What Worked. And What Didn’t

One somewhat counterintuitive result of a year replete with volatility in the small-cap market was that there were no outsized net gains or losses for the Fund at the sector, industry, or position level. The only sizable net gain came from positions in Information Technology. Net losses were concentrated mostly in the Energy and Industrials sectors, though Materials, Consumer Staples, and Telecommunication Services also detracted from 2014s results. Industrials were a slight sore spot in the otherwise bullish first half, though it remained one of the Funds largest sectors at the end of the period. The woes for Houstonbased engineering and construction firm KBR continued. Earlier in the year, the firm had its fiscal 2014 outlook reduced by cancellations and losses on some engineering and construction bids, as well as on pushed-out start dates for certain LNG (liquefied natural gas) projects. Its shares fell through most of the year, with a somewhat sharp dip in December when it announced plans to restructure its operations and divest or exit some noncore segments. We held a position at year end.

Unlike Industrials, Energy was a stalwart performer in the first half before the nearly 50% decline in oil prices sent shockwaves throughout the industry and elsewhere. Unit Corporation, a top performer in the six-month period ended June 30, 2014, operates as a contract driller and exploration and production company, among other energy-related businesses. With a long history as a successful, well-run business, its rebound potential when oil prices eventually recover looked strong to us, but its short-term prospects were tougher to gauge at the end of December, when it was a top-40 position. Nu Skin Enterprises was also a top-40 holding at the end of the period. The personal care products maker and distributor endured a host of challenges in 2014, including trouble with the Chinese government early in the year and the announcement of new debt arrangements in October. Its consistently punished shares can get off the mat, we suspect, with a comeback for its business in China. Multiline womens fashion retailer Ascena Retail Group endured sluggish sales for two of its highest profile brandstween fashion stop Justice and plus-size specialist Lane Bryant. Unsure of its ability to navigate a still-challenging environment for retailers, we reduced our position in the second half.

A rising stock price helped to leave the Fund with a sizable position in Core-Mark Holding Company, which distributes and markets various consumer goods to convenience stores, grocery stores, drug stores, and other retail centers. Increased earnings gave investors a convenient reason to buy. Long-time holding Sapient Corporation provides integrated management consulting services, Internet commerce solutions, and systems implementation services. We sold our shares in November shortly after it was announced that French advertising company Publicis Groupe was paying a substantial premium to buy the company.