How are changes in the semiconductor industry’s ecosystem creating opportunities?

So within the semiconductor ecosystem, the Premier Fund has exposure to a fabless semiconductor manufacturer, to a leading subsystems provider, to a leading test and measurement company, and in each of these instances, what we’re looking for are differentiated, durable business models but, importantly, where we can identify what I refer to as a structural multiplier effect.

So take, for example, the ongoing challenge within the industry as it relates to the continued miniaturization of the chip. The legacy architecture of chip manufacturing was to put everything onto one chip and shrink that over time, referred to as Moore’s law, but that architecture has effectively hit its limit. So what’s referred to in the industry today as advanced packaging, whereby we’re mixing and matching all these chips onto a system-on-chip, within that approach and the architecture around that, what becomes increasingly important is the interconnect between all these chips on the system-on-chip, and that’s increasingly driving complexity and critical elements as it relates to this ecosystem.

FormFactor is a direct beneficiary of advanced packaging because, as you put more chips onto these advanced architectures, the more probe cards and testers are required. So FormFactor is a dominant scale provider. They are the largest provider in the U.S. of probe cards and testers. They have a full third share in advanced processing. They have the largest R&D budget in the industry, so fairly dominant in scale, which is important because there is an underlying secular intensity as it relates to capacity which is, again, creating barriers for others to come into the ecosystem.

How have the recent supply chain issues affected the way you invest?

Well, I think the supply chain issues are well known. They’re heighted and they’re going to continue and be protracted for a long period of time across many, many industries. So what’s very critical throughout this time period is to understand as it relates to the supply cost inflation, whether business models have the ability, either tactically or strategically, to pass on pricing. And there I think we’re very comforted as it relates to the Premier Fund because our companies have pricing power. They have the ability to tactically address price, perhaps sometimes in a situation on a lag basis but, more importantly, what we’re finding is they’re taking advantage of this period of time to price more strategically, price more to the value of the product and service that they provide, and what we’re hearing is that will remain relatively sticky and permanent over time.

What are some of the advantages of a small-cap quality approach?

In the first quarter of this year, quality outperformed, protecting on the downside as you would expect, particularly in the strategy of Premier to do so during these volatile times. I think it’s important to note even in the month of April, a month where you saw shy of a full 10% correction, Premier had a downside capture ratio of 65%.

As risk managers, we have a high disdain for down-market performance periods, but we do take some solace in the fact that we protected extremely well during these heightened volatile times. As it relates to quality in the underlying company attributes that we have, I think again we can use an interesting example in the semiconductor industry.

Down Market Resilience: FormFactor (Nasdaq, FORM) vs. SOX 2/28/22-5/18/22 (%)

Past performance is no guarantee of future results.

So the Semiconductor Index, the SOX, since late February has seen extreme volatility and is down some 15%, FormFactor’s stock price was effectively flat during that time period. It’s a testament to their quality attributes and, importantly, I believe the market coming to appreciate their underlying quality attributes and increasing profit pool.

Premier Fund is an all-weather fund. Our companies are durable, differentiated business models with capital structure strength that are going to protect well during tough times.

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