In September the Fund (I-class) was down 1.7%, versus a 1.3% decline in the MSCI World small-cap index. Year-to-date, the Fund (I-class) is up 8.2% vs the benchmark return of 8.3%. Despite some value style headwinds year-to-date we managed to perform in line with the benchmark year-to-date. The MSCI World small-cap value index is up 4.2% year-to-date. On 26 September we hosted a round table on small-cap investing in London. In its presentation MSCI Research described that clients increasingly allocate to a broader opportunity set, increasing the exposure to more international markets and to small-caps. We were also pleased that the Mr Alok Maskara shared his perspective on being CEO of listed small-cap company Luxfer. He confirmed that small-caps are underresearched and smaller companies can benefit from having engaged long-term shareholders like ourselves.

Three top contributing stocks during the month of September were Smartone (+31%), Pendragon (+14%) and Sleepnumber (+9%). SmarTone, a Hong Kong mobile telecom operator, saw its share price increasing by 31% in September. Over the last year, the company has been adversely affected by increased competition on price by a few others telecom players in Hong Kong. As of September, the competitive behaviour turned more rational, with one of the companies leading recent price cuts now started to raise prices again. This more benign pricing environment will positively help earnings momentum at SmarTone. Pendragon’s stock price increased 14% in September. There was no significant stock specific news last month. The stock is still materially undervalued if Pendragon can maintain its historic margin profile. Sleep Number Corporation stock moved up 9% in September. Labor day weekend is the most important weekend in the US for mattress retailers. According to channel checks sales were strong during that weekend. Also, the market started discounting the upcoming bankruptcy filing of competitor Mattress Firm.

Negative contributors in September were First Solar (-7%), AA (-13%), and Delek (-22%). First Solar's shares were down 7% last month. First Solar's shares are under pressure this year due to a slowdown in Chinese demand. First Solar's orderbook gives visibility until 2020, while the balance sheet comprising of net cash and solar projects representing US$34 per share provides further downside protection. Shares of the AA, the leading UK based roadside assistance operator, declined by 13% in September, after the company announced interim results. While the financial results in itself were not really posing a surprise (the company already published a trading statement and reiterated its full-year guidance), short term earnings momentum was adversely impacted by conscious investments in the business as well as affected by the worst weather conditions in the last 15 years in the UK. As long-term shareholders we are willing to look beyond this short-term earnings pressure. New CEO Simon Breakwell embarked on an extensive investment plan to remain future-proof in road assistance and to grow the insurance offering. We had a meeting with the CEO and CFO in London immediately after the earnings announcement. While we believe management is making the right investments to strengthen the company´s position for the mid to long-term, it is too soon to expect to see the first effects from these investments already. We continue to monitor the situation carefully. Delek's shares were down 22% over the month, after a surge in the share price in the first half of 2018. As the biggest customer of Midland crude, Delek benefits from the wide crude differentials resulting from a shortage in crude oil takeaway capacity in the Permian. Specifically, limited pipeline capacity allowed Delek to purchase discounted crude at the source in Midland and sell product priced off dearer WTI and Brent benchmarks. Recently, rumours about a new pipeline out of the Permian pressured sentiment, and the market stated pricing a convergence in crude prices. We expect differentials to remain wide, though to a lesser extent than in the summer, resulting from strong crude oil production out of the Permian and still tight pipeline capacity until late 2019. Delek is exceptionally well positioned to benefit from this.

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.