reacted favorably and has traded up close to a level that we think is fairly valued. We have sold a portion of our warrants and plan to continue reducing the size of the combined position, while earning a 3.4% tax advantaged dividend yield.

HCI Group Inc. (HCI): As we wrote in our last letter, HCI’s common stock had appreciated to our target price, and we reduced the size of our position. Along with the other Florida focused homeowners insurance firms, HCI’s equity fell substantially in the lead up to Hurricane Irma. We thought the stock wasoverly discounting the potential losses, due to HCI’s reinsurance contracts, and we repurchased a portion of the shares we sold. The stock has since risen near its pre-Irma price and we continue to hold a position, receiving a 3.7% tax advantaged dividend yield.

Lexington Realty Trust (LXP): Lexington Realty, a Real Estate Investment Trust with a focus on single tenant, triple-net lease industrial buildings, continues to be one of our larger positions. The company has repositioned its portfolio from the office segment into industrial assets with better growth prospects. LXP has a strong balance sheet with debt ratios expected to remain strong while the company benefits from acceleration in attractive build-to-suit opportunities. LXP currently offers a 6.7% dividend yield and we expect rising earnings will lead to further increases in the dividend.

Community Banks: We continue to find opportunities investing in Community Banks. Our investments in these equities and convertibles amount to approximately 20% of the portfolio. We are continuing to add to them as we believe there are opportunities for growth in terms of increased earnings, increased dividends and mergers and acquisitions. As this portion of the portfolio has grown, we have reduced other Financials Sector investments, including JPMorgan warrants, Capital One Financial warrants, and positions in two insurance companies.

Q2 2017

With the equity markets valued at relatively high multiples and interest rates and credit spread relatively low, we have positioned the portfolio less aggressively than in the past. At quarter end, we held a 5% cash position (not using leverage). This is not a macro call, but rather the result of our bottom up fundamental analysis of our companies and investments. As with the rest of the equity and fixed income markets, many of our investments have traded up to high valuations and we have done more selling than buying. We have reduced our positions in the following securities:

HCI Group (HCI): HCI, a Florida based insurance company has performed well as the management executes on its growth plans. At the end of the quarter, HCI announced that it began the process of attaining regulatory approval to expand its flood insurance offering to nine additional states. We have invested in HCI group through one convertible bond, one convertible preferred and its equity over the past 6 years. HCI’s common stock has appreciated to our target price and been one of our top performers this year. During the quarter, we reduced our position by 25% and may reduce it further.

Apple (AAPL): Year-to-date, the Technology sector has been the top performing S&P 500 sector. Rising Tech valuations and excitement over Apple’s upcoming iPhone 8 launch has lifted expectations and driven Apple’s share price to an all-time high. We reduced our position in the $140’s and $150’s and plan to hold a smaller position.

TTM Technologies (TTMI): As we communicated in our previous letters, after several strong quarters of operational outperformance and increased guidance, the equity and convertible bond have appreciated significantly. During the quarter we sold virtually all of our investment in these convertible bonds.

Our Financial Sector investments have performed well and we offer the following updates on two of our Community Bank investments:

Byline Bancorp (BY): In 2016’s second quarter letter we announced that one of our Community Bank investments, Ridgestone Bank (RGST), was being acquired by Byline Bancorp, a private regional commercial bank operating in the Chicago Metropolitan area. On June 30th 2017, Byline Bancorp waslisted on the New York Stock Exchange, and began trading under symbol “BY”. Byline’s strategy of consolidating the Chicago area prior to listing has worked well.

NorthStar Banking Corp.: We had built a position in Tampa-based NorthStar common stock with the expectation that it would be able to grow its loan portfolio, increasing profitability. Tampa is a fast growing market and is one of the areas in Florida that has attracted acquirers, offering the possibility of additional upside. In May, Seacoast Banking Corp of Florida (NYSE: SBCF), a regional commercial bank announced that it would acquire NorthStar Banking Corp. at a premium to book value and our purchase price. This deal is expected to close in the fourth quarter.

Portfolio Strategy

With securities prices relatively high and geopolitical and macroeconomic uncertainty also high, we are cautiously putting your (and our) capital at risk. We are adding to our shorter duration convertible bond positions and continue to find opportunities in the Financial Sector. Other, shorter-term convertible bonds we plan to add to include:

Consolidated-Tomoka Land Co. (CTO): Consolidated-Tomoka is a Florida real estate operating company using proceeds from land sales to fund diversified asset purchases. This transformation will improve returns and diversify its earnings stream. We think CTO’s equity trades at a discount to the value of its real estate. We have taken a position in its convertible bond which offers the potential for upside participation with the equity, downside protection, and a 3% yield to its maturity date in less than 3 years.

Pattern Energy (PEGI): Pattern Energy is an owner & operator of wind power projects in the U.S., Canada, Puerto Rico and Chile. Approximately 90% of its forecasted power generation is either contracted or hedged for an average term of 14 years, which provides significant cash flow visibility. We initiated position in PEGI’s convertible bond which offers both downside protection and upside participation with the equity, while providing 2.4% yield to maturity in 3 years. Additionally, our convertible bond has a “dividend-protection” feature (we highlighted a similar example at our Annual Investor Meeting in May: Colony NorthStar bond). PEGI pays a significant dividend to its shareholders, and the number of shares of common stock we can convert our Convertible bond into will grow as these dividends are paid.

Q1 2017

During the first quarter we experienced a constant flow of economic and regulatory news that impacted the markets. It is unclear whether there will be healthcare reform, what form it may take, and what impact this has on the likelihood of tax reform or an infrastructure spending bill. There continues to be a series of geopolitical risks including: a US government shutdown, French elections in the aftermath of another terrorist attack, and signals that the US Federal Reserve will begin to reduce the size of its balance sheet. At the risk of redundancy, we continue to focus on the companies that we currently invest in and hunt for new securities to buy.

Our largest contributors to the first quarter return were Apple (AAPL), TTM Technologies (TTMI) and HCI Group (HCI). We have reduced the size of each of these positions as they have either approached our estimate of fair value or exceeded the position size with which we are comfortable.

Apple: We started reducing our position in Apple, as the equity more accurately reflects the value of company as well as the risks and opportunities that lie ahead. We initiated our position when the equity was trading far below our estimate of intrinsic value, and only slightly above the conservative valuation we attributed to its core, loyal customer base. We still expect Apple to have a bright future, but at the current level ($140’s), think the risk-reward opportunity is no longer as skewed to the upside. We will hold a smaller positon.

TTM Technologies: After a third strong quarter of operational out performance and increased guidance, the equity and convertible bond continued to appreciate. The company has continued to extract merger synergies, expand its market share and aggressively grow its sales in its aerospace/defense and automotive segments. While we wrote in our year end letter that we planned to continue to hold our position, the equity appreciated substantially during February, and we cut our position in half. As with all of our best performing convertible investments, after they rise substantially in price, the risk-reward profile becomes more like that of equity.

Portfolio Strategy

As we have written in prior letters, while we are not making a macro call on the equity, fixed income or convertible markets, we are currently positioned less aggressively than in the past. Our investment approach is based on taking advantage of the opportunities the market offers us. With equity markets at relatively high valuations and fixed income yields relatively low, we have not been aggressively using leverage. The portion of our portfolio invested in Financials being the exception, as we anticipate this sector will perform well in a rising interest rate environment. We have also been focusing on relatively shorter term convertible bonds. We highlight two convertible bonds that we have recently added to and anticipate buying more:

Colony NorthStar (CLNS): Colony is a diversified industrial, healthcare, and hospitality REIT, formed from the merger of Colony Capital, NorthStar Asset Management (NSAM) and NorthStar Realty Finance (NRF). This merger, which was completed in the first quarter, positions Colony for operational synergies, revenue diversification, and greater access to capital to expand the business. As the combined company is better understood by investors, we expect the stock price to trade at a higher multiple than it currently does, which will increase the value of our convertible bond. We recently added to our position in the convertible, which has a 3.5% yield, matures in under four years, and has an attractive upside/downside profile.

Cowen Group (COWN): Cowen is a growing financial services company with business lines in investment banking, investment management and brokerage services. Cowen’s equity trades at a discount to its tangible book value, which we think offers a degree of downside protection to its price in the future, and opportunity for upside. Recently, Cowen announced a strategic partnership with China Energy Company Limited (CEFC), a Fortune Global 500 company. CEFC will infuse additional capital, becoming a 20% owner of Cowen, paying a 30% premium to the then market price. CEFC will also provide Cowen with attractively priced debt financing and facilitate expansion into China. Separately, Cowen announced the acquisition of Convergex Group, which will significantly expand its brokerage business. While our optimism about Cowen’s future may not unfold as expected, our investment in the convertible bond provides us with downside protection. This security generates a 3% yield, matures in under two years, and has an attractive risk-reward profile.