Annual Shareholder Letter

September 30, 2018

Dear Shareholder:

Consistent with our longstanding investment philosophy and process, substantially all the Fund’s assets are invested in a focused portfolio of companies which we believe possess strong growth characteristics, fundamental strength, and compelling long-term price appreciation potential.

During the Reporting Period, the Fund’s Class A and I shares generated cumulative total returns, without sales charges, of 26.17% and 26.53%, respectively. These returns compare to the cumulative 26.3% total return of the Fund’s benchmark, the Russell 1000 Growth Index.

The majority of the Fund’s outperformance versus the benchmark was generated by our holdings in the Health Care, Consumer Discretionary, and Communications Services sectors. Amazon (AMZN, 5.0% of the Fund), Adobe Systems (ADBE, 4.0% of the Fund), and Netflix (NFLX, 2.2% of the Fund) were our biggest contributors to performance over the past year. Our stock selection was not as fortuitous in the Materials, Financials, and Industrials sectors. However, our winners did well enough to moderate the impact of our less-successful investments. The net effect was modest outperformance for the Fund compared to the Russell 1000 Growth Index.

A couple of comments from last year’s Shareholder Letter warrant repeating:

• Your Fund’s managers employ an unabashedly active approach to portfolio management. We focus intently on our goal of delivering long-term excess returns, after all expenses, when compared to the Russell 1000 Growth Index and the S&P 500 Index. Far from mirroring the indexes, we seek to build a diversified but focused portfolio of 30-40 individual common stocks which we believe have the potential to reward shareholders with outsize returns over the intermediate and long term.

• Our commitment to owning such a focused group of stocks dictates that we also employ strong risk management techniques. There are a lot of definitions of “risk” in our industry, but for us it is best defined as the potential for permanent loss of capital. Short-term price volatility – the daily, weekly, and monthly fluctuations in securities prices – is interesting and sometimes exciting, but these zigs and zags are ultimately meaningless to long term investors. We are willing to accept moderate amounts of volatility in the prices of our investment positions, but we work very hard to avoid exposing our investors to investment propositions which threaten permanent destruction of capital.

Much ink has been spilled highlighting how expensive US equities are after almost a decade-long bull market. While it is true that stocks are no longer objectively cheap – as they were in 2008-2009 and late 2011 – we do not believe that valuations are materially extended. The S&P 500 currently trades at 16.8x forward earnings, representing only a modest premium to the 25-year average of 16.1 by that metric.  Moreover, the index’s forward earnings yield of 6% represents a premium of approximately 1% to BAA bond yields, which compares favorably to the average discount of -.1% over the past 25 years. As always, caveats apply. Forward earnings estimates could prove to be too optimistic, which could make today’s valuations look expensive in retrospect. Alternatively, bond yields could move materially higher than expected, which would reduce the relative attractiveness of equities to investors. But by and large, we see few signs of true frothiness in the markets. Using the late-‘90’s bull market as an example of “irrational exuberance,” we note that the S&P 500’s forward P/E ratio reached 27x in the spring of 2000, implying an earnings yield of only 3.7%. This represented a massive discount to the (risk-free, if held to maturity) 10-year Treasury yield of 6.2%. We see few valuation or investor sentiment parallels between that era and today’s market environment.

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