Manager Commentary

As of December 31, 2013

The fourth quarter ended December 31, 2013, closed a remarkable year for the performance of small cap stocks in U.S. markets. The Russell 2000 Index1 (the Index) added 8.72% for the quarter to end the 12-month period with a 38.82% gain that had many investors and observers wondering when the impressive run-up in small cap stock valuations might approach a zenith. After all, in the five years since the 2007-2008 Global Financial Crisis, the Index has earned an average annual return of 20.08%. In our view, while there continue to be ample opportunities to identify high quality stocks at attractive valuations in the small cap sector of the market, the risk-aware investor analyzes potential investments even more closely as a market rally reaches levels as lofty as these.

For the quarter and the year ended December 31, 2013, the Pax World Small Cap Fund returned 6.73% and 43.24%, respectively. For the same periods, the Index returned 8.72% and 38.82%. Top performing sectors in the Fund relative to the Index were health care, information technology and consumer staples. Stock selection in health care was the driving factor in that sector’s outperformance, particularly our decision to overweight the Fund’s allocation to Natus Medical, Inc. Stock selection and allocation decisions were benefical to the Fund relative to the Index in information technology, an overweight, and consumer staples, an underweight. Sectors with the largest negative impact on the Fund’s performance relative to Index were consumer discretionary, financials and industrials, primarily due to stock selection.

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1The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. One cannot invest directly in an index.

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