Our domestic fund got a new name in December. It also finished off an excellent 2017.

 

December

Year to Date

Since Inception (Annualized)

Inception Date: 11/1/2010

Motley Fool Small-Mid Cap Growth Fund (TMFGX)

1.06%

28.36%

14.45%

Russell 2500 Growth Index*

1.01%

23.92%

14.48%

For a standardized list of performance for the Small-Mid Cap Growth Fund, please click here. For fund holdings, please click here.

Before I get down to the business of recapping our 2017 performance, I need to point out that we have changed the name of this fund from Motley Fool Great America Fund to Motley Fool Small-Mid-Cap Growth Fund. We will still invest in great companies headquartered in America, but we felt that a name that directly stated what the fund invests in would be more informative for our shareholders.

2017 was a good year for domestic stocks. The S&P 500 gained 21.6%, and our benchmark, the Russell 2500 Growth Index was up 23.9%. For historical context, the S&P has delivered returns better than last year’s strong performance about one-third of the time over the past 90 years. So, aside from the cryptocurrency bubble, 2017 was good but not particularly unique.

That’s another way of saying that outside of certain pockets of the market, like tech, and companies that have abandoned their prior business lines to enter the blockchain world, we don’t find domestic stocks to be egregiously overvalued. As of year’s end, our holdings in the fund were trading for approximately 25 times this year’s expected earnings on a weighted average basis. We would agree that on the surface that doesn’t look particularly cheap, but the consensus earnings per share (EPS) growth expectation for this year is close to 20%. Furthermore, we suspect there is upside to 2018 earnings estimates, as fourth-quarter (Q4) calls in the coming weeks will detail the impact of the new corporate tax changes.

The three largest contributors to the fund’s performance last year were Align Technology (up 131%), IPG Photonics (up 117%), and XPO Logistics (up 112%). The market rewarded Align and IPG Photonics for delivering growth in sales and profits with returns that were higher than anything they reported in the prior five years. Meanwhile, as of year’s end, XPO Logistics had appreciated to become the largest position in the fund, at a 7.6% weight. As active fund managers, we’re willing to have big positions in companies we have followed for years and in which we have a high degree of confidence.

The three biggest detractors from the fund’s performance last year were Aceto (down 52%), Under Armour (down 47%), and Horizon Global (down 42%). It was shocking to see the wheels falling off the growth story at Under Armour, as the company’s streak of seven straight years of 20%-plus sales growth came to a very abrupt halt. To be fair, though, it’s difficult for a company to manage getting bigger and bigger every year without having its systems and teams stretch and break down at some point.

We don’t care for market predictions, because they’re almost always wrong, but I will say that we’re optimistic about the long-term prospects for the businesses we own. As investors who aim to hold on to our stocks for many years, that’s where our focus will always lie. We wish all of you a happy New Year and thank you for trusting us to manage your money.

The Small-Mid Cap Growth Fund changed its name from The Great America Fund on December 31, 2017.

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