Westport Select Cap Fund commentary for the third quarter 2014.

Westport Select Cap Fund: Portfolio Review

During the third quarter, the Westport Select Cap Fund’s Class R shares fell 3.43%, ahead of the Russell 2000® Index’s loss of 7.36%. For the first nine months of 2014, the Westport Select Cap Fund’s Class R shares outperformed the Russell 2000® Index with a positive return of 1.34% compared to a decline of 4.41% for the Index.

Since inception 16¾ years ago, the Westport Select Cap Fund has outperformed the Index by more than 3% points a year, with an annual average return of 10.14% to 7.06%, respectively.

Once again, data provided by Lipper, Inc. provides an interesting overview of the Westport Select Cap Fund’s performance in the first nine months of 2014 and for the twelve months ended September 30. According to Lipper, the average Small-Cap Core fund lost 6.7% in the quarter and gained 5.7% over the twelve month period while the average Mid-Cap Growth fund, a category used by Morningstar, Inc. in rating the Westport Select Cap Fund was down 2.3% in the quarter but was up 9.92% for the latest four quarters. By comparison, for the latest twelve months the Westport Select Cap Fund had a gain of 10.87%.

The third quarter saw particular weakness in small cap stocks as the Russell 2000® Index declined 7.36% compared to a gain of 1.13% for the S&P 500. In this environment the Westport Select Cap Fund’s outperformance of the Russell 2000® Index by nearly 4 percentage points was, in our opinion, quite acceptable.

A major factor in the Fund’s outperformance this quarter was the fact that the majority of the Fund’s holdings, sixteen of twenty-four, outperformed the Index.

Westport Select Cap Fund: Best performers

Once again, Universal Health Services, Inc. (NYSE:UHS) shares, the Fund’s largest holding, was the principal contributor to positive performance gaining 9.1% and adding 120 basis points. Also up was United Rentals, Inc. (NYSE:URI), the Fund’s second largest position which rose 6.1% and added 54 basis points. Four other stocks bucked the downward trend – DeVry Education Group Inc (NYSE:DV), Brown & Brown, Inc. (NYSE:BRO), Darden Restaurants, Inc. (NYSE:DRI) and Synopsys, Inc. (NASDAQ:SNPS) – in total adding 48 basis points positive performance.

Westport Select Cap Fund: Worst performers

On the downside, the eight holdings that underperformed the Index in total subtracted 398 basis points from results. The largest losses were incurred by FEI Company (NASDAQ:FEIC), down 17% and costing 122 basis points and Rogers Corporation (NYSE:ROG), also down 17% and impacting by 76 basis points.

Moving to results for the nine month period, the 575 basis point outperformance was largely generated by four positions. Once again Universal Health Services, Inc. (NYSE:UHS), our largest position, was the major contributor, up over 28%, adding 196 basis points. Close behind was United Rentals, Inc. (NYSE:URI) which was up 43%, contributing 170 basis points. The other two important contributors were Big Lots, Inc. (NYSE:BIG), up 33% and adding 87 basis points, and DeVry Education Group Inc (NYSE:DV), up over 20%, contributing 85 basis points.

On the negative side, 12 positions underperformed the Index, costing in total 390 basis points. Importantly, because several of these holdings are small positions in the portfolio, their total impact to performance was in fact less than the 441 basis point decline in the Index. The largest negative contribution of 75 basis points came from a 12% decline in Precision Castparts Corp. (NYSE:PCP). Only two other holdings cost the Fund more than 50 basis points, FEI Company (NASDAQ:FEIC) declined 136% with a 57 basis point negative impact and IPG Photonics Corporation (NASDAQ:IPGP) fell 11%, subtracting 56 basis points.

During the first nine months of the year one position, CACI International Inc (NYSE:CACI), was eliminated and two new holdings, Yadkin Financial Corp (NYSE:YDKN) and Zebra Technologies Corp. (NASDAQ:ZBRA) were added.

There was no merger or acquisition activity so far this year.

Westport Select Cap Fund Q3 2014 Commentary