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The Frank Value Fund Institutional Class (FNKIX) returned 12.29% in 2025, compared to 11.05% 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 61.3%, outperforming both the Russell Midcap Value ETF return of 23.5% and the S&P 500 ETF return of 51.8%. For the three years ended December 31, 2025, the Frank Value Fund Institutional class ranked in the top 11% of its Morningstar category, Mid-Cap Value. Please see the end of this letter for more performance information.
Why Do it the Hard Way
Though the fund has outperformed the Nasdaq, S&P 500, various small/mid-cap indices, and our peers cumulatively since January 2022, this calendar year we underperformed the S&P 500 and Nasdaq. Why do all this research to underperform in the past twelve months? The answer resides partially in 2022, where our equity strategy posted a positive 4% gain while the S&P and Nasdaq fell 18% and 33%, respectively. The rest of the answer resides in the future, where math makes it nearly impossible for the indices to outperform a reasonably valued portfolio like Frank Value in the long term. Right now, if you were to purchase all of Microsoft (MSFT) for $3.6 trillion, analysts expect $75 billion of free cash production in 2026. That is about 2% of your purchase price. Contrast that with one of our top holdings, Garrett Motion (GTX), where 2026 expectations are 7 times the cash flow relative to the purchase price, or 14%. Microsoft is expected to significantly grow its cash flow in the future, but nobody expects 7x free cash flow growth in the next decade. This math makes it impossible for Microsoft to return more money to shareholders than any stock in our portfolio. Absent exponential cash flow growth, the only way a 2% FCF yield outperforms a 14% yield is if the expensive company gets even more expensive. That could certainly happen (it happened in 2025), but similar valuation levels throughout history have never been sustainable and always suffered painful declines in the long term. History tells us it is far more prudent to invest based on cash flows than relying on a “bigger fool” to purchase your stock at extreme valuations.
Microsoft is representative of most of the S&P 500 – spectacular companies working on amazing technologies valued at levels that make long-term returns ferociously mediocre. When we see down years like 2022, these stock prices must freefall to attract value-conscious buyers like ourselves. This setup occurred before in 1999, 2021, and with the Nifty Fifty in 1972. History repeats itself because human nature is constant.
Meanwhile, S&P 500 and other index holders suffer opportunity cost. Undervalued companies like Garrett Motion are so cheap that paying shareholders just a fraction of their cash flow results in shareholder yields (dividend + repurchase + debt reduction) far higher than any of the Magnificent Seven. The dividend yield on the Frank Value Fund is currently about 2%, which is double the S&P 500. Seven of our holdings are actively repurchasing more than 5% of their shares outstanding on an annualized basis! If Microsoft were to allocate 100% of its free cash flow to repurchases, they would have to cut the 0.75% dividend to zero and still only have the money to reduce shares by 2% per year.
What’s Next
Low valuations enable our holdings to repurchase much more stock, which accelerates our sleepy consumer staples companies into double-digit earnings growers. In short, we have done well in this three-year bull market AI madness, but our hard work on fundamentals goes unnoticed until the gains stop or slow down on the large indices. I believe this is inevitable long-term and probable in 2026. The setup is eerily similar to 2021 going into 2022.
Sincerely,
Brian Frank – Frank Value Fund Portfolio Manager
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* Represents an estimate based on the performance of the Fund’s Investor share class, adjusted for fees.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end by calling the Fund at 1-888-217-5426 or visiting our website at www.frankfunds.com. Returns include reinvestment of any dividends and capital gain distributions.
Non-FDIC insured. May lose value. No bank guarantee. The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund, and it may be obtained by calling 1-888-217-5426. Please read it carefully before you invest or send money.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the individual portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of January 6, 2026 and are subject to change without notice.
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Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
