The Frank Value Fund Institutional class returned -2.32% in Q1 2025, compared to -2.11% for the Russell Midcap Value Index. Since fully integrating catalyst-unlocking value into the strategy in January 2022, Frank Value Institutional class produced a Total Return of 40.28%, outperforming both the Russell Midcap Value Index 9.75%, and S&P 500 TR Index 23.77%. For the three years ended March 31, 2025, the Frank Value Fund Institutional class ranked in the top 2% of its Morningstar category, Mid-Cap Value. Please see the end of this letter for more performance information.
Opportunities in Uncertainty
A year's worth of risk and volatility hit US markets in the days after the first quarter's close, with a pair of 4% down days occurring after the Trump Administration announced its latest tariff plans. Leaders of large investment organizations like Larry Fink of Blackrock and Jamie Dimon of JP Morgan focused their comments on three main points:
- The US deficit is out of control and tariffs may help balance the budget
- Tariffs will likely cause inflation
- Economic and stock market weakness may continue
As a concentrated fund investing in mid-cap stocks, we have several advantages regarding the above that I would like to highlight. Foremost, the assets of the fund are immensely nimbler compared to the assets of Blackrock and JP Morgan. Unlike those massive corporations, the Frank Value Fund can focus its investments in value-releasing catalysts, ideally insulating our holdings' earnings from macroeconomic shocks like trade wars. For example, in the recent turmoil we raised our exposure to independent power producers as electricity demand continues to grow thanks to trends in AI data centers, electric cars, and reshoring of manufacturing. Electrification growth will continue whether the economy enters recession or not, and potential pullbacks in datacenter capital expenditures merely cap the upside surprises to independent power producer earnings while base earnings remain intact. We have much higher conviction in the earnings quality of independent power producers than companies that source goods from China or other affected tariff areas, and we have the size to concentrate in one while avoiding the other.
While the policy shocks reverberate through the market, correlation has been very high, but when the initial volatility passes, we believe our second major advantage – valuation discipline will shine. In April, the cheaper portions of the market like mid-caps have lost less value than the expensive S&P 500 and Nasdaq 100. Typically, in bear markets and early bull markets, value stocks lead. Soon, first quarter earnings reports and forward guidance will be scrutinized, and we believe most of our holdings have recession-resistant businesses which will attract capital. Additionally, investor risk-aversion reignites a valuation focus, and our unwavering commitment to value will benefit.
Finally, and perhaps most importantly, we are sifting the wreckage for opportunities. The Frank Value Fund ended the first quarter with about 7% in cash, among the highest level in several years. Market dislocations allow us to escalate our criteria and invest in companies where we believe long-term annualized returns will amount to over 20%. During the first few days of April, we swapped shares of Altria Group, which were essentially flat at $58 (outperforming MTD by over 10%) into an independent power producer which had declined 20+%. Our sell target on Altria was $62, leaving about 7% of upside behind, but the sell target on the new position is over 40% higher.
We have additional value creation opportunities like taking tax losses, swapping low upside for high upside, and eventually driving our cash towards fully-invested. We remain cautious though, because unlike Covid, large government stimulus is absent. Continued selling and a recession may lengthen this bear market considerably, with numerous false rallies in the meantime. Rather than try to predict the bottom, we will stay disciplined while remembering rewards accrue to those who stay largely invested and catch the turn.
Sincerely,
Brian Frank
Frank Value Fund Portfolio Manager
| Performance as of 3/31/25 |
Total Return % | Average Annualized Total Returns % | ||||
|---|---|---|---|---|---|---|
| YTD 2025 |
2024 | 2023 | 2022 | 3 Yr. | Since 7/21/04 | |
| Frank Value Fund Inst'l | -2.32 | 19.45 | 15.13 | 4.43 | 9.82 | 7.05* |
| Russell Midcap Value Index | -2.11 | 13.07 | 12.71 | -12.03 | 3.78 | 9.47 |
* Represents an estimate based on the performance of the Fund's Investor share class, adjusted for fees.