“Mr. Hare, I may move slowly. But, I can beat you in a race.”
–Aesop’s Fables (The Tortoise and the Hare)

Dear Fellow Shareholders:

The first quarter of 2016 brought enough excitement to last a year, or longer. After an historic sell-off that lasted through mid-February, investor sentiment turned on a dime to deliver a massive rally leaving U.S. equities modestly higher on the year. It was more than enough to keep the pundits and prognosticators on their toes.

As we see it, the decline was brought on by numerous factors including worries over lower corporate earnings and continued geopolitical risk. More importantly, investors were pricing in several additional rate hikes by the Federal Reserve. This changed in the middle of February when Fed Chair Janet Yellen and company put future rate increases on hold. As soon as this was announced, it was off to the races for the stock market. Worries about weak earnings and geopolitical risks were seemingly cast aside by investors enthusiastic for a continuation of Fed dovishness. The easy money rally was reminiscent of those we witnessed on numerous occasions over the last five years.

The Queens Road Small Cap Value fund out-performed its small value peer average and benchmark index during the market decline. To highlight our down market performance, as of February 12th, near the market low for the quarter, the year-to-date performance of the Queens Road Small Cap Value fund was -5.13% vs. -11.15% for the Russell 2000 Value Index. The fund has a demonstrated history of protecting capital during periods of market declines. The Queens Road Small Cap Value fund outperformed the Russell 2000 Value Index in nine of the last ten down-market quarters for the Russell 2000 Value Index (see chart below).

QRSVX down market comparison

The market decline presented an opportunity to add to some existing positions and to add some new positions to the fund at prices we considered very attractive. New names in the portfolio include intellectual property management company RPX Corp, heavy construction manufacturer L.B. Foster, retailer Urban Outfitters, brand management company Iconix, and several others. We have consistently used bottom-up, fundamental analysis to discover good companies that we can buy at attractive prices. In our long-term view, we felt valuations in these companies had fallen to compelling levels. For most of our purchases, our timing proved to be serendipitous. In hindsight, we should have bought more. Regardless, our performance in the ensuing rally has been respectable.

As expected, the fund’s performance trailed its benchmark during the market rally that began in mid-February. Fortunately, the preceding out-performance during the selloff more than offset the under-performance during the rally. For the full quarter the fund was up 5.42% vs. 1.70% for the Russell 2000 Value, our primary benchmark.

More important than our strong short-term performance, the fund continues to perform as we would expect in different types of markets.

  • When risk and fear enter the market, the fund tends to out-perform its peers and benchmark index.
  • When investors ignore risk and markets enjoy sustained rallies, the fund tends to rise, but not as much as its peer category and benchmark.

Over full market cycles, our out-performance in down markets has more than compensated shareholders for our under-performance during rallies. Since inception in 2002 through the quarter ending March 31, 2016, the Queens Road Small Cap Value has produced a compound annual return of 9.69% vs. 7.70% for the Russell 2000 Value Index, and a cumulative return of 258% vs. 178% for the Russell 2000 Value Index. It is also important to note that the fund produced this out-performance while taking much less risk than its peer category as measured by standard deviation and other volatility measures. While there is no assurance that this will continue, this correlation of performance during market declines and rallies has proven to be very strong over time.

We appreciate the confidence you place in us to invest your capital wisely. We stand beside you as the largest shareholders in our funds and are confident in the investments we hold. Please contact us at (888) 353‑0261. should you have any questions regarding our process or our portfolios.

Sincerely,

Steven H. Scruggs, CFA

Steven H. Scruggs
President, Portfolio Manager

Benton Bragg, CFA, CFP®
Benton S. Bragg
Chairman

PORTFOLIO MANAGER’S COMMENTARY

Steven H. Scruggs, CFA®
Portfolio Manager

The Queens Road Small Cap Value Fund had a total year-to-date return of 5.42% for the quarter ending March 31, 2016. This return compares favorably to the Russell 2000 Value Index which returned 1.70%, and the Morningstar Small Cap Value Category which returned 2.19% for the 1st quarter. The market decline in the first part of the quarter demonstrated our ability to protect capital on the downside. The fund has also outperformed the Russell 2000 Value Index over the past one, three, five and longer ten-year period. Since inception in June, 2002, the fund has produced an average return of 9.69% vs. 7.70% for the Russell 2000 Value Index, and a cumulative return since inception of 258% vs. 178% for the Russell 2000 Value Index.

YTD 12
Months
Average
Annual
3-Year
Return
Average
Annual
5-Year
Return
Average
Annual
10-Year
Return
Since
Inception
Cumulative
Since Incept
Queens Road Small Cap Value 5.42% 4.04% 9.57% 6.98% 6.48% 9.69% 258.21%
Russell 2000 Value Index 1.70% -7.72% 5.73% 6.67% 4.42% 7.70% 178.12%

Performance as of March 31, 2016
Gross annual operating expenses 1.26%; net annual operating expenses 1.24%
*Performance annualized since June 2002 inception

Important Performance and Expense Information
All performance information reflects past performance, is presented on a total return basis and reflects the reinvestment of distributions. Past performance is no guarantee of future results. Current performance may be higher or lower than performance quoted. Returns as of the recent month-end may be obtained by calling (888) 353‑0261.

Investment return and principal value will fluctuate, so that shares may be worth more or less than their original cost when redeemed. There can be no assurance that the fund will meet any of its objectives.

Gross annual operating expenses reflect each Fund’s gross total annual operating expenses, service fees, other expenses, and any applicable acquired fund fees and expenses. Net annual operating expenses reflect gross annual operating expenses exclusive of any applicable acquired fund fees and expenses. All expense information is reported as of the Fund’s most current prospectus. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds and other investment companies.

From inception to 12/31/2004 the Fund’s manager and its affiliates voluntarily absorbed certain expenses of the fund and voluntarily waived its management fee. Had the Fund’s manager not done this, returns would have been lower. The Fund’s manager and its affiliates do not intend to absorb any expenses or waive its management fee in the future.

Queens Road Small Cap Value Fund invests primarily in small-cap companies which may involve considerably more risk than investing in larger-cap stocks.


Investments that helped performance

  • Delta Apparel rose 36% during the quarter as the company continued its streak of reporting strong numbers. Delta produces high-quality t-shirts, high-performance athletic wear and fleece layers under the labels of Salt Life, the Cotton Exchange and others. Continued strength in gross margins coupled with improved expense management allowed operating margins to improve significantly. The strategic initiatives the company implemented in the last year are bearing fruit. Salt Life and Junk Food segments showed strong double digit growth as did the company’s eCommerce business.
  • Fabrinet was up 36% for the period. This manufacturer of complex optical components was founded in 2000 by Seagate Technologies co-founder Tom Mitchell and went public in 2010. During the quarter the company posted impressive financial results as well as strong forward guidance. Management cited growth in new business and increased customer demand as the main driver for continued operating momentum.
  • L.B. Foster gained 33% during the first three months of the year. Foster is a leading manufacturer and fabricator of transportation and construction materials including concrete rail ties, steel bridge flooring and railings and other pre-cast concrete structures. This newer holding appears to be recovering from two recent missteps. On the heels of a major warranty claim by a primary customer and a poorly timed oil and gas related acquisition, the firm’s shares have been pummeled over the last year. In spite of the ongoing warranty claim issues and the recent write down of the poorly timed investment, we believe the long term prospects for the company are positive. The company’s core businesses are performing well and its stock is priced at a very attractive valuation.

Investments that hurt performance

  • Plantronics – fell 17%. This slow-growing, but reasonably valued communications company manufactures the Voyager brand of Bluetooth and wireless headsets for office use and Backbeat headphones for music and gaming devices in the consumer market. It has recently been losing market share in commercial headsets, its largest market. While still the largest player in this market we are closely monitoring its competitive position and pricing ability. In spite of recent struggles, we maintain a positive outlook on the company.
  • Cubic – dropped 15% during the quarter. Cubic operates in two primary markets. Their global transportation division provides systems and information that improves payment and efficiency for mass transit systems. Their global defense unit provides training, analysis and simulation systems for the security forces of the US military and allied nations. Reported earnings have been disappointing lately but looking forward, a recent major restructuring appears to be showing signs of dividends. With a strong balance sheet and a healthy backlog, we remain optimistic regarding Cubic’s long term prospects.

The thoughts expressed in this piece concerning recent market movements and future prospects for small company stocks are solely the opinion of Queens Road Funds at April 28, 2016, and, of course, historical market trends are not necessarily indicative of future market movements. Statements regarding the future prospects for particular securities held in the Funds’ portfolios and Queens Road Funds’ investment intentions with respect to those securities reflect the portfolio manager’s opinions as of April 28, 2016, and are subject to change at any time without notice. There can be no assurance that securities mentioned above will be included in any Queens Road Fund-managed portfolio in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. The prospectus contains important information on the Fund’s investment objectives, risks, and charges and expenses. Please read the prospectus carefully before investing or sending money. The Fund invests primarily in small-cap stocks which may involve considerably more risk than investing in larger-cap stocks. (Please see “Primary Risks for Fund Investors” in the prospectus.) As of 04/28/2016, the Fund held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund’s overall value to decline to a greater degree.