2019 – Q3

The Mercator International Opportunity Fund (MOPPX, MOOPX)

Q3 2019

MOPPX, the institutional shares of the fund, are available on the TD Ameritrade and Schwab platforms. An “A” share version, MOOPX, is now available on the TD Ameritrade platform. Brokerage fees may apply.

MOPPX was up for the quarter, +0.82% vs. –1.07% for the Morgan Stanley EAFE index.

Year to date, the Fund is up 25.0%, outperforming the Morgan Stanley EAFE index by 12%.

Q3YTD1 YearSince Inception
MOPPX0.82%25.00%-2.78%-1.34%*
MSCI EAFE-1.07%13.00%1.35%-1.26%
Foreign Large Blend**-1.33%12.05%-2.22%-3.46%

*inception of MOPPX is 4/2/2018
Past performance does not guarantee future results. Loss of principal is possible. Investment returns and principal value of an investment in the Mercator International

**Foreign Large-Blend portfolios invest in a variety of big international stocks. Most of these portfolios divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios typically will have less than 20% of assets invested in U.S. stocks.

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 1-800-869-1679T.

The World Needs More Shark Tank and Less Top-Down Policy Making

Today, economic policy debate around the world seem centered on a simple choice of stimulus methods for avoiding recession. In the past, recessions were an accepted fact of life. But now, every time there is a hint of slowdown, the cry for stimulus rises up, with the only question being how to do it. Should the central bank lower interest rates and grow the monetary base or should the government be more profligate with taxpayers’ money?

Maybe the focus is all wrong. Like over prescribed antibiotics, these methods are losing their efficacy. Just avoiding recession is not the same as creating growth. In Europe and Japan, a better tonic for flagging economies may be to cut regulation and free up entrepreneurs to do what they do best. What the world needs now is less top-down policy making and more Shark Tank shows. Make entrepreneurs sexy again.


Central Banks’ Power Grab

The US Federal Reserve was given a two-part mandate of keeping inflation and unemployment at low levels. But with the “Greenspan put” and Bernanke’s “wealth effect”, the Fed unilaterally took on the additional task of supporting asset prices. Moreover, we recently heard from a former head of the New York Fed that helping the “right” presidential election outcome is a natural extension of monetary responsibilities. This is no longer mission creep. It is an outright
power grab.

Similarly, the European Central Bank has dramatically enlarged its area of influence. It is hard to recall, but the ECB’s sole official mandate is keeping price stability in Euroland. Nowhere is it mentioned that their authority includes managing economic growth or unemployment rates, let alone bond prices. But Mr. Draghi’s “whatever it takes” attitude has led to never-ending quantitative easing. These repetitive bond-buying programs have pushed yields into negative territory. Has there ever before been a sustained period when borrowers were paid to lend money? Such aggressive intervention may have managed to delay a recession in Europe, but at what long term cost? In any case, this was never any of the ECB’s business.

And then there is the case of Japan. Their central bank took monetary easing even further. What should investors make of the fact that the Bank of Japan is not only a huge investor in bonds, it is also the top shareholder of Japanese stocks?

Five years ago, Prime Minister Abe of Japan recognized the need for structural reform when he ran for office. Together with fiscal stimulus and monetary easing, it was one of the “three arrows” of his economic plan. However, as so often happens, “Abenomics” got very watered down once it was time to deliver on real reforms. Not much has changed in the land of the rising sun besides the aggressive and politically convenient monetary policies.

In Europe, over decades, increasing regulation weakened people’s animal spirits. Where spots of growth did appear, Brussels could not leave it alone to build on itself. Instead, EU bureaucrats shoveled thick new layers of Europe-wide regulations on top of the accumulated sludge of national laws. Sluggish growth was the result.

Just avoiding recession is not the same as creating growth. With safety as the focus, forward motion may be sacrificed. Without a new approach, economic stagnation is likely to become the new normal.

Entrepreneurial Animal Spirits Needed for Innovation and Growth.


Monetary and fiscal policies can help in the short term, but without innovation, spending money becomes a zero-sum game. Printing money may stimulate demand for existing products and services. But it is innovation that gives everyone more bang for his buck. One only has to look at the cost and quality of TVs nowadays to understand how buying power grows dramatically with innovation. Innovation and competition are better than printing money.

Where does economic growth actually come from? In emerging economies, it is often driven by exports of commodities. Emerging markets do well if global demand is strong. In developed economies, growth depends on innovation, driven by entrepreneurs. That is why an environment that nurtures entrepreneurs and their ambitions is a precondition for sustained growth in developed countries. Unfortunately, once they reach a certain level of comfort, countries too often forget what made them rich. Worse yet, in many developed countries outside of North America, entrepreneurs are demonized and punished for their success.


The US is fertile ground for starting businesses, but entrepreneurs exist everywhere, even where conditions for their success are not optimal. As I travel around the world, I meet impressive businessmen and women. Europe and Japan have great entrepreneurs. It could even be argued that entrepreneurs who survive in unsupportive environments are by necessity
among the best. What flourishing could be possible if the cultural and policy settings in which they operate became less restrictive?


Much more than the same-old, tired, top-down policies, a change of attitudes might well unleash surprising growth. Europe and Japan need to rediscover the joy of creating businesses and making money. Companies like the ones MOPPX invests in can show the way.

The Mercator International Fund is up 25% so far this year despite slowing economies.

The Fund’s main focus is on successful foreign entrepreneurial companies that have reached what we think of as the “sweet spot” in their life cycle. These companies are big enough to be listed on a stock exchange, yet small enough to expect a lot of growth in the future. Companies with a proven business model while still early in their development.

Some examples of investments made recently include Lumibird (LBIRD:FP 11,000, 1.62%), European’s leading laser technology company and Mediawan (MDW:FP 4,500, 0.48%), France’s largest content provider for TV and streaming platforms. In Japan, we bought the largest manager of influencers, UMMM Co.(3990:JP 4,000, 1.90%), and the leading social media company LINE Corporation (LN:US 4,000, 1.40%). One of our positions in the UK, EntertainmentOne (ETO:LN 10,000, 0.68%), is being taken over by Hasbro mainly for the Peppa Pig franchise.


Hervé van Caloen
Mercator International Funds
Mercator International Investment Opportunity Fund

IMPORTANT DISCLOSURES:


Mutual fund investing involves risk. Such risks associated with the Mercator International Opportunity Funds 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.

MOPPX Total Annual Fund Operating Expenses is 2.20%. The Advisor has contractually agreed to waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing costs such as (a) interest and (b) dividends on securities sold short; taxes; and extraordinary expenses) at 1.65%. The waiver of fees and/or reimburse expenses is scheduled to expire on May 31, 2020.

MOOPX Total Annual Fund Operating Expenses is 5.42%. The Advisor has contractually agreed to waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing costs such as (a) interest and (b) dividends on securities sold short; taxes; and extraordinary expenses) at 1.45%. The waiver of fees and/or reimburse expenses is scheduled to expire on August 31, 2020.

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.

Positions reported as of 9/30/19.

Arbor Court Capital, LLC serves as the Distributor for the Fund and is a member of FINRA and SIPC.

2019 – Q2

The second quarter of 2019 was another strong one for the Mercator Fund.

MOPPX Q2, 2019

Q2YTD1 Year
MOPPX6.35%23.99%-3.19%
MSCI EAFE3.53%14.24%1.35%

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 1-800-869-1679T.

The world has turned decidedly manichaean. So have stock markets. Everything seems divided between good and bad with nothing in between. Favored stocks go up, no matter the valuation. Unfavored stocks go down, no matter the fundamentals.

I call it the Amazon trade. Investors who took profits early on because of the high valuation good money but missed out on even bigger long term returns. The lesson is clear: buy winners in an emerging industry and then never sell. Valuations don’t matter if you own the leader in a winner-take-all environment.

Valuations of these perceived winners have now reached last century’s excessive levels. However, today’s investors are more discerning than they were in 1999 when it was all right to be long Amazon (AMZN), but one had to avoid the many Pet.coms. We believe this logic of owning the leading companies in a growth sector at any price has now been stretched.

Shopify (SHOP; 1.35% of MOPPX), which was MOPPX largest holding is an example of the Amazon trade. (Here is what I wrote about Shopify 3 years ago: https://seekingalpha.com/article/3961494-shopify-e-commerce-solution). The stock was trading at $25 at the time. Three years later, Shopify is up more than 13 times and trading at 35 times 2018 sales. Shopify is a success story, no doubt. But to say that SHOP is valued for perfection is an understatement. Prudence and the belief that the Amazon trade is overdone leading us to reduce our position to 1.35%.

Stretching this Manichaean logic, the valuation gap between perceived winners and losers has widened to a degree that no longer reflects fundamentals. CrowdStrike (CRWD), a leading Artificial Intelligence-based cybersecurity platform and a recent IPO, is trading at 38 times forward sales. Compared that to the under 7 times sales that BlackBerry (BB; 2.87% of MOPPX) paid for CRWD competitor Cylance. CRWD 75% projected growth vs Cylance’s 25% justifies a premium, but the gap seems excessive. BlackBerry, who now has 25% of its revenues coming from Cylance, trades at 4 times trailing revenues. (https://seekingalpha.com/article/4274717-blackberry-stop-talking-ws-bean-counters).

Another example is the valuation gap between two highly profitable car manufacturers, Ferrari (RACE) and Aston Martin (AML.LN; .99% of MOPPX). RACE trades at 12 times trailing revenues while AML.LN is valued at only 2 times last year’s sales. We sold RACE and bought AML.LN.

I realize that there are many other factors that determine stock prices, but today these excessive valuation gaps offer opportunities to investors looking for opportunities in small to medium growth stocks overseas.

Hervé van Caloen
Mercator Investment Management, LLC
Mercator International Investment Opportunity Fund (MOPPX)

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.

MOPPX Total Annual Fund Operating Expenses is 2.20%. The Advisor has contractually agreed to waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing costs such as (a) interest and (b) dividends on securities sold short; taxes; and extraordinary expenses) at 1.65%. The waiver of fees and/or reimburse expenses is
scheduled to expire on May 31, 2020.

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 b 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.

Positions reported as of 7/18/2019.

Arbor Court Capital, LLC serves as the Distributor for the Fund and is a member of FINRA and SIPC

2019 – Q1

MOPPX had a very strong start to the year, substantially outperforming its index and its 
peers and regaining most of the underperformance of the last quarter.

Q1 1 Year 
MOPPX +16.58% -8.6% 
MSCI ACWI Ex USA NR USD + 10.31% -3.71% 
Foreign Large Blend
 +12.33% -9.98% 
Foreign Small/Mid Blend +10.24% -5.18% 
Morningstar

This past performance is not indicative of future returns, for up-to-date performance 
data please contact our transfer agent at 1-800-869-1679. See Note 1. 


Note 1 
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. MOPPX Total 
Annual Fund Operating Expenses is 2.20%. The Advisor has contractually agreed to 
waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total 
annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing 
costs such as (a) interest and (b) dividends on securities sold short; taxes; and 
extraordinary expenses) at 1.65%. The waiver of fees and/or reimburse expenses is 
scheduled to expire on February 28, 2019. 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.

Market Volatility and China’s One Way Road.

Markets were whipsawed at the end of 2018 and the beginning of 2019. Fears of 
impending recession drove a dramatic sell-off in global markets. But soon thereafter, a 
strong jobs report combined with the Fed’s decision not to hike rates again lured buyers 
back. Stocks rallied back with a vengeance. 

At the end of last year, cash was king; having a defensive portfolio looked brilliant. The 
problem was that investors who timed the correction correctly had to time the rebound 
as well if they wanted to stay ahead. Chances are that the investor who was bearish in 
December did not turn bullish in January. 

Timing the market is akin to mind reading. It requires a special talent. For those who do 
not have such talent, focusing on stocks’ long term fundamentals is a better proposition. 
to be able to take advantage of them. Investors should also seize the opportunity to 
reshuffle their portfolios. In a sell-off, the good goes down with the bad. All valuations 
come down which greatly increases the relative attractiveness of strong companies. 

In a correction, a portfolio manager has the opportunity to increase positions in stocks in 
which he has strong conviction. At the same time, stocks with weaker fundamentals can 
be let go without hurting the relative performance. I believe It is also a good time to add 
to liquid blue chips. They are most likely to bounce back first.

Walls of Worries.

The danger lies in not properly assessing the nature of a sell-off. For example, one 
would have been ill-advised to buy aggressively Japanese stocks in the wake of the 
asset meltdown of 1989/90. Thirty years later, the Nikkei has still not recovered. Far 
from it. To regain its all-time high, the Japanese stock index needs to go up another 
70% to regain its value of three decades ago! 

Fortunately, global markets are not trading at anything near the exuberant earnings 
multiples experienced in Japan in the 1980’s. We have lots to worry about, not the least 
a Chinese economy built on excessive debt. A global slowdown and trade tensions 
have kept investors’ enthusiasm in check. The Chinese market is much below its 
all-time high. European valuations continue to lag those of the US and Japanese stocks 
are just starting to show signs of life. 

There are legitimate concerns and investors have to navigate them. However, accidents 
are more likely when markets are euphoric, not when everybody is focused on what can 
go wrong.

The Biggest Long Term Risk.

In my view, the biggest risk to the global economy comes from China. Unfortunately it is 
very difficult to assess the real state of its affairs. The official numbers are not 
trustworthy and the problems are hidden. Everybody knows it. Market operators are not 
fooled. The stock market continues to perform dismally in spite of the miraculously 
stable economic numbers that always manage to be in line with the Communist Party’s 
targets. 

What if China is not actually growing at the official 6.4% rate? What if China were to 
implode under the burden of its overall debt? Can the Chinese economy continue to 
thrive under increasing government interference? These are legitimate long term 
concerns. However, in the shorter term, global markets are more likely to experience a 
relief rally ignited by the coming trade agreement between the US and China. I have 
argued before(https://seekingalpha.com/article/4231515-trade-war-won) that China will 
make major concessions because they have no choice. Their economy is too 
vulnerable.

A New Binary World.

As the world is stepping back from unchecked globalization, two major economic blocs 
are gradually emerging. One bloc is based on the rule of law, the other is based on the 
rule of Beijing. The first group of countries believes in free markets. The second group 
believes in a command economy. There is some debate going on about how to make 
free trade more fair in the “West”, but there is no question that the economies falling in 
the Chinese orbit are being orchestrated from Beijing. This is what today’s trade 
negotiations are all about. Forget trade deficits. The stakes are much higher. The US 
administration is forcing China to decide how much free trade its economic model can 
tolerate. 

Is it realistic to believe these two visions of the world can coexist and interact? After all, 
the Soviet economy survived – for a while – because it was cut off the rest of the world. 
The Soviet economy was an autarky. It functioned without interacting with the free 
world. The Chinese model is different. It is using limited freedom of enterprise and it is 
highly dependent on exports. It is combining free markets with state run industries. 
Above all, China’s economic miracle was achieved thanks to the open and welcoming 
markets of the West. In contrast to the USSR, China’s model depends on interacting 
with the world.

China’s Predator Economy.

For too long, China has acted as a fox in the hen house. The “West” expected that a 
reforming China welcomed into the free system would gradually become more free, 
which would benefit everyone. But as it turned out, China has exploited the free markets 
while stubbornly refusing to play by their rules. The Trump administration is right to 
demand a fair playing field. Theft of intellectual property, requirements that investment 
partners share knowhow with their future competitors, the unfair subsidies of state 
owned companies, as well as the impediments placed on foreign companies wishing to 
repatriate profits are just a few examples of how China rigs the system.

 This is not to say the Chinese Communist Party should be required to espouse a fair 
and free market economy. It would be naïve to expect that to happen. But the West can 
no longer afford to do business in China under the current de facto arrangement. Too 
many US, European or Japanese companies have been burnt in China. There have 
been too many cases of foreign companies trying to build a presence in China only to 
find they are competing with their erstwhile “partners”. In order for mutually beneficial 
trade to be sustainable, fundamental reforms are needed.

The Silk Road is a One Way Road.

The challenge going forward is to build trade practices that can accommodate two 
different economic models. Internally, the Chinese domestic economy is going to have 
to be more friendly to foreign corporations. Externally, there are challenges too. The 
Chinese model does not limit itself to The Middle Kingdom. It is highly expansionist. 
Globally, the Chinese economic model takes its inspiration from the Japanese Zaibatsu 
or the Korean Chaebol and takes it to a governmental level. 

A Zaibatsu – or a Chaebol – system is a group of financial and industrial conglomerates 
that collectively controls a large part of the economy. Similarly, the Chinese state has 
built a “conglomerate of countries” that controls large parts of the global economy. 
Different countries cooperate on the basis of their comparative advantage and 
specialization. But the initiative and final strategic vision always lies with Beijing. 
In his book “Belt and Road”, Bruno Maçães describes how the Chinese economic model 
works. “Under the Belt and Road, countries open their policy-making process to other 
countries before and above opening their economies to foreign companies.” To give one 
example, when China needed honey, it asked Kyrgyzstan’s government to export 
400,000 tons of honey. Once a need is established – in this case lots of honey – detailed 
negotiations on the financing and the production facilities are expected to follow. 
Capital is made available to friendly countries, but must be used in ways that further 
China’s industrial goals. When a Kazakh group partnered with China Nonferrous Metals 
Industry Group for a copper and cobalt project in the Democratic Republic of Congo, the 
financing was done by three Chinese banks. China also invested in infrastructure 
projects in Kazakhstan where the government provides the capacity needed for the 
refining of cobalt. All the cobalt is sent to China, where it is used in the manufacture of 
the final product, batteries for electric cars.

One World, Two Economic Systems.

Already many countries in Asia are pushing back. India and Japan feel threatened by 
China’s expansionism, especially since Chinese economic ambition is closely followed 
by military buildup. 

The Trump administration is trying to set rules that make possible trade with the 
Chinese and its growing number of satellites. World prosperity and world peace will 
depend on the ability of these two systems to agree upon more-or-less compatible and 
mutually beneficial rules of engagement.

MOPPX Activity in Q1, 2019

We have made some new investments in the Mercator International Opportunity Fund, 
adding mostly Japanese names to the portfolio. 

We bought Fancl (0.96% of the fund), UUUM (0.89%), MonotaRo (1.03%) and Comture 
(0.91%). Fancl is a well-known Japanese cosmetics company that is very popular in 
China and among Chinese tourists in Japan. UUUM is Japan’s largest manager of 
influencers on YouTube. MonotaRo sells machine tools, engine parts and factory 
consumable goods online. Comture (0.91%) is a leading software service company that 
is riding the wave of Cloud computing. The penetration rate of Cloud computing among 
large Japanese companies is still estimated to be as low as 10%. 

We made those investments after research trips to Tokyo, London and Dublin. Overall, 
we noted that the outlook for those economies is better than what headlines lead us to 
believe. The Japanese business climate is good, although not excessively bullish. In 
the UK, Brexit is a never-ending political mess. It creates unwelcome uncertainties, but 
business is still growing steadily. There were no signs of a recession, nor did we hear 
management in London complain about the business environment. British businessmen 
are reacting to the adversity caused by Brexit with their usual phlegm and 
determination. Keep calm and carry on!

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

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