Oak Value Fund: Investment Adviser’s Review – First Quarter 2010

“We are what we repeatedly do.” – Aristotle

In suggesting the importance of habits in the pursuit of excellence, Aristotle provided an instructive framework for investing. Successful companies, such as those we target for the Oak Value Fund (the “Fund”), tend to repeat effective activities or efforts that have been effective while minimizing or eliminating ineffective activities. It is no mere coincidence that these companies are very profitable and produce high returns on capital (and do so without the use of significant financial leverage) while demonstrating the ability to grow both domestically and abroad. Through the years, their leaders have consistently made the decisions to repeat those activities that produce and reinforce successful outcomes. The benefits of these habits have been most apparent in recent years. While many of their competitors were retrenching, these companies were generally improving their business models, expanding their product offerings and market positions, and investing shareholder capital to take advantage of long-term growth opportunities.

We have learned that the odds of our success as long-term investors are much improved when we focus our attention on identifying and analyzing a select subset of such advantaged businesses and then patiently wait for the market to give us opportunities to buy them at attractive prices. Among the habits that have proven to be most crucial to our successful management of the Fund are: the establishment of an investable universe of advantaged businesses; the process by which we attempt to understand and analyze these businesses; the framework by which we assess their business models from a competitive, structural and economic standpoint; and, the manner in which we attempt to deliberately balance risk and reward opportunities within the context of a relatively concentrated portfolio.