2018 – Q4

MOPPX Q4 2018
Larry Fink Likens Hedge Fund Selloff Last Quarter to ‘Mini 2008’ was the headline of a recent article on
Bloomberg. A JP Morgan report on European small and midcap stocks also compared the recent panic
selling to the 2008 financial crisis. “In fact”, the analyst writes, “2018 saw just as much volatility as very
trying years such as 2008 and 2009.”


The only difference between what happened in Q4 of 2018 and last decade’s financial crisis is that this
time there was no crisis. Last quarter’s correction in stock prices worldwide was not a reaction to
changes in companies’ fundamentals. It was a brutal mood swing set off by the Federal Reserve Bank’s
tight policy combined with skepticism that the trade dispute between China and the US could be
resolved. The Brexit mess only added fuel to the fire.


Such macro concerns are justified. If anything, a pause in the multi year rally in stock prices was
probably healthy. Trees don’t grow to the sky. At least not in a linear way. But in the olden days, one
would have expected a 5% correction, not a panic. After all, company earnings have remained strong.
The US economy is still humming.


It is difficult to know why a healthy correction turned into a debacle. The post-Christmas bounce
suggests the sell-off was just an overreaction. Many blame computer programs. Already in June of 2017,
a JP Morgan research report claimed that only 10% of trading is regular stock picking. There is little
doubt that quantitative and computer trading have added a lot of volatility to markets.


The bottom line is that long term stock pickers need to take this new paradigm into account. Increased
volatility does not change the fundamentals of companies. More than ever, amplified stock price swings
require investors to have strong conviction. A loss is only realized when one sells. A drawdown is only a
paper loss. When conviction is strong, such drops in prices are an opportunity to increase exposure.

Here are some basic rules we have always applied. The strong bounce of the fund’s NAV in January seem
to justify our patience:


Corrections are difficult to predict. In the long run, trying to time the market is a losing proposition.

Focus on fundamentals.

Don’t sell when sentiment is too negative. Sentiment changes very quickly.


Take advantage of corrections to buy oversold stocks and sell those where conviction level is low.


Be patient.


Focus on fundamentals.

MOPPX Activity in Q4 2018
We made a few changes to the fund last quarter. We sold our positions in the Swedish video game
company G5 Group (G5EN:SS) and the Danish jewelry group Pandora (PNDORA:DC). Both companies
have deteriorating fundamentals. G5’s growth rate slowed markedly and Pandora’s management
turmoil seemed to get worse.

After two research trips to the UK in the fall, we decided to start building positions in Zoo Digital Group
(ZOO:LN; 0.87% of MOPPX) , DS Smith (SMDS:LN; 0.83% of MOPPX) and First Derivatives (FDP:LN: 1.17%
of MOPPX). These companies’ management greatly impressed us. Zoo Digital is a young company
making good use of the digital revolution to provide subtitles and dubbing services to producers of
movies and TV programs. DS Smith is a leading cardboard manufacturer which supplies 80% of Amazon’s
packaging needs in the UK. First Derivatives is a software company that provides trading analytics
platforms.


We also visited with a couple of companies we already own in the fund. We learned that Ocado (2.4% of
MOPPX), the leading food e-retailer in the UK, is now a manufacturer of the robots the company uses in
its warehouses. It is selling these together with its expertise of warehouse and shipping management to
more and more food retailers around the world. Ocado (OCDO:LN) should in our opinion thus be viewed
more as a technology company than as a retailer which means it deserves a higher valuation.
Entertainment One (ETO:LN; 1.97% of MOPPX) confirmed their business outlook remains bright.
Streaming companies such as Netflix or Amazon have a huge and growing need for content they
produce. In addition, ETO’s Peppa Pig, a children’s cartoon character, has recently gained popularity in
China. It helps that we are soon entering the year of the Pig.
Conclusion.


It is easy to focus on the many tensions in the world. External events or sentiment changes influence
stock prices greatly in the short term. But, for patient investors, it is fundamentals that will determine
success. For example, Interroll (INRO:SW 2.25% of MOPPX), a Swiss maker of conveyor belts, lost 20% of its value in the
early December selloff only to regain it as soon as they published their quarterly sales and earnings
numbers in January.

Even in terms of the macro backdrop, it could take very little for sentiment to shift back to optimism.
Firstly, it appears market participants are starting to believe the Fed has gotten the message and
factoring a less restrictive monetary policy into their expectations for 2019. Secondly, achievement of a
trade deal between the US and China is in the interest of both countries. For this reason we are
optimistic a mutually satisfactory agreement can be reached. Yes, the implementation will take more
time and disputes will reemerge. But the announcement of a deal will be an enormously bullish signal
for markets.


Hervé van Caloen
Mercator International Investment Opportunity Fund (MOPPX)
Sumner Financial Advisors
tel: 1 646 764 4769

IMPORTANT DISCLOSURES:
Mutual fund investing involves risk. Such risks associated with the Mercator International Opportunity
Fund (MOPPX) as well as applicable investment objectives, charges and expenses must be considered
carefully before investing. This and other important information about the Mercator International
Opportunity Fund is found in the Prospectus, a copy of which or current performance information may
be obtained by contacting Mutual Shareholder Services (“MSS”) toll free at 1-800-869-1679. We
encourage you to read the prospectus carefully before investing.
Past performance does not guarantee future results. Loss of principal is possible. Investment returns and
principal value of an investment in the Mercator International Opportunity Fund will fluctuate so that an
investor’s shares, when redeemed, may be worth more or less than their original cost. For up-to-date
performance information please contact the fund’s transfer agent at 1-800-869-1679.
Investing in mid or small cap companies can be considered riskier than investing in large cap companies.
In addition, the size of companies comprising an Index, although midcap by some country standards,
could be considered small cap in the U.S. Currency risk involves the chance that the value of a foreign
investment, measured in U.S. Dollars, will decrease due to unfavorable change in currency exchange
rates. Arbor Court Capital, LLC serves as the Distributor for the Fund and is a member of FINRA and SIPC