Oak Value Fund - Q2 Letter

Recent Purchases

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Diageo - Diageo is the world’s leading premium drinks business with an outstanding collection of international brands across the spirits, wine and beer categories. Operating in some 180 countries around the world, the company has become truly global. Well known brands including Ketel One and Smirnoff vodkas, Johnny Walker Scotch Whiskies, Captain Morgan’s rum, Bailey’s Original Irish Cream liqueur, J&B Scotch Whiskey, Tanqueray gin, Crown Royal, Beaulieu Vineyard and Sterling wines, Bushmills Irish Whiskey, and Guinness stout populate the company’s product portfolio. In addition, the company also has the distribution rights for the Jose Cuervo tequila brands in the United States and other countries.

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Diageo is also a prior Fund holding and a company that we consistently monitor for the opportunity to buy its shares at an attractive price/value relationship. The company has been steadily adding brands to its portfolio and continuing to leverage local and regional brands in to create global franchises. On a parallel track, Diageo’s management has been disciplined in its efforts to continually improve its cost structure throughout its brands and business lines.

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Increased investor concern regarding a slowing U.S. consumer has contributed to the weakness of the company’s shares as this geographic region represents about 30 percent of total sales. While we acknowledge Diageo's U.S. market position, it is not the dominance in this market that attracts us. Instead, we are more focused on the global nature of the overall company – the other 70 percent. As we have experienced with other portfolio companies with a similar international mix, we believe the international components will more than offset any further weakness in the U.S. markets. Additionally, we believe the trend seen over the last few years to premium spirits will continue, benefiting Diageo—which holds one of the largest premium portfolios in the global spirits business.

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Put simply, we believe Diageo is a high quality business and that its shares are significantly undervalued. The company management’s focus on improving returns on invested capital has served to only reinforce our attraction to this business.

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Also, Larry Coats (co-manager of the fund) recently made another appearance on BNN and discussed American Express and Tiffany, among other things.

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