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As the numbers at the bottom of this post indicate, the GumpCap Contrarian Focus third quarter experienced solid performance on top of a strong market. The same can be said for our one year performance, as we anniversaried the very weak prior year performance. We continue to be happy with our performance relative to the market since our June 2003 inception, but are disappointed that it has not met our "dream" return objective of 15% annually over that time horizon.

We added two names to the portfolio during the year:
Simpson Manufacturing (SSD) is a building products company with a leading position in structural connectors. The company has historically enjoyed great operating margins, but this figure has suffered with the downturn of the construction market. While results should be improving with a stabilizing/rebounding market, that hasn't happened this year due to increased price competition and investments in new products (along with acquisition integration). We think these investments in new, higher margin products and geographies will ultimately pay off and the competitive pressures will stabilize. At a recent $33/share, valuation at face value doesn't look appealing running about 2.4x trailing sales and 29x forward estimates. We bought at modestly lower prices, but believe that longer-term sales and profitability growth will result in even the current price to appear cheap within three to five years.

American Public Education (APEI) is a provider of online higher education. The company's primary target has been military personnel as well as first responders, but it has a general education program and is reaching out to corporate and other sponsors (including Wal*Mart). All for-profit higher education players are under intense scrutiny about costs, government reimbursement, and the effectiveness of their degrees. APEI is different from many of their competitors as their tuition is relatively low ($750 for a three semester hour undergraduate class, unchanged since 2000). We think APEI will face less pressure to reduce costs than competitors -- and its lower prices will continue to attract more students. We believe APEI has one of the industry's more sustainable business models and took advantage of overall turmoil to initiate a position.

We completely eliminated Artio Global Advisors (ART) during the third quarter. We just started the position in the first quarter, believing that the company had suffered the worst of its asset flows and the tenured management team would stabilize performance. While we don't believe Artio's international investment team has permanently lost its touch, we do think the harm to the business has been so grave that meaningful business rebound is less probable. With numerous other appealing ideas, we decided to admit an error and recognize a loss.

Here is brief commentary on the largest contributors and detractors from a portfolio perspective:
Mueller Water Products (MWA) rose after reporting a solid underlying quarter, with a further boost from investor enthusiasm about companies tied to a rebound in housing and broader realization about the company’s improved balance sheet post-US Pipe divestiture.
Colfax (CFX) rebounded from its prior quarter plunge as it reported solid orders and operations, overcoming some fears that global economic issues would stifle its transformation as it integrates the Chart Int’l acquisition.
IAC/Interactive (IACI) jumped higher on continued to report strong revenue growth, particularly in search. The company doubled its dividend and acquired to broaden its search resources.

Hospira (HSP) New manufacturing issues and FDA observations continue emerging as the company strives to correct legacy problems, pushing out the timing and raising the cost of resuming normal production. We think these problems are fixable, the new management team will do it, and the company can ultimately leverage its capabilities in injectable pharmaceuticals, biogenerics, and other areas for profitable growth.
Cerner (CERN) Stumbled after reporting good results when investors wanted (and in the short-term were paying for) even better performance. Quarterly results, particularly bookings, are often choppy for the firm and volatility is par for the course in this name. We believe the company’s health care IT products and services, customer base, business model, and vision for the future will likely enable it to sustain superior growth for many years.
Artio Global Investors (ART) Reported continued disappointing results and cut its dividend. We sold out of the name at a loss to redeploy our capital elsewhere. We had several ideas higher confidence ideas to invest into and think the odds are becoming tougher for the asset base and performance to stabilize.

Q3:12 1 Yr 3 Yr 5 Yr ICD
Contrarian Focus (net) 9.36% 40.76% 22.12% 8.35% 10.98%
Russell 3000 6.23% 30.20% 13.26% 1.30% 6.91%
Russell 3000 Value 6.44% 31.05% 11.83% -0.72% 6.67%

Note: ICD is inception to date, starting June 27, 2003. All performance figures for periods over one year are annualized.

The preceeding performance data is preliminary, approximate, and not calculated according to to CFA Institute performance presentation standards. For simplicity sakes, dividends have been accounted for on payment date (rather than ex-dates) since April 30, 2011. This performance only represents one portfolio that has been managed since 6/27/03. "Net-of-fee" performance deducts a 1% annual management fee (that was charged when the portfolio was managed at an investment advisor and is now hypothetically deducted to maintain realism.
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