In June the Fund (I-class) was down 1.2%, versus a 0.4% decline of the MSCI World Small-cap index. Year-to-date, the Fund (I-class) is up 5.9% vs the benchmark return of 5.6%. The outperformance in H1 2018 was realised despite some style headwind as indicated by the MSCI World Small-cap value index which returned only 3.0% in the first half of 2018. At the end of June, Morningstar published its first qualitative analyst review of the Fund. We are very pleased to have received a Bronze qualitative rating from the Morningstar analysts in addition to our 5-star Morningstar rating based on performance.

Three top contributing stocks during the month of June were LHC Group (+11%), Synaptics (+19%) and Sparebank SR1 (+10%). LHC Group, a US home health provider, presented at several broker conferences in June. The key take-away from the management presentations was the integration of the Almost Family acquisition that is tracking ahead of plan. Furthermore the regulatory environment is improving for the home health industry, which is also supporting the shares. Synaptics, a pioneering human interface technology, confirmed on 19 June that it is engaged in discussions with Dialog Semiconductor plc regarding the potential acquisition of Synaptics by Dialog. We think a deal makes sense for both companies and we shared our view on the current situation in a (non-public) letter to the Board of Directors of Synaptics. There is no assurance however that a transaction will result from these discussions. Sparebank SR 1 shares recovered from a weak start of 2018. The company announced a small one-off gain in one of its subsidiaries and a merger of the insurance activities in which it has a 19.5% stake with the non-life insurance activities of DNB. Both announcements are small positives for the shares. We also met with the management last month. The CEO believes the worst is behind in terms of oil related loans, as industry conditions have improved and loans have been restructured and appropriate loan loss provisions have been taken.

Negative contributors in June were Luxfer (-8%), US Silica (-17%), and First Solar (-22%). The shares of Luxfer declined by 8% in the month of June, after the share price had rallied 37% in May. The strong performance in May was not only driven by solid fundamentals, but also by the expectation that Luxfer would be included in a US small-cap equity index. This not happening, caused somewhat of a disappointment by the financial market. US Silica was down 17% in June, after a strong run up in the past two months. Takeaway capacity constraints in the Permian have led to the horizontal rig count plateauing and the market worrying that well completion activity, where US Silica's sand is used, would slow. In our view, with WTI crude above $70, other oil-producing basins will pick up the slack and the market for sand will remain very tight, at least in the near future. Most of US Silica's production capacity will be sold at solid margins under long-term contracts with blue-chip customers, which should lead to sizable free cash flow growth in the back half of the year. First Solar's stock price was down 22% last month after the Chinese government reduced its installation target for 2018. Since China is 40% of global demand this could lead to a small reduction in global demand in 2018 as other regions are not able to fully compensate for this decline. The expected ASP pressure due to the potential oversupply has weakened the short-term outlook for the solar industry. First Solar's shares declined less than its peers as the company has a strong orderbook that gives visibility till mid-2020. We remain positive on First Solar as the underlying long-term demand is healthy and First Solar latest technology (Series 6) has the lowest cost price per watt in the industry. Moreover, the strong balance sheet and solid orderbook provides downside protection.

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.