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18.18. Securities of Smaller and Emerging Growth Companies

Investment in smaller or emerging growth companies involves greater risk than is customarily associated with investments in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. 

While smaller or emerging growth company issuers may offer greater opportunities for capital appreciation than large cap issuers, investments in smaller or emerging growth companies may involve greater risks and thus may be considered speculative. The fund managers believe that properly selected companies of this type have the potential to increase their earnings or market valuation at a rate substantially in excess of the general growth of the economy. Full development of these companies and trends frequently takes time.

Small capitalisation and emerging growth securities will often be traded only in the OTC market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by the relevant Investment Compartment of portfolio securities may require the Investment Compartment to make many small sales over a lengthy period of time, or to sell these securities at a discount from market prices or during periods when, in fund management’s judgment, such disposition is not desirable.

The process of selection and continuous supervision by the Manager does not, of course, guarantee successful investment results; however, it does provide access to an asset class not available to the average individual due to the time and cost involved. Careful initial selection is particularly important in this area as many new enterprises have promise but lack certain of the fundamental factors necessary to prosper. Investing in small capitalisation and emerging growth companies requires specialized research and analysis. In addition, many investors cannot invest sufficient assets in such companies to provide wide diversification.

Small companies are generally little known to most individual investors although some may be dominant in their respective industries. The fund managers believes that relatively small companies will continue to have the opportunity to develop into significant business enterprises. The private companies, that any Investment Compartment  may invest, may have limited financial resources, shorter operating histories, more asset concentration risk, narrower product lines and smaller market shares than larger businesses, which tend to render such private companies more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. These companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. These companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. In addition, the relevant Investment Compartment values the private company investments in accordance with valuation guidelines adopted by the Manager, in good faith, which are designed to accurately reflect the fair value of securities valued in accordance with such guidelines. The relevant Investment Compartment is not required to but may utilize the services of one or more independent valuation firms to aid in determining the fair value of these investments. Valuation of private company investments may involve application of one or more of the following factors: (I) analysis of valuations of publicly traded companies in a similar line of business, (ii) analysis of valuations for comparable merger or acquisition transactions, (iii) yield analysis and (iv) discounted cash flow analysis. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Investment Compartment’s private investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the amounts the relevant Investment Compartment may realize on any dispositions of such investments. In addition, the impact of changes in the market environment and other events on the fair values of the relevant Investment Compartment’s investments that have no readily available market values may differ from the impact of such changes on the readily available market values for the relevant Investment Compartment other investments. The Investment Compartment NAV could be adversely affected if the Investment Compartment’s determinations regarding the fair value of the Investment Compartment’s investments were materially higher than the values that the Investment Compartment ultimately realizes upon the disposal of such investments.