The year 2018 ended on a volatile note. December was a very soft month with the Fund (I-class) down 9.9% and the MSCI World Small-cap index down 10.1%. The Fund (I-class) outperformed its benchmark by 0.2% over the month. For the full year, the Fund (I-class) is down 5.5% after costs, versus the benchmark that is down 9.5%, yielding a 4.0% outperformance. Substantially all the outperformance was driven by stock selection. Throughout the year,our value style has been a headwind, with the MSCI World small-cap value index down 11.7% for the year. In 2018 the Fund performed well versus our peers. For the full year, the Fund ranked in the top quartile of our Morningstar global small-cap peer group. On a three-years rolling basis, we currently rank number 1 in the Morningstar peer group. We continue to see strong interest in our strategy from international investors. 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. The MSCI World Small-cap index declined approximately 18% from the recent peak to through, however many stocks saw declines of 40-60% or more. 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 December were Otello Corporation (+4%), Del Frisco’s Restaurant Group (+13%) and Protector Forsikring (+4%). Otello Corporation's stock price was up 4% in December. We discussed the stock in our November monthly. As we disclosed one month ago we added significantly to our position as we view the risk reward as extremely compelling. The downside risk is very low in our view with the stock trading in the NOK 12-14 range due to the strong balance sheet which is debt free while the upside potential is about 100% in our base case scenario. The Fund made a 13% return on our position in Del Frisco’s Restaurant Group (DFRG). This is materially higher than the 3% return of the stock in December (in EUR), due to our timing and the execution skills of our trading team. We rebought a position in the stock that we had exited earlier in the year, after activist investor Engaged Capital took a 9.99% stake. We think the Board of Directors (BoD) can only pursue a sale of the company in its entirety or in pieces given the pressure that has arisen from shareholders after recent missteps by the leadership team. We shared our view on this with the BoD as well. We believe the value of the four restaurant concepts DFRG owns, is higher than the current Enterprise Value. Protector's share price was up 4% despite an additional warning on the change of ownership insurance business. The change of ownership insurance contracts protects homesellers against claims of buyers. These contracts experienced elevated claims related to gray silverfish. The company also announced it is considering strategic options for the change of ownership business. Since the company has taken a substantial provision in 2018 against claims that could arise in 2019, the future impact of the silverfish issue is limited.

Negative contributors in November were Luxfer (-24%), MRC Global (-23%), and Brunswick (-13%). Luxfer's share price was down 24% in December after a strong share price performance for the year up until November (+58%). On 18 December, Luxfer announced a large acquisition, thereby doubling its current size. The market reacted adversely to this announcement. We do believe strategically the acquisition makes sense for the longer term, because the combination creates a global market leader in rare earth and rare metal-based materials. However, given the size of the deal and as it is partly financed with debt, this changes the risk profile of the firm. We are happy with a lower portfolio weight, since we had been reducing our position at higher share price levels since the summer. MRC Global was down 23% in December as a further decline in the oil price during the month pressured sentiment. MRC is a leading distributor of pipes, valves and fittings used in the oil & gas industry and thus exposed to the energy sector. The recent oil price volatility occurred at the time when the industry sets next year's budgets, which in turn implies softer growth for MRC in 2019. However, in our view the market now prices in a worse outlook than what we feel is realistic. With early indications for flat to up mid-single digit upstream capex spend in 2019 we consider the current share price of MRC attractive. Brunswick's stock was down 13% in December which was only slightly worse than the benchmark. Due to the fund's heavy weight in the stock it was still the third largest negative contributor. The stock specific news flow was positive in December. At the end of the month Brunswick disclosed it has been granted exclusions from Section 301 tariffs for some of its engines. At the midpoint of guidance this provides a $13mn pre-tax benefit to 2019 earnings.

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.