At the height of this eight-year bull market, we are trying to reconcile the notion that the markets and the global economy may be “as good as it gets” with the potential that as a result of technological change, increased market volatility and the strength of the Chautauqua Capital team, “the best may be yet to come.”

Chautauqua Capital’s approach is to identify trends and companies that as a result of their business model advantage, benefit disproportionately from these trends. In some periods, the trends evolve more slowly than we had anticipated or the company’s ability to translate better business conditions into more rapid profits growth is delayed as they reinvest in their advantage to maximize its potential. In some cases, the fundamentals unfold beautifully but the markets do not seem to care. In the fourth quarter and for much of 2017, several trends accelerated faster, the companies we invested in realized their expected potential and the markets recognized the enhanced underlying value. We caution that what we experienced in 2017 will not always be possible. We do believe that our approach is the very best way to achieve capital appreciation but optimally, in order to capture the benefit of our skill and approach, investments should be made for a multiyear period.

MARKET UPDATE

During the quarter, growth style outperformed value style in the MSCI, emerging and U.S. markets. Large capitalization stocks outperformed small capitalization stocks, except in the MSCI EAFE and Emerging Markets Indices®.

Performance by country, in which the funds were invested and as measured by MSCI, is as follows: Brazil -1.87%, Canada 4.46%, China 7.62%, Denmark 2.25%, France 1.60%, Germany 2.78%, Hong Kong 6.58%, India 11.82%, Ireland 3.47%, Italy -2.27%, Japan 8.52%, Korea 11.64%, Netherlands 0.88%, Singapore 10.10%, South Africa 21.46%, Spain -1.45%, Switzerland 1.78%, Taiwan 4.03%, U.K. 5.74% and U.S. 6.55%. Overall, emerging markets outperformed developed markets for the quarter.

Economically sensitive sectors outperformed defensive sectors in the fourth quarter:

It was a quarter filled with notable events. The quarter began with Chancellor Angela Merkel, fresh off her fourth term victory, having to scramble to create a coalition in the Bundestag after the radical right wing “Alternative for Germany” party took a surprise 13% of the vote to finish third. The matter remains unresolved and negotiations will probably continue in January. Xi Jinping consolidated his power after being re-elected Communist Party Secretary General at the every-five-year Party National Congress. He now has the most influence and unchecked power since Mao Zedong. We expect that China’s growth will slow but the risk of a hard, debt-driven landing will diminish due to the pace of reform. In other words, it will be slower but higher-quality growth. In October, Japan’s Prime Minister, Shinzo Abe, strengthened his “Liberal Democratic Party’s” position with snap elections. Multiyear stimulus seems to finally be fueling inflation.