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

August 16, 2022

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

We find ourselves questioning the maxim, “Good things come to those who wait.” After waiting years for interest rates to rise, thereby ushering in a value stock renaissance, “Be careful what you wish for.” is perhaps a more appropriate sentiment. Indeed, while interest rates ascended significantly during the first half of the year and value stocks outperformed, this came in the midst of a stock market selloff, which saw the benchmark S&P 500 enter bear-market territory. The 10-year Treasury yield, which ended 2021 at 1.51%, rose to a peak of 3.48% in June as inflation blew past expectations. Perhaps most concerning, food and energy prices continued to march higher, pinching consumers’ pocketbooks and causing increased fears of a pullback and resulting recession. Meanwhile, the Federal Reserve remains in a predicament, aggressively raising interest rates, while attempting not to cause too drastic a slowdown in the economy. At the same time, they are surely taking note of many key commodities rolling over. For example, as of July 15th, oil is 25% off 2022 highs, lumber 56%, wheat 43%, corn 27%, copper 37%, etc. While these decreases have yet to work their way into lower prices for consumers, eventually they should, and the Fed risks being overly hawkish and sending the economy into a severe downturn.

Meanwhile, the U.S. may already be in a recession. Real GDP declined 1.6% in the first quarter, consumer confidence is plunging as gas prices hit record highs, and retail sales fell 0.3% in May for the first time this year, falling short of consensus expectations for +0.1%. Recession or not, it is likely semantics – the economy is slowing. However, much as we were of the opinion last year that the stock market and Federal Reserve were underestimating prospects for inflation, we believe many of the draconian scenarios being discussed are likely overshooting the mark. Many believe that in order to tame inflation the Fed will need to continue aggressively hiking rates in 50 to 75 basis point increments for the next several meetings, thus sending the economy into a severe recession. By way of reference, estimates in mid-June had the Fed Funds Rate reaching a high of 3.75% by April, 2023 (compared to 1.58% at the time), which we believed to be overly aggressive, as the already-slowing economy is doing some of the Fed’s work for it. Notably, current expectations have been reduced to a high of 3.30%. As mentioned above, many commodities are well off peak levels, and gas prices have started to decrease. Additionally, supply chains are beginning to normalize, which will alleviate some of the resultant cost pressures. Notably, inflation expectations have also come in recently, as can be seen by the 5-year TIPS breakeven chart below.

In our estimation, the Fed will be less aggressive than current forecasts would indicate, and while we may experience a moderate recession, many stocks are already discounting that (or worse). As discussed further below, we see attractive opportunities in several cyclical areas, including (but not limited to) certain restaurants and banks.

We believe the bank sector offers an asymmetric risk-reward opportunity. Despite taking the Funds’ sector exposure lower after strong price performance in 2021, we nonetheless remain overweight. Bank valuations today are attractive, currently in the bottom decile on forward price-to-earnings and bottom quartile on price-to-tangible-book-value. It is worth noting that forward estimates reflect a normalization of credit quality toward pre-COVID levels. At this point, investors are discounting a moderate recession in valuations, and investor sentiment is unsurprisingly poor. Given banks are dependent on consumer and business credit quality, on the surface it is understandable why investors have flocked from the sector. However, we are significantly more constructive on fundamentals.

Post the Great Financial Crisis, balance sheets have drastically improved which offers significant downside protection in the event that a recession takes place. Loan underwriting standards are very strong relative to long-term history, securities portfolios carry minimal risk, lenders are awash in liquidity, and banks maintain excess regulatory capital. While the introduction of Dodd-Frank and other regulatory burdens following the Financial Crisis have been a headache for banks, they have undoubtedly strengthened risk controls and oversight. It is also worth noting that while investors believe a major deterioration in credit quality is around the corner, credit quality and delinquency trends remain quite good.

Additionally, investors are overlooking the upside case for owning banks via earnings leverage to higher short and long-term interest rates. This can alternatively be viewed as an embedded hedge against the persistence of above-

trend inflation. The loan growth outlook also remains strong for the sector, and many banks we regularly meet with cite record loan pipelines. Compared to other sectors, banks remain shareholder friendly when it comes to capital return policies with regular stock buyback programs and attractive dividend yields. We also expect the bank consolidation trend to continue with multiple names in both the Opportunity Fund and Capital Appreciation Fund as potential beneficiaries. In summary, we like owning banks at heavily discounted valuations with an embedded call option on higher rates and a less than severe economic downturn.

Restaurants are another cyclical area in which we see opportunity. As many have witnessed, restaurants were severely impacted by the pandemic-induced lockdowns of the past few years, with full service restaurants the most severely affected given their reliance on in-person dining. To help withstand the difficult environment, restaurants leaned into off-premise sales channels such as curbside and 3rd party delivery, menus were simplified to reduce food waste, and companies found more efficient ways to staff restaurants and run corporate operations. Eventually, COVID-19 vaccines were administered to the population, and legislators began easing the restrictions on in-person dining. Many restaurant stocks reached all-time highs as investors extrapolated the new, leaner, cost structures of these companies onto a sales environment of pent-up demand and looser restrictions. However, that optimism would prove to be short lived.

Over the past 18 months, restaurants have faced a variety of issues which negatively impacted company fundamentals, investor sentiment, and ultimately, stock prices. Staffing has been a challenge, with companies struggling to recruit and train employees in a tight labor market, especially as various waves of COVID drove increased absenteeism and reductions in the workforce. Restaurants were forced to either increase their wages or fail to service demand. Company margins were further pressured by increasingly elevated food procurement costs. Combined, these cost buckets have a major impact on overall restaurant profitability, with food & beverage plus labor costs typically accounting for 60% of a restaurant’s revenue. As a result of these pressures, the prospect of ever-expanding margins was deemed too optimistic and investors reduced their outlook for the restaurant industry’s prospective earnings power.

Fast forward to mid-year 2022, and investor concern has shifted from margins to consumer demand. Cost inflation across a wide range of essential products and services has led to declining consumer sentiment and a lower level of discretionary funds available. Additionally, the Federal Reserve is tightening financial conditions to slow economic activity and fight inflation. Slowing economic activity and more cautious consumer spending habits are not typically favorable for discretionary activities like dining out. Given this backdrop, restaurant stocks have sold off considerably. Earnings estimates for the broader S&P 1500 Restaurants index have fallen >7% this year to reflect cost inflation across both food and labor, and a weakening demand environment. The index price is down 21% year to date through June 30, as the broader market environment has reduced the multiples investors are willing to pay for a given level of earnings.

Our preference for “quality” or strong businesses with best-in-class management teams is only heightened during times of volatility or economic stress. With earnings estimates for the group revised lower and investor sentiment largely negative, we saw an opportunity in late June to increase our exposure by initiating a position in Texas Roadhouse (TXRH) in both Funds. Texas Roadhouse is a chain of over 670 steakhouses offering hand-cut steaks and other barbeque-oriented food at a moderate price, in a fun, family-friendly atmosphere. While TXRH is not immune to the challenges facing the industry, we believe the company’s top-tier margin profile, pristine balance sheet, long-term oriented corporate culture, and track record of industry outperformance positions TXRH

favorably for the long term. Management has outlined various levers at their disposal to mitigate the various headwinds facing their business. The company currently offers an average check that is several dollars cheaper than their closest competitors, leaving room to increase prices as needed, while also implementing new digital technologies that should improve hourly labor efficiency across their restaurants. In the event of a more benign operating backdrop, we believe the company has the opportunity to capitalize on a long unit growth runway while still generating significant sums of free cash flow. To summarize, TXRH is a best-in-class restaurant operator and the current market environment presented us with an opportunity to invest with a favorable risk-to-reward profile.

The Prospector Opportunity Fund decreased 11.82% during the first half of 2022. This compared to a 21.57% decrease for the Russell Midcap and a 23.43% decline for the Russell 2000. The two biggest drivers of outperformance were your investments in the financial services and healthcare sectors, which both materially outperformed the benchmarks. While healthcare outperformance was led by strong gains in both Merck and Cigna shares, financial services was driven by our property-casualty holdings, including Alleghany Corp. (Y), W.R. Berkley (WRB), and White Mountains Insurance Company (WTM - discussed further below).

In March, Alleghany (the Opportunity Fund’s top contributor during the period) agreed to be acquired by Berkshire Hathaway for a 29% premium to Alleghany’s average stock price over the previous 30 days. Part of our thesis for owning Alleghany was its being undervalued on a sum-of-the-parts / private market value basis, and we’re happy to see that value recognized. The company owns a variety of businesses, but insurance and reinsurance are the largest contributors to aggregate results. Fundamentals for re/insurance started improving in 2019 and we were confident that earnings in 2021-2022 would be much improved. Investor concerns regarding aggregate industry exposure to COVID insurance claims yielded an attractive opportunity in the stock. We knew their businesses well, having followed developments for years, and valued the segments on a sum-of-the-parts analysis, including private market values for comparable re/insurance enterprises sold in recent years. We concluded that shares of Y were selling well below our derived intrinsic value and invested accordingly.

We view two of your Fund’s largest purchases in the first half of 2022 similarly to Alleghany – White Mountains Insurance Group (WTM) and Fairfax Financial (FFH-TSE). White Mountains has always been a buyer and seller of businesses. In 2018, WTM acquired NSM, a specialty insurance program administrator, and in 2020, announced a material investment in Ark Insurance Holdings. The timing of these acquisitions looks excellent through today’s lens. Insurance industry pricing power returned in 2019, and much value has been created in the sector since that time. We performed a similar sum-of-the-parts analysis on WTM as we did Y, including private market values for comparable re/insurance enterprises sold in recent years. We estimated that NSM & Ark represent more than 50% of White Mountains’ intrinsic value, despite only representing ~37% of the stated GAAP equity and ~14% of tangible equity.

Fairfax has been referred to as the “Berkshire Hathaway of Canada” from time to time. The company owns many sizeable reinsurance and insurance enterprises, as well as a diverse mix of non-insurance businesses, either via 100% ownership, or partial ownership via common stock holdings. We have followed developments at the company for many years and find the current positioning to be quite favorable for the environment of today. With the Federal Reserve aggressively raising interest rates, we note the sizeable cash and short term investment balances of FFH, which equated to ~44% of invested assets and >2x tangible common equity. As we have shared with our thoughts on Alleghany, much value has been created in the re/insurance sector in recent years, and by our estimation, the current share price of FFH does not accurately reflect the private market values of its insurance subsidiaries.

Interestingly, in December of 2021, FFH sold 10% of one of its subsidiaries, Odyssey Re, for $900M, implying a $9 billion valuation for that subsidiary. For point of reference, Odyssey accounts for less than half of FFH’s tangible equity, and the aggregate market capitalization of FFH is $13 billion. With a view that FFH is significantly undervalued, we initiated a position in FFH during the first half.

The Prospector Capital Appreciation Fund declined 8.94% during the first six months of 2022. This compared to a decrease of 19.96% in the benchmark S&P 500. While a rotation to value stocks helped your portfolio outperform the benchmark in most sectors, the largest area of outperformance came from financial services, where two of the Fund’s largest investments entered into agreements to be acquired at large premiums. These included the aforementioned Alleghany Corp., as well as your portfolio’s top contributor for the period, First Horizon Corp. (FHN).

At the end of February, FHN received an all-cash bid from Toronto-Dominion Bank. The purchase price totaled $13.4 billion, or a +37% purchase price premium. By way of background, our investment in Tennessee-based First Horizon originated in August of 2020. In our view, the bank was well positioned for the COVID environment. Their large mortgage bank and fixed income trading business greatly benefited from the zero-interest rate environment and exhibited counter-cyclical attributes. Also appealing were EPS tailwinds in the form of cost and revenue synergies resulting from First Horizon’s merger with Iberia Bank (completed in early 2020). Additionally, there was downside protection in the form of a large credit mark on Iberia’s acquired loan book. As the pandemic progressed, First Horizon’s balance sheet became increasingly asset sensitive, resulting in an embedded “call option” on higher rates.

We especially liked the geographic footprint of First Horizon which has a large presence in the attractive markets of Tennessee, the Carolinas, Florida, Georgia, and Texas. We view these markets positively given the presence of pro-business policies and strong in-migration trends fueled by the relative cost of living, job growth, quality of life, and warm weather. Our theory is this should translate into above trend loan growth and be supportive to credit quality in the face of higher rates. As a result, we view the South as an attractive market for M&A, and pegged First Horizon as a long-term M&A candidate. Management teams are confirming our rationale, as the attractiveness of the Southeast is a key reason why Toronto-Dominion is acquiring First Horizon. PNC also cited the attractiveness of the South with their $11.6 billion acquisition of BBVA USA.

While the potential to be acquired is never the sole reason we own a stock, in your portfolio, there are other banks which we view as highly attractive M&A targets. These include Florida-based SouthState Corporation (SSB – the Fund’s second largest purchase during the period), Georgia-based Synovus Financial Corp (SNV), and Comerica Incorporated (CMA) which has a large presence in Texas and growing franchises in Florida, Arizona, and North Carolina. We expect the trend of bank consolidation to continue across the United States, with a particular emphasis in the South as supported by the commentary of large potential acquirers. Your portfolio remains in a good position to benefit from this continued trend of consolidation, which is an important catalyst to realizing value.

While two of the Fund’s most significant purchases were the aforementioned White Mountains and Fairfax Financial (discussed in POPFX highlights), the largest purchase for PCAFX during the first six months of 2022 was a new position in the May, 2025 2.75% convertible of Zillow Group, the real estate marketplace. Zillow stock had come under extreme pressure given questions over the direction of the real estate market as well as management credibility issues after the company announced in November they were discontinuing and unwinding their ill-fated foray into buying and “flipping” homes. This announcement, along with the admission that they purchased many homes for above where the company expected to be able to sell them caused a very negative investor reaction.

Given the robust cash flow profile of Zillow’s underlying business, we watched with great interest as events unfolded and the stock continued to come under pressure. With the announcement of 1Q22 results, the company reported they were able to sell their entire portfolio of homes, which bolstered and already-strong balance sheet. Subsequent to the sales, Zillow sits with a net cash position of $2 billion, is buying back a significant amount of shares, and trades near a 10% free-cash flow yield. With the converts trading at a modest premium to par at time of purchase and Zillow stock attractively valued, we see the security as an attractive way to participate in upside should the housing market be more favorable than feared, while having solid downside protection.

Equity and bond market declines have been pronounced, and we are only half way through 2022. The Federal Reserve has started its aggressive campaign to lower inflation, and equity and bond markets are likely to remain volatile until investors can adequately discount the degree and duration of interest rate increases. The U.S. and rest of the world continue to manage the impacts of high inflation, Russia’s invasion of Ukraine, and China’s “zero-COVID” policy. In our assessment, markets reflect a reasonably high probability of recession.

Employment remains a bright spot in this economy. Supply/demand imbalances in the labor market bode well for the health of the consumer given full employment and the prospect for further wage gains, which partially mitigates the impact of inflation on the consumer. While there are rising concerns regarding affordability, the housing market should be buttressed by a shortage of affordable housing after over a decade of underinvestment post the Financial Crisis. Lower-income consumers have been most impacted by the current inflationary environment, but consumer balance sheets remain generally healthy for the majority of Americans. COVID mortality has improved and related pent-up demand is impacting many areas of the economy. These are reasons to believe a recession could be less significant than the previous two recessionary periods.

Following years of lower interest rates helping to drive ever-higher growth-stock valuations, we feel value investing is ripe for a period of outperformance. Further, given the recent market correction, we are finding opportunities to invest in quality businesses with solid balance sheets and cash flows, whose share prices have detached from our assessment of the fundamentals. The bargains inherent in your portfolio should attract acquirers and other investors over time.

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.

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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, 2022 – June 30, 2022).

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.

ADR – American Depositary Receipt

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.