Feb 25

Portfolio Manager Commentary — Western Union (WU)

As value investors who operate with a long investment time horizon, one of the most important characteristics we look for when selecting stocks for the Castle Focus Fund is a company’s ability to compound its intrinsic value over time. Some companies routinely meet or exceed our cash flow forecasts, steadily grow earnings, and raise their dividends. These companies are often worth more five and ten years later. Other companies develop an unpleasant habit of missing expectations and struggling to grow earnings, in which case intrinsic value tends to stagnate or worse — outright decline. In most cases, we find that a deteriorating competitive advantage is usually to blame, often combined with poor management execution or bad capital allocation decisions. Western Union (WU) fits that description and we finally decided to reallocate our capital to greener pastures. We began selling Western Union in May 2013 and exited the position on February 6, 2014. Our average selling price was $16.49 per share.

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Western Union was an original position in the Fund with our first purchase occurring on July 1, 2010 at a price of $15.05. Unfortunately, our investment results were far from satisfactory. Our average purchase price in Western Union was $17.01. We consistently lowered our estimate of fair value over time while increasing our estimate of business risk — a qualitative measure we use to estimate the predictability of future cash flows from operations.

WUChart

While the Fund’s total investment return in Western Union was positive, the greater concern was our consistently declining estimate of Western Union’s fair value. The problem was that the company’s money transfer pricing and margins continuously declined due to intensifying competition and regulatory setbacks. We do assign some blame to company mismanagement but far more worrisome to us is Western Union’s diminishing competitive advantage that we initially found so attractive when we initiated the position. Technology has steadily been lowering the barriers to electronic financial transactions. As these barriers have dropped numerous competitors have grabbed a piece of Western Union’s high returns on capital. We are no longer comfortable that these competitive forces will diminish any time soon. We admit defeat in Western Union but continue to look for investment opportunities that we believe will compound their intrinsic value while sustaining if not improving their competitive advantages.

The opinions expressed are those of the Castle Focus Fund’s portfolio manager and are not a recommendation for the purchase or sale of any security.

As of the date of this report, the Fund did not own any shares of Western Union (WU). As of the most recent quarter-end (12/31/13) Western Union represented 1.61% of Fund assets.

The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund , and it may be obtained by calling 1-877-743-7820, or visiting www.castleim.com. Read it carefully before investing.

The risks associated with the Fund, detailed in the Prospectus, include the risks of investing in small and medium sized companies and foreign securities which may result in additional risks such as the possibility of greater price volatility and reduced liquidity, different financial and accounting standards, fluctuations in currency exchange rates, and political, diplomatic and economic conditions as well as regulatory requirements in foreign countries. There also may be risks associated with the Fund’s investments in exchange traded funds, real estate investment trusts (“REITs”), significant investment in a specific sector, and non-diversification. Technology companies held in the Fund are subject to rapid industry changes and the risk of obsolescence.

Distributed by Rafferty Capital Markets, LLC-Garden City, NY 11530, Member FINRA.

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