CHESWOLD LANE ASSET MANAGEMENT, LLC 100 FRONT STREET, SUITE 960 WEST CONSHOHOCKEN, PA 19428 PHONE 610-940-5330 FAX 610-941-5009

INTERNATIONAL HIGH DIVIDEND STRATEGY 2013 ANNUAL INVESTMENT LETTER Thank you for your continued interest in Cheswold Lane’s international value equity strategy. In the fourth quarter of 2013, our investment strategy composite returned +3.24% on a gross basis compared with a return of +5.71% in the MSCI EAFE (Morgan Stanley Capital International Europe, Australasia and Far East) index including income, net of withholding taxes and expressed in US dollars. For the full year, the strategy returned 18.39% compared to 22.78% for the index. Market Review – 4Q and 2013 For a second year in a row, US and other developed market equities were the star asset class across the globe. Emerging markets earned low single digit returns in local currency, and negative returns in US dollars. Emerging countries were large beneficiaries of US Quantitative Easing (QE), as capital, crowded out of the US bond market, found its way to many emerging country bond markets. However, during the summer, Fed Chairman Bernanke called the peak in QE and capital began rotating out of emerging countries. Countries which relied heavily on foreign buyers of emerging bonds experienced the most stress during 2013. US government bonds depreciated in value as long term interest rates increased by more than 100 bps during the year. Improving economic data from Europe, especially the UK, attracted investment flows into international equity funds. In Japan, the initial success of Abenomics was reflected in 55%+ equity returns in local terms, and 27% in US dollars. The BOJ followed the Fed and ECB in proclaiming to do “whatever it takes” to kick start the Japanese economy and cure the country of deflation. Retail investors, often a contrary indicator, have returned to equities, lured by recent high returns and pushed out of money losing bond investments.

2013 STOCK MARKET RETURNS %

Developed Markets S&P 500/Russell 2000 MSCI‐EAFE MSCI‐Europe x‐UK MSCI‐UK MSCI‐JAPAN MSCI‐AUSTRALIA Emerging Markets MSCI‐Emerging Markets MSCI‐Brazil MSCI‐Russia MSCI‐India MSCI‐China

LARGE CAP USD Local

SMALL CAP USD Local

32.38% 22.78% 27.65% 20.67% 27.16% 4.16%

26.93% 23.12% 18.43% 54.58% 20.88%

38.83% 29.30% 39.53% 39.18% 26.34% ‐9.85%

35.68% 35.28% 36.59% 53.58% 4.62%

‐2.60% ‐16.04% 0.76% ‐3.83% 3.64%

3.44% ‐3.26% 6.87% 8.57% 3.68%

1.04% ‐26.15% ‐16.43% ‐14.18% 18.62%

7.01% ‐14.91% ‐10.25% ‐3.11% 18.66%

Returns in the 4th quarter were led by the US and Europe. Asian returns included notable foreign exchange weakness versus the US dollar. The combination of growing confidence in the European recovery and the fear of declining economic momentum in Japan narrowed the full year return differential between these markets.

4Q STOCK MARKET RETURNS % LARGE CAP USD Local

SMALL CAP USD Local

Developed Markets S&P 500/Russell 2000 MSCI‐EAFE MSCI‐Europe x‐UK MSCI‐UK MSCI‐JAPAN MSCI‐AUSTRALIA

10.50% 5.71% 8.12% 7.41% 2.29% ‐0.87%

6.36% 6.42% 5.02% 9.57% 3.60%

8.73% 5.91% 10.71% 11.08% ‐0.27% ‐3.83%

7.13% 9.13% 8.60% 6.82% 0.52%

Emerging Markets MSCI‐Emerging Markets MSCI‐Brazil MSCI‐Russia MSCI‐India MSCI‐China

1.83% ‐5.56% 0.33% 10.34% 3.81%

2.96% 0.09% 1.48% 9.02% 3.79%

1.26% ‐9.69% 0.16% 23.10% 7.83%

2.27% ‐4.29% 1.51% 21.63% 7.81%

“Don’t fight the Fed” has been a saying on Wall St for decades. The chart below plots indexed equity returns from 2009 to 2013 and highlights major central bank policy events by the Fed, ECB and BOJ. It’s clear central banks have been equity investors’ best friend for several years now. EQUITY RETURNS POST CENTRAL BANK ANNOUCEMENTS

Source: JP Morgan

The chart below shows recent monthly purchasing managers’ indexes (PMI) for the major global economies. The timing of the last two major central bank policy actions, the ECB and the BOJ (chart above), correspond with periods of very weak PMIs in Europe and Japan. Both times the central banks were able to spur improving PMIs and stock market rallies demonstrating that monetary policy is still the most forceful short-term macroeconomic policy tool in times of economic weakness.

2

Source: JP Morgan

The public policy debate regarding intermediate and long-term effects of massive central bank stimulus continues – winners, losers, asset bubbles, government inaction, etc... Despite a third year of negative earnings revisions leading to no earnings growth during the period, financial markets are exceedingly bullish on the prospect of GDP growth in 2014 across the Eurozone. 2014 bottoms-up, consensus earnings growth estimates are currently 15%. Top-down, assuming Europe’s PMI surveys remain at current levels (51-52) for the year, historical regression analysis gives a best estimate of 10-11% earnings growth; a material improvement from the past 3 years and the primary reason for market optimism. EUROZONE ANNUAL EARNINGS GROWTH ESTIMATES – 2011-2013

Source: JP Morgan

3

Forward valuation multiples reflect this optimism, which is why European stocks were up 20-30% with no earnings growth in 2013. Sector returns and valuation diverged in 2013 as well. Cyclicals are far more sensitive to domestic economic growth – banks, autos, capital goods, etc…and represent the majority of earnings growth expectations for 2014.

12 MONTH FORWARD P/E MULTIPLE

MSCI EUROZONE

MSCI UK

Source: JP Morgan

Portfolio Review & Outlook Our portfolio struggled to keep up with our benchmark this year. Small, economically sensitive and high beta was a winning combination in 2013 – this however, is not Cheswold Lane’s investment style. That being said, our stock selection, especially in Japan was less than stellar. The Japanese market faded in the 2nd half of the year, as the outlook for Europe brightened. Its clear to us that the velocity of global capital has accelerated. We believe earnings results over the next couple of quarters will confirm the investment thesis of our Japanese holdings, especially positions initiated in 2013. Our lead portfolio manager was in Tokyo for an investment research trip in early December. Our view is that the Abe government sees this as a “last chance” to reinvigorate the economy. They need this to work. The US and Europe have allowed the Japanese to devalue their currency in order to increase profits, generate inflation and spur economic growth. With the profits and inflation in hand, it’s time for the government to implement structural reform to generate sustainable economic growth – this is the so called “Third Arrow” of Abenomics. In their own words, senior Abe economic policy makers believe that if the country doesn’t follow through with structural reform that they would be viewed as “quick-buck artists” by their global peers. It wasn’t lost in translation and we agree. This does however make us incrementally more bearish on the yen. We can forsee the BOJ continuing to help major exporters and real asset owners (real estate, stocks, etc…) as a carrot for higher cap ex, wages, and regulatory reform. Net/Net, this makes the return hurdle higher for domestic oriented Japanese stocks in our portfolio. In Europe, equity markets tracked the upward movement of economic surveys. Cyclicals have led the market, especially periphery banks; but for the first time in several years a “buy domestic Europe” investment theme has taken root in the markets. Depressed telecom, retail, media and utility stocks, despite continued negative earnings revisions, rallied sharply in the 2nd half of the year. The consensus management word of the 3Q earnings season was “stabilization.” This was enough to drive global money flows into Europe and push valuation multiples to the high end of the 10 year P/E multiple range. Market performance has narrowed significantly because cyclicals look poised to see their first increases in earnings in several years, while global

4

defensive stocks are struggling with earnings growth headwinds from lower emerging market demand and foreign exchange translation losses. Our estimate is that the foreign exchange effects will be lapped by the 2nd quarter of 2014. Emerging market demand growth remains highly variable, but we think a number of countries are going to see improving trends in 2014 – Indonesia, India, Vietnam, Brazil and many resource rich countries in West and East Africa. China remains a challenging call to make.

Market & Portfolio Details Telecom was the strongest sector in our markets due to an increase in global M&A. Vodafone announced the often rumored sale of its stake in Verizon Wireless to Verizon, which opened the door for a merger in the second half of 2014 of AT&T and Vodafone. We see a potential 30+% return on the stub Vodafone shares in the next 12-18 months via a transaction with AT&T. Softbank moved forward with its acquisition of a majority of Sprint and subsequently hired bankers to fund a Sprint (newco) acquisition of Deutsche Telecom’s US wireless carrier, T-Mobile. Not to be left out of the newsflow, Telecom Italia, Telefonica and Portugal Telecom are all in negotiations related to strategic transactions with their Brazilian wireless assets. The laggards this year were materials (metals and mining), energy, utilities and consumer staples. However, the underlying performance of each sector varied considerably by region of the world and by time of the year. Japan was very strong in the 1st half, but weak in the 2nd half. Europe was the opposite. 2013 EAFE SECTOR RETURNS

Source: Cheswold Lane

Sector returns in the 4th quarter were generally consistent with full year returns. Strength in telecom and weakness in utilities, materials and consumer staples. Asia significantly underperformed Europe during the 4th quarter across most sectors.

5

4Q 2013 MSCI-EAFE SECTOR RETURNS

14% 12% 10% 8% 6% 4% 2% 0%

Source: Cheswold Lane

Our 4th quarter sector attribution, chart below, shows the significant weakness in energy, materials and consumer staples sectors. Stock selection, especially in Japan, drove the majority of the underperformance in these sectors. Our energy holdings struggled due to a combination of earnings shortfalls and market fear of a collapse in oil prices due to the potential of Iranian barrels coming to the market. Japanese steel holdings failed to meet market expectations in the 3rd quarter, but the earnings trends continue to improve and we expect better performance in 2014 results. In the staples sector, Tobacco stocks (British American Tobacco and Japan Tobacco) have fallen out of favor due to their low economic sensitivity and significant exposure to emerging market demand. British American Tobacco has experienced 3-4% negative earnings revisions, but 15%+ P/E multiple compression during the 2nd half of 2013. Most of British American Tobacco’s earnings revisions are due to foreign exchange translation, not a fundamental shortfall in the company’s performance. 4Q 2013 CHESWOLD LANE SECTOR ATTRIBUTION

0.4% 0.2% 0.0% ‐0.2% ‐0.4% ‐0.6% ‐0.8% ‐1.0%

Source: Cheswold Lane

From a sector weight perspective, the portfolio saw modest change. Of note, we reduced the portfolio’s weight in energy while increasing health care via a new position. The energy cap ex cycle is maturing. Project execution has been a major issue in 2013 and flat operating cash flows have pinched oil and gas companies’ financial flexibility. State owned oil companies, which are mostly in emerging countries have also delayed projects in order to support cash flows of their sovereign.

6

CHESWOLD LANE SECTOR WEIGHTS RELATIVE TO MSCI EAFE

12% 10% 8% 6% 4% 2% 0% ‐2% ‐4% ‐6% ‐8%

Source: MSCI

During the 4th quarter, we eliminated one portfolio holding - Pernod Ricard. The company is leveraged to high-end, Chinese cognac consumption, which has suffered due to the clampdown of gift giving and lavish parties for government and corporate officials. Compounding the slowdown in revenue growth, is the company’s lack of expense management rigor, especially compared to their global rival, Diageo, our preferred global spirit company. We started a new position in the French pharmaceutical company, Sanofi, and the largest steel manufacturer in Japan, Nippon Steel. Sanofi is nearing the trough of its earnings cycle and we see improving R&D results and less patent expiration as the path to sustainable growth. Cost savings and an opportunity to repurchase 6% of its shares at a discount from L’Oreal are also potential positives for the stock in 2014. Nippon Steel merged with Sumitomo Metal in October 2012, creating the 2nd largest steel company in the world. Significant integration savings are expected in 2013-2014, while demand in domestic Japan is seeing a cyclical rebound. The threat is a lack of demand acceleration in non-Japan Asia. The opportunity is increased market share for Japanese producers for local markets and export and price increases driven by improving demand across Asia. Our portfolio would benefit from an increase in market volatility. We have chosen not to chase high momentum stocks and sectors in Europe. This can be painful in the short term, but prudent in the intermediate and long term. Our view is that expectations across Europe are high and valuation, in a broad sense, is full. One factor pushing equities higher are sovereign bond yields. European periphery bond yields have compressed significantly during the last six months. Once again, it looks like the bond market is pricing in very little credit risk differential between Spain or Italy and Germany. Best regards, Colleen Quinn Scharpf Eric Scharpf Matt Taylor

7

THE VIEW FROM CHESWOLD LANE…

A world order in which no single country or durable alliance of countries can meet the challenges of global leadership – Dr. Ian Bremmer, President of the Eurasia Group

I traveled to Tokyo the first week of December for an investment conference and a series of corporate meetings including current portfolio holdings in the steel, energy and engineering/construction industries. The investment conference, hosted by Nomura Securities – the “Goldman Sachs” of Japan, included a large number of academic, corporate and government speakers. One of the more interesting keynote presentations was from noted political scientist, Dr. Ian Bremmer. He is the youthful, wonky professor; a Davos–Charlie Rose– Financial Times A-List regular, who artfully coined the term, “G-Zero” to describe his framework of the current geopolitical world. His style is quite entertaining; his content thought provoking, all while leaving you the impression that he is letting you in on his latest conversations with world leaders, CEOs and financial shakers – never overtly partisan, but definitely a little gossipy. Dr. Bremmer started the lecture by giving the audience of investment professionals ~ 90% Japanese, his background and expertise as well as the history of his political risk and consultancy firm, the Eurasia Group. For background, Dr. Bremmer received his MA and PhD from Stanford University in Political Science and at age 25 was the youngest National Fellow at the school’s renowned, Hoover Institution. In 1998, he moved to New York and founded the Eurasia Group, a global political risk and consulting firm. Today, the firm has about 200 clients made up of corporations, government entities, hedge funds and private equity firms. The Eurasia group provides “analysis and expertise about how political developments and national security dynamics move markets and shape investment environments across the globe.” The Basics of the G-Zero Framework? According to Bremmer, for the past 70 years we have lived in a G-1+ world. The US, by virtue of being the only “man standing” after World War II, set up the majority of international institutions, rules and operational frameworks. The World Bank, the IMF, the United Nations and the WTO – while all sounding like global institutions are really American institutions used to manage the world as US leaders feel appropriate. Over time, the G-7 was born, reaching its apex in the mid 1990’s. It was made up of like-minded developed countries that

8

believed democracy and free market capitalism were the best systems to generate lasting peace and prosperity. But it was still dominated by the US. Dr. Bremmer’s view is that America’s leadership role gradually declined over time, but ended with the massive shock wave generated by the global financial crisis. In September of 2008, fears of an economic catastrophe ushered in a larger group of countries to negotiate and solve global problems. The G-20 included major developing countries like China, Brazil, India, Mexico, Argentina, Saudi Arabia and Indonesia. There were some successful initiatives: an agreement on joint monetary and fiscal expansion, increased funding for the IMF and new rules for global financial institutions. But these cooperative agreements were achieved in large part out of mutual fear – fear of a global financial meltdown. As countries began to recover, interests diverged and thus cooperation and compromise proved fleeting. This was to be expected considering the challenge of negotiating with 20 different countries; especially when they don’t share common views about the role of the state in an economy, or about the value of the rule of law, transparency or freedom of speech, press and assembly. The economic fallout of the crisis left the developed world in a relatively weaker position than most emerging countries. Electorates in most developed nations were highly critical of their government leaders for either getting them into the crisis or failing to get them out. New leadership, especially in the US, France, the UK and Japan were elected to solve domestic problems, not overseas ones. Only 5% percent of American voters in the 2012 election claimed that foreign policy was their top priority. And so the G-Zero was born; a world order in which no single country or durable alliance of countries can – or is willing to – meet the challenges of global leadership. So, is America in decline? Dr. Bremmer posed this question to himself because he has come under some scrutiny for being a part of the “declinist” faction of the global elite circle. His answer was, “No” that the US remains the most important country in the world and that US economic strength remains unshaken. The US dollar will remain the reserve currency of the world and foreign investors are even more attracted to the safe haven status of the US capital markets and economy post the financial crisis. However, Dr. Bremmer said he believes US foreign policy power is in decline, especially after the last six months. He laid out four damaging events that have negatively impacted foreign countries’ perception of America: (1) the Snowden/NSA spying on foreign leaders affair; (2) the Syrian red line incident; (3) Republicans shutting down the government which forced Obama to cancel his trip to a critical Asian Summit (APEC); (4) the transition from a very strong, Asia-oriented, foreign policy team in the first term (Hillary Clinton, Kurt Campbell and Tim Geithner) to a less capable team in the 2nd term. The challenge for policy makers and US geopolitical advisors is the growing number of Americans who don’t believe they have personally benefitted from globalization – especially with respect to trade policy and jobs. Add two unpopular, bloody and expensive wars and it’s clear why the American electorate has become more protectionist and isolationist in the past decade. The future in a G-Zero World: Winners, Losers…And what it means to Cheswold Lane According to Dr. Bremmer, we should expect increased volatility and conflict in the world, especially related to border disputes, trade conflicts, cyber security and climate change. This leads to his relatively pessimistic view of the emerging markets – which he defines as “a country that has more political risk, than economic.” Rapid economic expansion during the last decade caused growing pains in many emerging countries, as their electorate pressed governments for higher wages, health care spending, and commodity subsidies and better infrastructure and education. This strained government budgets and caused many emerging countries to increase foreign borrowings. Market participants are watching key elections this year, especially those in the so-called “fragile five” – Turkey, India, South Africa, Indonesia, and Brazil, emerging economies with the biggest overseas financing needs. Higher political risk often leads to lower foreign direct investment, local capital flight and increased foreign currency and sovereign bond hedging (i.e. shorting). Dr. Bremmer highlighted Turkey as the emerging country he was watching the most – and not in a good way. His advice was to be very selective in emerging markets this year. Putting the shorter term emerging market concerns to the side, Dr. Bremmer stated that there are three big geopolitical stories to follow – China’s rise, Middle East turmoil and the redesign of Europe. The three

9

countries with the most to lose from these trends are Japan, Israel and Britain. Not surprisingly, they also happen to be three of the US’ strongest allies. Because we were in Tokyo, he spoke mostly about the rise of China, and what it meant for Japan. Both countries have new heads of state since late 2012, and political tensions have increased sharply in the last year. The countries are politically sparing over a group of uninhabited islands, the Senkaku Islands (in Japanese) / Diaoyudao Islands (in Chinese), that Japan controls in the East China Sea. The islands are close to Taiwan and recently found to contain significant oil and gas reserves (tens of billions of barrels). China claims that Japan stole them in 1895; then the US held them post WWII and eventually turned them back over to the Japanese, as well as the island of Okinawa in 1972. The combination of China’s economic rise and the G-Zero has led Japan to feel vulnerable. The US remains its most important ally, but US interests have shifted as the economic power of China has ascended. The Japanese government feels that the current US administration cares more about their relationship with China than Japan. Dr. Bremmer agreed and said he did not think Japan had any options. As this sentence was being translated from English to Japanese, I turned around and looked at the faces in the room…it’s was pretty glum. Dr. Bremmer gave Xi Jinping high marks for his political strategizing. China launched their recent offensive the prior week, stating that all commercial aircraft would now have to register their flight plans with the Chinese, if they were going over the Diaoyudao Islands. China was now claiming this as their airspace. The Japanese government balked and refused to let their airlines oblige. The US failed to follow the Japanese’s lead; US Airlines were told by the US government to file flight plans with the Chinese if they were going over the East China Seas airspace. Why did the US government do this, especially considering they knew it would infuriate the Japanese? Because earlier in the week, China’s foreign minister had flown to Geneva and played a critical role in working out the final details of the US vs Iranian nuclear disarmament deal – pretty good timing for the Chinese to use the US to publicly weaken relations with its strongest ally in the region, Japan. Economically, the Japanese need access to domestic Chinese markets so their foreign relations response to Chinese aggression is complicated. They are trying to pivot to South East Asia as an alternative source of demand for Japanese exports. This highlights the importance of the Trans-Pacific-Partnership (TPP Agreement). The trade agreement is near completion and will improve trade between many South East Asian countries, Japan and North America. The treaty will include countries with more than 650 million people and total GDP in excess of $20 trillion. TPP is an economic wedge the US and Japan is trying to place between South East Asia and China. Regardless of TPP, Japanese export companies have increased risk due to deteriorating Japanese/Chinese foreign relations. With respect to the Middle East, Dr. Bremmer thought Israel’s position was analogous to Japan’s with respect to its closest ally, the US. Israel was shocked that the US eased sanctions and appears willing to accept a “nuclear Iran”. The reality is that US / Israeli interests have diverged. After two bloody and expensive wars, few Americans would support military action against Iran. Additionally, the US domestic energy renaissance caused by shale oil / new hydraulic fracking techniques means that our economic dependence on Middle East oil is falling. Will Israel accept a nuclear Iran, despite its historically strong rhetoric? – Yes, is Bremmer’s belief. Current polling trends have Britains against increased integration between the UK and Continental Europe. Some political scientists believe the British are contemplating leaving the EU. In the past, the UK had a seat at the table of world affairs in part due to its special relationship with the US. In a G-Zero world and the EU being redesigned with a distinctly German leadership role, the UK is unlikely to play a material role in future major geopolitical decisions. They appear to be on the outside looking in – in Europe and without an invitation to the table from the US, because we cannot afford extra tickets. Finally, Dr. Bremmer expressed his view that the US is a relative winner in a G-Zero world, but will likely suffer from what he calls the “safe haven curse”. He fears that the benefits of being the largest and most secure economy means that things won’t get dire enough to force the country to execute the needed long term restructuring and reforms in entitlements, taxes and education. Net/Net, I see the increased risk for global investors in a G-Zero world. It’s real and geopolitical outcomes are hard to predict. Unfortunately, it doesn’t look likely to change in the next 5 years. The positive solution is ultimately found in a stronger US and Chinese relationship. The world could prosper if a credible G-2

10

geopolitical environment developed in the future. But the countries are significantly apart on most issues trade, national defense, natural resources, climate change, human rights, cyber security, democracy, etc… Dr. Bremmer didn’t confirm that a G-2 world was likely, but even if it were, I think it would be a minimum of 10+ years from now. Thank you for your continued support. Best wishes for a successful 2014, Eric Scharpf Portfolio Manager Cheswold Lane Asset Management

11