January 1, 2015

Dear Friends,
The S&P Index, a widely accepted measure of the stock markets performance, increased
approximately 12.5 percent last year. This one number, however, does not reveal what I
believe was the most important fact about last years market; the very wide dispersion in
returns among different sectors of the market.
We maintain a proprietary data base of the performance of different sectors of the market.
Last year companies that we classify as Large, i.e. those with a market valuation in excess of
$25 billion, rose 16.6 percent. MidSize companies, those with a market capitalization
between $7 and $25 billion, rose 17.5 percent. In sharp contrast, the performance of Small
companies, those with a market capitalization between $500 million and $7 billion, actually
fell in value and ended the year with a negative performance, -1.16 percent.
The dispersion of returns in 2014 was high in both absolute terms and in comparison with
those of other years. In 2013, for example, the performance of large, mid, and small cap
companies were close: 31.5, 31.4 and 34.1 percent respectively. A major characteristic of the
equity market last year was the huge premium investors were willing to pay for safety and
liquidity.
Last year military fighting took place in Russia and the Middle East; political instability was
prevalent in South America; economic change was unfolding in China and Europe was
undergoing deflationary pressures. Investors living in these countries wanted their money to
be safe. Like us, they wanted to hold their funds in a place where it could earn a return and
they could be confident they would get it back. Investors from all over the world turned to
the United States as the destination of choice for their money.
The equities of smaller companies are less liquid and therefore more volatile than those of
larger companies. As the demand for dollars increased, the dispersion of returns between
different sectors of the market began to widen.
What will 2015 hold in store? Will a large disparity in returns favoring the larger and more
liquid companies continue? Or can smaller companies earn the same or even higher returns
than the larger companies, just as they did in 2013?

I believe a strong case can be made that next year the returns of smaller and more volatile
companies can increase at the same or even faster rate than those of larger companies. One
reason is that U S economy is now enjoying a widespread recovery from its recent recession.
Last month the Council of Economic Advisors released data showing the current growth rate
of several different measures of economic activity are now in the 4 to 5 percent per annum
range. These measures include Total Corporate Profits, Private Fixed Investment in
Structures and Equipment, Total Industrial Production, and Manufacturing and Trade Sales.
A second reason that smaller cap companies could appreciate during the coming year is that
the price of a barrel of oil fell by almost 50 percent late last year. The drop in gasoline prices
at the pump will add between $700 and $1,000 a year to the spending power of almost every
automobile driver. Lower energy costs should facilitate the opportunity for smaller service
oriented companies to increase their profits and expand their assets. Combined with their
relatively low returns, the merger and acquisition activity in this sector could increase and the
returns of the small cap sector begin to improve.
In the last two weeks the stock prices of small companies, as measured by our proprietary
data, rose more than those of both large and mid-blend companies. Two weeks is too short a
period to be considered a trend. However it is a long enough period for us to begin to
carefully watch this sector and to search out those small cap companies that are in a position
to take advantage of the opportunities that lie before them. We are currently undertaking just
such a course of action and plan to keep you informed of new developments as they occur.
All of us wish you and your loved ones a Healthy, Prosperous, and Happy New Year.
Sincerely,

Eugene Lerner
Managing Director, Partner