Portfolio Manager’s Letter
Quarter Ended March 31, 2009
April 17, 2009
Dear Value Investors:
The first quarter of 2009 marked the continuation of the extraordinarily volatile market conditions prevailing in the latter
months of 2008. After a sharp market rally in the early days of January, sentiment rapidly soured and equity prices resumed
their ferocious decline to a low point on March 9th well beneath levels reached in mid-November. As can be seen in Figure
1, at this low several of the small-cap market indices were down by as much as 30 percent for the year. Deep-value stocks
as represented by the S&P 600 Pure Value Index had declined a massive 46.9 percent year-to-date. However, as the final
weeks of the quarter drew to a close, the market winds rapidly reversed direction and delivered investors the sharpest rally
since 1933. During this intense rally, which has now persisted for more than a month, the Aegis Value Fund increased in
value by approximately 55 percent. As of today, the Aegis Value Fund is up 5.2 percent year-to-date, compared with a loss
of 7.8 percent for the Russell 2000 Value Index.
Figure 1: Performance Comparison Summary as of March 31, 2009
Portfolio Average Market Cap. Price/Book Q1/2009
Nasdaq 100 Index (1) $47,490 M 2.8 2.1%
Russell 1000 Growth (2) 53,808 M 2.7 -4.1%
S&P 500 (3) 67,310 M 1.8 -11.0%
Russell 2000 Value (2) 747 M 0.9 -19.6%
S&P 600 Pure Value (3) 261 M 0.4 -24.6%
Russell Microcap Value (2) 230 M 0.8 -20.5%
Fama/French Small Value Benchmark (4) -15.9%
Aegis Value Fund (5) 210 M 0.3 -15.2%
1. Bloomberg: Market Cap. and Price/Book of QQQQ as of 3/31/09; Q1 return from nasdaq.com and finance.yahoo.com
2. Russell.com data as of 3/31/09
3. Bloomberg: Market Cap. and Price/Book of RZV and SPY as of 3/31/09; Q1 return from sp-indexdata.com
4. Kenneth R. French Data Library, http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
5. Aegis Financial Corp.
Aegis Value Fund’s one-year, three-year, five-year, ten-year and since inception (5/15/1998) average annual returns for the period ending March 31,
2009 are -57.9%, -25.0%, -13.0%, 3.1%, and 2.3% respectively. Returns include reinvestment of dividends and capital gains. Russell 2000 Value
Index one-year, three-year, five-year, ten-year, and since inception (AVALX-5/15/1998) average annual returns for the period ending March 31, 2009
are -38.9%, -17.5%, -5.3%, 4.9%, and 2.2%. All historical performance returns shown in this shareholders’ letter for the Aegis Value Fund Inc. are
pre-tax returns. This report does not constitute an offer or solicitation of any transaction in any securities. The Aegis Value Fund is offered by pro-
spectus only. Performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and princi-
pal 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 per-
formance may be lower or higher than the performance data quoted. Please call 800-528-3780 to obtain performance data current to the most recent
month-end. The Fund has an annualized expense ratio of 1.50%.
Clearly, the volatile market conditions experienced in late 2008 persisted in the first quarter. Forced deleveraging by finan-
cial institutions, margin calls and investor fund redemptions continued to drive the volatility. While a lack of corporate and
retail credit availability continued to weigh on the real economy, domestic loan demand also showed signs of softening as
battered consumers worked to rebuild savings and repay debt. As a result, corporate fundamentals remain depressed.
Market valuation multiples on a large number of stocks tumbled. Valuations on companies requiring near-term credit mar-
ket access to roll debt or relying heavily on consumer spending were particularly impacted. Often motivated by liquidity-
driven selling, many corporate valuation levels have been driven down to levels significantly beneath those justified by de-
terioration in fundamental value. As can be seen in Figure 2, at quarter-end there were 683 stocks in the market trading
under tangible book value with market capitalizations greater than $70 million. This quantity is near the all-time peak
(since we began tracking this statistic in 2002) reached earlier in the quarter. Figure 3 shows that companies held by the
Aegis Value Fund now trade at a weighted average price-to-book of 29.4 percent, among the very lowest in the Fund’s
nearly 11-year history.
Figure 2: Number of Stocks Selling Below Tangible Book Value (Market Cap. Greater Than $70 Million)
683 stocks as of
March 27, 2009
2002 2003 2004 2005 2006 2007 2008 2009
Source: Stock Investor Pro
Figure 3: Aegis Value Fund Historical Price-to-Book Ratio
29.4% as of
40% March 31, 2009
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Aegis Financial Corp.
The Fund remains fully invested in deeply discounted small-cap value stocks in anticipation of the abatement of the mar-
ket’s recent liquidity shock and an eventual turn in the economy. It is important for shareholders to consider that in past
periods of emergence from economic difficulties, smaller companies have significantly outperformed the overall market. A
recent Morningstar study of 3-year, post-recessionary periods following the last 10 recessions highlighted that while large
stocks gained a cumulative 47.7% on average during these periods, small stocks gained a much larger 74.0%.
While the markets have become volatile, our investment philosophy remains constant. We continue to focus our invest-
ments on heavily discounted, low price-to-book stocks carrying valuations among the lowest in today’s market. We are
paying particular, but not exclusive, attention to potential investments with large holdings of cash and limited leverage.
When we consider the purchase of companies that have outstanding debt (these companies tend to be the most dramatically
discounted in today’s environment), we place intense focus on their debt maturity schedule and work to assess if they have
the capacity to survive the current economic storm and meet debt repayment obligations. Given our philosophy, it is impor-
tant to know that several of our largest investments maintain significant holdings of cash and/or limited amounts of debt,
giving these companies substantial flexibility and survivability in the current environment. While the unpredictable liquid-
ity and redemption concerns of the various banks, hedge-funds, and institutional investors make near-term market prices
volatile and unpredictable, we believe that over time, the vast majority of our holdings are likely to pull through this diffi-
cult period and valuations on many of our investments have the potential to increase significantly as the recent economic
slide begins to show signs of improvement.
Evaluating the broad economy, several recent data points leave us hopeful the economy may be nearing an inflection point.
We would like to share with you a few of the tentative signs of economic improvement that we have observed:
• The rapid deterioration in the housing market appears to be stabilizing, which should aid in reviving consumer confi-
dence as well as sustaining the banking sector. As of April 9th, the Mortgage Bankers Association’s index of applica-
tions to purchase or refinance a home had risen in 5 of the last 6 weeks. With mortgage rates low and home prices
down, housing affordability has improved substantially. This stabilization is offset somewhat by tighter lending and
higher unemployment rates, but nonetheless points to increased economic housing activity.
• Investor confidence has also begun to improve as concerns over the collapse of banks and money market funds have
abated. As of March, money flow into non-cash investments showed signs of an uptick as investor risk-appetite grew.
Recent data from the Investment Company Institute shows that beginning the week of March 18th, money started to
flow into bond and domestic equity mutual funds, albeit more slowly into equities. The week of April 8th showed in-
creasing flow into equities. This trend has significant running room, as U.S. investors in March were holding more
assets in cash than in equities for the first time in more than twenty years, according to the American Association of
Individual Investors. Portfolio equity allocations are now at an all-time survey low of 41 percent.
• The Conference Board Measure of CEO Confidence has recently bounced off the historic lows it set in the fourth quar-
ter of 2008. Despite signaling continued weakness in the labor market, the survey indicated that CEOs have “grown
more optimistic about the short-term outlook.” Many economists expect real consumer spending to show consistent
annual increases beginning in the third quarter this year, while unemployment (traditionally a lagging indicator) is not
expected to peak until the fourth quarter or early next year.
• During February, for the first time in eight months, inventories at U.S. wholesalers declined in relationship to sales.
While wholesale inventories dropped by 1.5 percent (the greatest drop on record), wholesale sales increased by 0.6 per-
cent. Thus wholesalers were continuing to draw down inventories, while retailers and other businesses wanted to re-
plenish supplies. If the trend continues, it is a strong early sign of recovery in economic activity.
• Gallup’s Consumer Mood Index was up 6 points for the week ending April 5, the fourth consecutive week of increase.
The index is now as high as it’s been in over a year—buoyed, perhaps, by improvements in the stock market. Addi-
tionally, a recent AP-GfK poll showed the number of Americans who think the country is heading in the right direction
more than doubled between October and February—to 40 percent.
• China’s aggressive stimulus program is beginning to take root. New lending in China surged more than sixfold year-
over-year in March to $277 billion. Banks, which are mainly state-owned, are being directed to make over $700 billion
in new loans this year—a hurdle that is likely to be significantly surpassed. While debate continues regarding the
long-term quality of these loans, the near-term effect is stimulative, and China is a key driver to robust global growth.
Urban fixed-asset investment in China has surged 26.5 percent in the first two months of 2009. Manufacturing ex-
panded in March for the first time in six months. Automobile sales in China have exceeded automobile sales in the
U.S. for the last three months in a row, and are running at a pace of 1.1 million per month.
• Energy prices of oil and natural gas remain moderate, after a significant decline over the last 9 months. As a result,
worldwide consumers have been provided with an increase in spending power compared to a year ago. While other
commodity prices have shown moderate signs of a rebound through March, these costs too remain well below year-ago
levels. Consumers are likely to begin to see increased effects of these lower energy and commodity prices translating
through to lower prices on consumer goods of all kinds.
While there are signs of increased economic activity, it is clearly very difficult to predict the exact timing of a recovery
from this recession that is now the longest in the post-war era. Despite better recent news, long-term economic challenges
certainly remain. The country is headed for a massive 2009 deficit of $1.75 trillion, a four-fold increase in the deficit over
the previous year. This spending is likely to have substantial repercussions on inflation and taxation pressures well into
future years. Commercial real estate has also received a lot of attention lately as a sector that will continue to suffer as lend-
ing tightens and unemployment increases. Prices in commercial real estate are thought to be down 30 percent from peak
levels, putting further pressure on bank balance sheets. We remain cognizant of such long-term challenges when selecting
investments for the Fund.
One particular market threat increasingly coming into focus is the Fed’s growth of the money supply, which dramatically
expanded from $843B at the start of 2008 to an estimated $1.6T today. Typically money supply growth of this magnitude
would be highly inflationary. However, the rapid slowing of monetary velocity caused by depressed bank lending levels
and a diminished consumer appetite has thus far kept significant inflationary pressure in check. In dramatically growing the
money supply, however, the Fed will now have the difficult task of trying to perfectly time the removal of its huge mone-
tary stimulus as the pace of bank credit creation quickens and velocity of money increases. If the Fed pulls the money sup-
ply in too quickly, it risks damaging economic recovery. If the Fed reacts too slowly, inflation may take-off with a venge-
ance. We believe there will be an unspoken bias on the part of policymakers to accept a period of above-trend inflation in
order to reduce the ongoing burden of high consumer and public debt levels. Politically, monetary inflation is likely to be
the easiest option, shifting the burden towards foreign and forgotten treasury holders, and away from voting taxpayers.
Therefore, with economic activity showing some signs of recovery, we are thinking a little further down the road, and trying
to position the portfolio for the possibility of higher-than-usual inflation. We believe companies with real assets and natural
resources will eventually be the beneficiaries of such a scenario, as will companies with manageable longer-term fixed-rate
debt that can be repaid with cheaper dollars.
If inflation does take hold, investors in low-yielding and long-duration fixed-rate government or corporate bonds are likely
to be disadvantaged as the thirty-year bull market in these bonds comes to an end. Through this bull market, yields on AAA
corporate bonds have fallen from a peak of over 15.49% in September 1981 to a low of 5.05% in December 2008. This
trend is illustrated in Figure 4. Investors with long time horizons or investors in bonds with distant maturities should con-
sider substantial risks that bond yields turn higher, causing the value of existing bonds to decline.
Figure 4: Moody’s Seasoned Aaa Corporate Bond Yield (AAA)
1980 1985 1990 1995 2000 2005 2010
Source: Board of Governors of the Federal Reserve System
Tentative signs of revival in the economy, massive government deficits, large increases in the money supply, challenges to
the dollar’s status as the world’s reserve currency, and an already extended period of very poor equity returns are all indica-
tors that timing currently favors equities rather than these highly-rated bonds. While there is currently abundant opportunity
in high-yield bonds, we strongly believe investors who are now moving more heavily into AAA corporate bonds and Treas-
uries are highly likely to be disappointed to find their “safe” investment depreciating rapidly as the 30-year bull market in
As large shareholders in the Fund, we understand how the market declines and heightened volatility of the last 18 months
have been painful. Even now, we cannot know with certainty whether this most recent upturn in equities will persist. Yet
we can be confident that the equity markets today are providing bargain priced securities. We know that great stock pur-
chases are often made in the face of uncertainty and despair. The key to reaping the advantage of those superior long-run
returns is to remain invested and patiently focused on the fundamentals following periods of market illiquidity and panic
selling such as those experienced in the last six months.
Please be aware that whatever the market conditions, we are working diligently to identify the best investments currently
available in the market. Our firm remains focused on the deepest value stocks in the market, and we are well-positioned for
the time, when it does come, that equity markets return to more stable conditions. Employees and their families remain
heavily invested in the Fund, and I have continued to purchase additional Fund shares in personal and family accounts in the
first quarter. For those of you holding cash on the sidelines, we encourage you to continue averaging into the Fund at these
levels. As always, our shareholder services representatives are available via 1-800-528-3780 for routine questions. Should
you have any detailed questions regarding our Fund’s investment process or market approach, you are always welcome to
call me personally at 703 528-7788.
Scott L. Barbee
Aegis Value Fund
The Aegis Value Fund is offered by prospectus only. Before investing in this Fund, investors should carefully consider all
risks of investing in: stocks in general, “deep value” stocks, stocks of smaller companies, and stocks of foreign companies.
Investors should consider the Fund’s investment objectives, risks, charges, and expense. The prospectus contains this and
other information about the Fund and should be read carefully before investing. To obtain a copy of the prospectus, please
call us at (800) 528-3780, or visit our website at www.aegisvaluefund.com, where an online prospectus is available.
Date of first use: April 23, 2009 Fund Distributor: Rafferty Capital Markets, LLC