In October the Fund (I-class) was down 6.6% versus a 7.6% decline of the MSCI World small-cap index. This was the steepest monthly decline of the index since the start of the Fund. Life-to-date we have so far been able to, on average, outperform our benchmark in these down months. Despite some value style headwinds year-to-date the Fund showed a 1.0% performance versus a benchmark return of 0.0%. While we realize declines in the stock markets are always painful for our shareholders in the short-term, we also know from our experience that particularly in these markets an active manager can make a real difference. On average the small-cap universe declined 13% from the recent peak to through, however many stocks saw declines of 40-60%. We have added and will add to our portfolio stocks that are oversold and are focused to find a few new, high quality stocks that are heavily oversold.

Three top contributing stocks during the month of October were Dialog (+24%), Spirit Airlines (+13%) and Hitachi High Tech (+12%). Dialog, a European semiconductor company, saw its share price increase by 24% in October. The main reason for this was the announcement of a technology licensing agreement with Apple. We bought our initial position in Dialog on June 22 at EUR 13.8 per share. The stock had declined from a peak of EUR 50 per share in 2017. There was clearly a lot of uncertainty in June. However, what we saw fitted perfectly in the GSC playbook. We saw a company with leading positions in some niche parts of the semiconductor industry run by a strong and experienced management team. The balance sheet was rock solid with a lot of cash and no debt and the valuation significantly below intrinsic value. At the time of writing (November 6, 2018) the stock is up to a level above EUR 24 per share and in our view still undervalued. Spirit Airlines, a US ultra-low-cost carrier, was up 13% in October. The airline reported strong third quarter results and surprised the market with a better than expected guidance for Q4. Demand for air travel in the US is currently very strong, allowing airlines to pass higher jet fuel prices on to customers. In addition to a healthy fare environment, Spirit has executed well operationally and implemented various revenue initiatives that are starting to bear fruit. Hitachi High Tech's share price rose 12% last month, reversing some of the declines we have seen in previous months. Hitachi High Tech's fiscal Q2 results showed, as expected, some weakness in the semiconductor equipment division, while the medical equipment division continued to show a strong performance. Since 30% of the market cap is net cash the company's enterprise value is only 6x EBIT.

Negative contributors in October were Thermon (-14%), Trinity Industries (-20%), and Brunswick (-21%). Thermon reported quarterly results below expectations. While the company raised its guidance on revenues for the full year, the gross margin in the quarter was lower than anticipated by analysts. We believe this lower gross margin mainly reflects the lumpiness of the business and the large amount of mix effects. The quarterly results did not change our view on the business, its position within the value chain nor its (future) profitability. Trinity Industries reported quarterly results below expectations. Moreover, the company has been in the process of preparing a spin-off of part of its business as per 1 November, which created some noise. The share price has been partly rebounding in the first days of November. Brunswick's stock was down 21% in October. We view this sell-off as overdone. The company reported very strong Q3 results in its core Marine segment. The turnaround in the Fitness division takes longer than expected which is somewhat disappointing, but given the relatively small size of this division the impact on the stock price should be limited. The company also announced a leadership transition where the CEO Mark Schwabero will be succeeded by the internal candidate David Foulkes. We added to our position on the weakness.

The Fund invests world-wide in smaller companies (small-caps). One attractive feature of small-caps is that they are generally monitored by a small number of analysts, which leaves plenty of opportunity to add value as active investors. When looking for new investment opportunities, screening is applied to reduce the investment universe to a manageable size of 500 companies. We screen for companies that are of above-average quality and that are attractively valued. Extensive fundamental analysis is done on both existing portfolio companies and new portfolio candidates. This includes analysis of the company’s public filings (like annual reports) and comprehensive dialogues with the management teams of companies that we invest in. For each stock we base our investment decision on an extensive investment case, which is supported by a proprietary financial model. ESG topics (Environmental, Social and Governance) are fully integrated in our investment process. The result is a well-diversified portfolio of 60-90 companies spread across sectors and regions. Many portfolio companies have leading positions in the niche markets in which they operate. The companies in the portfolio typically have robust balance sheets and high returns on capital employed, which indicates that these companies are structurally capable of increasing shareholder value via their operations. The portfolio has a more attractive price earnings ratio versus the benchmark.