Prospector Opportunity Fund (POPFX) N-CSRSCertified semi-annual shareholder report (management investment company)

August 3, 2021

Dear Shareholders of the Prospector Capital Appreciation Fund and Prospector Opportunity Fund,

Transitory.  Anyone following the markets recently has heard the word bandied about ad nauseam, and the question of whether inflation would serve to be temporary (transitory) or more permanent drove the daily movements of the market.  The Consumer Price Index (CPI) reading for March showed heightened levels of inflation, jumping 2.6%, fueled by an economy that was rapidly expanding due to increased vaccination rates, reopening of businesses, and continued stimulus.  Following that reading, the debate over “transitory or not” quickly heated up, with every economic reading being scrutinized as to whether it was indicative of more persistent inflation.  If inflationary, then the 10-year Treasury would sell off, value stocks would lead growth, and vice versa.  The April CPI reading jumped again, this time to 4.2%, followed by 5.0% for May and June’s 5.4% - the highest reading since August 2008.  Despite these readings, the markets seemed to vote “transitory” as long-term bond yields came off the late March highs, and the yield curve began to flatten.  This was exacerbated when Fed chairman Jay Powell indicated during the June meeting that they would expect to raise rates earlier than previously planned (albeit not until 2023), eliciting fears of a prematurely hawkish Fed pouring cold water on the current economic expansion.  The 10-year yield, which ended March at 1.74%, sank to 1.47% at June 30, and the yield curve flattened considerably.  This also caused investors to pile back into growth stocks and sell interest-rate sensitive stocks (for example, banks and other financials) as a consensus developed that we were poised to be in a persistently low interest rate environment.  As discussed in previous writings, lower long-term yields tend to favor higher-growth companies as future earnings are discounted at lower rates.  So, is the market right?  Will inflation serve to be transitory despite the rapid economic expansion and unprecedented stimulus, and thus are we destined for a semi-permanent low-interest rate future?  Before a conclusion is reached, we believe the following additional questions will likely need to be answered:

By this point, we have all likely experienced some impact from recent shortages of products, materials or labor.  If you were looking to build a deck, or a similar project, you surely noticed the impact as lumber prices soared to over $1,600 per thousand board feet from under $400 a year prior.  In the market for a car?  You’ve likely had trouble finding one, and / or noticed the sky-high prices of what is actually available.  A confluence of pandemic-related events has led to shortages of lumber, autos (due largely to a lack of semiconductor supply), and many other products.  When the pandemic hit, manufacturers shut down plants, sawmills, etc., laying off workers in the process.  In a normal recovery, these plants and mills slowly come back online as the economy gradually improves.  However, during this unprecedented v-shaped recovery, supply has been unable to recover as quickly as demand – creating these product shortages.  Additionally, this has been compounded by a labor shortage despite continued high levels of unemployment.  Whether because out of work individuals are reluctant to go back to work due to ongoing COVID-19 concerns, the lack of child care, or the ongoing stimulus payments they are receiving, many companies are finding it hard to re-staff their factories, shops, restaurants, etc.  Many restaurants have been forced to open on a limited schedule due to staffing shortages.

While many of these shortages will work their way through the system, proving to be temporary (e.g., lumber prices are back to just under $600 as mills have come back online or ramped up production), it remains to be seen how much will last longer term.  Prices are increasing on products as companies attempt to keep up with input cost pressures, and businesses are being forced to raise wages to entice new employees.  Will these price increases reverse as supply chains stabilize and will wage pressures abate as enhanced unemployment benefits roll off in the fall, causing some unemployed Americans to start looking for jobs again?  And not to be overlooked, given rents

make up about one third of CPI – will the July 31st end to the moratorium on evictions, enabling landlords to adjust leases, cause a significant rise in rents?  Only time will tell.

As can be seen in the chart above, we’ve been in a persistently negative real rate environment since the beginning of the pandemic, with rates staying persistently low despite the economy’s rapid recovery.  We do not purport to be economists, but one macro-economist we respect suggests this may be partially the result of Fed asset purchases, and thus may lead to a rise in rates as asset purchases abate.  Mike Darda, of MKM Securities, points out in recent notes that the real yield of 10-year inflation-protected securities has averaged about 25 basis points over a long period.  According to Darda, assuming inflation expectations of about 2% hold steady (recall, the Fed has indicated a willingness to allow inflation to go over 2% for a period), “that would mean the 10-year yield would climb to 2.3% or so.”   Adding some weight to this theory, JP Morgan recently noted, “…from the start of 2021 through May 2021, the Federal Reserve’s Treasury purchase of $80B per month has totaled $400B YTD, or roughly equal to the total net issuance of Treasury securities of $415B. As of May, the Fed held 24% of total Treasuries outstanding and up from 15% in February 2020 (pre-pandemic).”  Should the Fed begin to limit asset purchases, it seems plausible yields will rise in response.

To date, an estimated $5 trillion of stimulus has been injected into the economy by the U.S. government, equal to 24% of GDP.  This compares to $1.6 trillion during the Great Financial Crisis, or 11% of GDP, of which a large portion was aimed at stabilizing the financial system versus directly stimulating the economy.  This is in contrast to the pandemic-induced stimulus program, of which much went directly into consumer pockets (via checks, school lunch aid, unemployment insurance, etc.) and to small businesses (PPP Program, Economic Injury Disaster Loans, etc.).  This stimulus has unquestionably aided the current “v-shaped” recovery.

An infrastructure bill could add an additional boost to an already rapidly expanding economy, and while President Biden announced a bipartisan agreement on a $1.2 trillion infrastructure deal on June 24th, followed by a bipartisan Senate bill being introduced on August 1st, we would not cast aspersions at those who are dubious any such agreement will pass.  However, if a bipartisan deal doesn’t pass, the likelihood increases that a Democrat simple-majority bill is pushed through via the budget reconciliation process.  Should this occur, it’s more than likely the package would be

much larger than a bipartisan deal, potentially in the multiple trillions.  While controversial in a gridlocked Washington, where more and more gets pushed through via executive orders, and via the budget reconciliation process, a larger infrastructure deal would surely add more fuel to the economy, and raise the specter of increased inflation.

Even if the aforementioned scenarios all point in the direction of rising interest rates, the wildcard will be if we see a resurgence of COVID-19.  Recently, concerns over the “Delta” COVID-19 variant have weighed down the market and contributed to the rally in Treasuries, further depressing interest rates.  There have also been reports of a “Lambda” variant, that has hit some South American countries and even Canada, and is anecdotally more severe than even the Delta variant.  Should one or more of these variants cause the vaccines to prove ineffective, we could see slowdown, or even a double-dip recession.  More than likely however, this would lead to another flood of government stimulus, and just delay the expansion as vaccine boosters effective against the new strains are developed.  The added stimulus and continued ballooning of the U.S. balance sheet would further stack the deck in favor of an inflationary period and increased rates down the road, albeit delayed by the virus.

So, what does this all mean for the Funds?  While your portfolio would, in our estimation, benefit from any rise in interest rates and steepening of the yield curve, that is not a main thesis for portfolio holdings or sector bets.  The same could be said as it relates to inflation.  For example, we are overweight banks - a sector which would surely benefit from rising interest rates and a steeper yield curve (as net interest margins would expand).  However, as we have stated in prior communications, we feel there are multiple other “ways to win” with the banks we own...including a significant capacity to grow loans as the economy continues to expand, the potential to return material amounts of capital to shareholders or be acquired, as well as continued multiple expansion.

In fact, focusing on individual holdings or sectors is missing the forest for the trees, in our view.  The biggest factor in a rising interest rate environment is likely to be a rotation out of highly-valued growth stocks, which have enjoyed a decade plus of outperformance and valuation expansion, and into value stocks.  In our view, investors who are overweight these growth companies are making an implicit bet that the low-interest rate environment will last for the foreseeable future - especially (as can be seen from the chart below) given the valuation gap between growth and value is near the widest it has been since the dotcom bubble.  While, admittedly, we’ve been waiting for Godot (in the form of a rotation to value stocks) for quite some time, we are steadfastly continuing our process of bottom-up research, finding attractively-valued investments, while always considering the potential downside first.

The Prospector Opportunity Fund increased 15.36% during the six-month period ended June 30, 2021.  This compared to a 16.25% increase for the Russell Midcap and a 17.54% advance for the Russell 2000, as smaller companies fared better during the period.  Top contributors to your portfolio during the period were largely holdings which benefited from the continued cyclical recovery.  Among the top five contributors were:  fast-casual restaurant chain Noodles (NDLS), staffing services company Robert Half (RHI), oil & gas production company Hess (HES), and KeyCorp (KEY), the largest contributor among our bank holdings.  Also within the top five was FLIR Systems, Inc. (FLIR) which was acquired by Teledyne during the period.  Given the strong overall performance, there were few decliners in the first half, however, the top two detractors were both catastrophe-exposed property-casualty insurers – RenaissanceRe and Lancashire Holdings.  We discuss these names further in the Capital Appreciation section below.

The largest purchase during the first half of 2021 was a new position in FirstBank (FBP), the second-largest bank headquartered in Puerto Rico with a market cap of $2.6 billion.  The bank offers consumer and commercial banking services in Puerto Rico.  Historically, we’ve avoided investing in Puerto Rican banks given the persistent contraction of the economy since the Great Financial Crisis.  However, we believe Puerto Rico is turning the corner and in process of an economic rebound.

We believe the Puerto Rican consumer will be a major beneficiary of the pandemic relief effort.  To put stimulus into perspective, GDP per capita on the island is $32,000 compared to $64,000 for the United States mainland.  Residents have received the same Federal stimulus checks and unemployment benefits as their mainland counterparts.  Given GDP per capita is half of that on the mainland, we expect a multiplier effect which should result in a meaningful acceleration in the economy.  Additionally, post Hurricane Maria in 2017, $71 billion of relief money was allocated by Congress to Puerto Rico for reconstruction.  To date, only $21 billion has been disbursed.  Now under a Democratic-led D.C., relief funds are being released, with the proceeds slated for major infrastructure projects.  The undistributed funds equate to approximately 66% of Puerto Rico’s annual Gross National Income (GNI).  This represents a multi-year boon for the economy, both in terms of the immediate fiscal spending and long-term benefits from new infrastructure.

Also encouraging - Puerto Rico is fully open and tourism has returned per contacts on the island.  The territory is also doing well on vaccinations and ahead of the mainland.  Companies are hiring and wages are starting to move higher.  There is also a major shortage of both high-end and affordable homes, which is leading to significant construction activity.  Puerto Rico continues to attract high-net-worth individuals given major tax incentives associated with residency.  There is evidence that the out-migration trend of the past 15 years is reversing and some experts expect population inflows.  Finally, we are encouraged by positive traction regarding the island’s debt and fiscal restructuring.

We expect these tailwinds will result in a strong economy and positive sentiment, which should translate to loan growth and stable credit quality.  While FirstBank is a beneficiary of this backdrop, the bank can also drive earnings growth internally.  One initiative is through the return of excess capital.  Given the company has a common-equity-tier-one (CET1) ratio of nearly 18% as compared to mainland peers at 12%, we can make a case that FBP could repurchase 25%+ of shares outstanding over the next three years, while maintaining above-peer capital.  The bank is well on its way with the announcement of a $300 million buyback program in April.

We also have a favorable view of FBP’s 2020 acquisition of Banco Santander Puerto Rico.  The deal enhances FirstBank’s franchise value, and is 35% accretive to normalized earnings with a short tangible-book-value earn-back period.  Additionally, the bank also has over a third of its balance sheet in the form of cash and available for sale securities.  Remixing into loans over time will be a boon to earnings – and, if interest rates move higher, FBP has the optionality to reposition the securities book into higher yielding instruments.

There are multiple avenues for FirstBank to be a successful investment.  Despite this, the stock remains very cheap at 1.2x price-to-tangible-book value versus nearly 2.0x for mainland peers.  While FBP has traded at a discount to peers over the past decade, it often traded over 3x price-to-tangible-book value before the Great Financial Crisis.  While we don’t believe FirstBank will return to this rich valuation any time soon, they can close the valuation gap with peers.  The stock also trades at 9x 2022 estimated earnings versus the peer group at 14x.  Street estimates in our opinion are conservative and we can make a case that the stock is trading at less than 7x 2023E P/E assuming the aforementioned tailwinds come to fruition.  Finally, the stock has an attractive dividend yield of 2.3% and management is committed to growing the payout.

The Prospector Capital Appreciation Fund returned 13.57% during the first six months of the 2021.  This was slightly behind the benchmark S&P 500’s 15.25% return.  While most sectors in your portfolio outperformed on a relative basis, financial services stocks were the biggest contributor to the relative underperformance.  Although our bank stocks performed very well during the period, contributing solidly to performance, property-casualty insurance underwriter holdings - especially the most catastrophe-exposed names (e.g., RenaissanceRe and Lancashire Holdings) - were a drag on relative performance.  These stocks continued to be shunned despite the positive pricing environment, given a series of quarters which have been negatively impacted by catastrophe losses.  We continue to be of the mind that these reinsurers are attractively valued, and should garner attention from investors as they report “cleaner” quarters without outsized catastrophe losses.

One of the largest portfolio additions during the first half of 2021 was the purchase of common stock and convertible securities of NuVasive, Inc. (NUVA).  NuVasive, which has a market capitalization of $3.4 billion, develops products, technology, and procedures for the spine surgery market.  2020 was a challenging year for the company with the stock declining 40%+ by the time we began our research process.  Spine procedures are generally deferrable, and as a result of COVID-19, volumes were down meaningfully and it was uncertain as to when they would rebound.  However, by December we were gaining conviction in the eventual mass rollout of vaccines and the ability of hospitals and surgery centers to adapt to COVID implications – this gave us confidence the spine market would begin to rebound in 2021.  We continue to believe that volumes are on a good track to accelerate, especially in the back half of this year.

We also have conviction that NuVasive has taken steps to reinvigorate its product offering.  Historically, the company was the pioneer in minimally invasive lateral procedures and once commanded total market share.  Today, their market share has declined to ~50% given competition from other spine companies and lack of innovation.  They also are behind peers in launching a robotic application for surgeries.  That said, the company is reinvigorating its lineup by launching their largest and most comprehensive cervical product offering, and introducing surgery management hardware / software that will eventually integrate robotic-assisted surgeries in 2022.  In total, 20+ products are expected to come to market in 2021.  While NuVasive is one step behind select peers within robotic surgery and has received a valuation discount as a result, we believe this technology is over-hyped given roughly two out of ten procedures today are able to make effective use of a robot.  We also like their

recent tuck-in acquisition of Simplify, which is accretive to 2022 earnings per share (EPS) and enhances their capabilities in the cervical total disc replacement segment.

In December, when we initially started accumulating a position in NUVA common stock, the valuation was compelling - with the stock trading at 16x 2022E EPS and a near 5% free cash flow yield.  In our estimation, expectations for the company were (and still are) low from Wall Street analysts and investors which is a net positive.  The company is also underpenetrated internationally and is making good strides as Asia revenues grew double-digits in 2020 despite the pandemic.  The aspirational goal of management is to double international revenue – by way of reference, international equates to approximately 20% of normalized sales. The company is also making commendable progress on their goal to expand the operating margin to 20%+ by 2024 via growth, expense saves, and operational efficiencies – this represents over 400 basis points of margin expansion versus 2019.  Finally, we believe the stock has the opportunity to continue to re-rate as approximately half of its outstanding convertible notes and warrants are maturing / expiring this year (this has historically been an overhang for the stock).  The balance sheet is in good shape to fund the maturity of the $650m March 2021 convertible notes.

While we initially purchased NUVA common stock during December, and early-2021, we opted to take some gains in late May after the stock rallied over 40% from our initial purchase prices.  At that time, we initiated a position in NuVasive’s March, 2025 convertible securities, which were trading just above par value – giving us the ability to participate in a portion of the upside if the stock continues to appreciate, and offered attractive downside protection.  We continue to the (now smaller) NUVA common stock position, as well as the converts, and believe the outlook for the company is promising.

2021 looks to be a transitional year.  We are clearly in the early stages of a new economic cycle, following the coronavirus-induced recession of 2020.  Continued progress on vaccinations will allow the U.S. economy to continue returning to more familiar footing with the resumption of dining out, air travel for business and pleasure, and large group gatherings.  The recent United States elections, although closely contested, have ushered in a change in administration with attendant changes in the agenda around stimulus, spending, taxes, and trade.  The razor-thin margins in Congress are likely to temper any radical policy shifts.  Importantly the volatility emanating from the executive branch should ease.

While interest and mortgage rates have lifted, they are coming off historically low levels.  We are seeing early signs of reinflation, however consensus expectations for inflation over the longer term remain relatively subdued despite the historically high levels of government spending here and around the world.  We are carefully monitoring aggregate corporate debt levels (especially BBB- debt which is a single notch above junk status), currently above pre-2008 crisis levels and loom as a potential problem absent continued aggressive Fed support.  Unemployment has shown significant improvement, but continues to be an issue.

In our estimation, overall equity valuations remain at elevated levels, due to the sharp rebound in equities.  The high valuations of a small number of enormous technology companies certainly exert upward pressure to the overall averages.  Recovery in aggregate earnings will take time as certain industries such as hospitality, entertainment, and travel are tied to the success of a vaccine rollout plan, and will take longer to return to pre-coronavirus levels.  Treasury and high-grade corporate bond yields look unattractive after the dramatic flight to safety rally during 2020.  In any case, value investing is ripe for a period of outperformance, and the bargains inherent in your portfolio should attract acquirers and other investors over time.  Meanwhile, we still believe equities represent a superior asset allocation alternative to bonds over the longer term.

Thank you for entrusting us with your money.

Respectfully submitted,

Opinions expressed are those of the Funds and are subject to change, are not guaranteed, and should not be considered a recommendation to buy or sell any security.

Growth and value investing each have unique risks and potential for rewards. Growth stocks typically are more volatile than value stocks; however, value stocks have a lower expected growth rate in earnings and sales.

The Consumer Price Index (CPI) is a measure of the average change in prices over time in a fixed market basket of goods and services.  MSCI USA Value Index captures large and mid cap US securities exhibiting overall value style characteristics.  MSCI USA Growth Index captures large and mid cap securities exhibiting overall growth style characteristics in the U.S.  Price to Earnings ratio (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.  Common Equity Tier 1 (CET1) capital includes the core capital that a bank holds in its capital structure.  CET1 ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress.  The core capital of a bank includes equity capital and disclosed reserves such as retained earnings.  Free Cash Flow (FCF) is revenue less operating expenses including interest expenses and maintenance capital spending. It is the discretionary cash that a company has after all expenses and is available for purposes such as dividend payments, investing back into the business or share repurchases.  Free Cash Flow Yield is an overall return evaluation ratio on a stock that standardizes the free cash flow per share that a company expects to earn against its market price per share.  Basis point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.  Book Value is equal to the cost of carrying an asset on a company’s balance sheet.  Book Value can also be thought of as the net asset value (NAV) of a company, calculated as its total assets minus intangible assets (patents, goodwill) and liabilities.  Par is the face value of a bond.  Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.

The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Russell 2000 Index is an unmanaged small-cap index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell MidCap Index is an unmanaged mid-cap index that measures the performance of the 800 smallest companies in the Russell 1000 Index.  You cannot invest directly in an index.

Fund holdings and/or security allocations are subject to change at any time and are not recommendations to buy or sell any security. Please see the Schedule of Investments section in this report for a full listing of the Fund’s holdings. Prospector Funds, Inc. are distributed by Quasar Distributors, LLC.

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, which may include but are not limited to, redemption fees, wire transfer fees, maintenance fee (IRA accounts), and exchange fees; and (2) ongoing costs, including investment advisory fees; distribution and/or service fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (January 1, 2021 – June 30, 2021).

The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges no sales load or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. The example below includes, but is not limited to, investment advisory fees, shareholder servicing fees and other Fund expenses. However, the example below does not include portfolio trading commissions and related expenses, interest expense and other extraordinary expenses as determined under generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

The industry classifications included in the Schedule of Investments are in accordance with the Global Industry Classification Standard (GICS^®) was developed by and/or are the exclusive property of MSCI, Inc. (MSCI) and Standard & Poor Financial Services LLC (S&P). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bank Global Fund Services.

The industry classifications included in the Schedule of Investments are in accordance with the Global Industry Classification Standard (GICS^®) and were developed by and/or are the exclusive property of MSCI, Inc. (MSCI) and Standard & Poor Financial Services LLC (S&P). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bank Global Fund Services.