Market Sector Update

• Momentum continued in equites during the second quarter of 2017, as all the major indices in the U.S. raced to fresh all-time highs before pulling back modestly at the end of the period. The impressive gains came despite the backdrop of political risk, global geopolitical concerns and another interest rate hike by the Federal Reserve. Strong corporate earnings, as well as the possibility of less regulation, a tax overhaul and other business-friendly reforms, appear to have offered just the right confluence of data and events to excite investors.

Portfolio Strategy

• The Fund slightly underperformed the Russell Microcap Growth Index and Russell 2000 Growth Index (its benchmarks) for the quarter ended June 30, 2017.
• Similar to the first quarter of the year, returns in the Russell Microcap Growth Index were led by health care and technology. Additionally, the telecommunications sector added significantly to the index’s return in the second quarter due to the acquisition of one company at a significant premium. On the downside, persistently weak crude prices once again put pressure on both the energy and materials sectors.
• Portfolio performance attribution analysis for the quarter highlights that stock selection was strong; however this was mostly offset by the negative allocation impact, which stemmed primarily from the lack of ownership of the one telecommunications company discussed above. The Fund’s technology exposure also negatively impacted relative performance versus the Russell Microcap Growth Index.
• Health care was the standout performer for the Fund this quarter on both an absolute and relative basis. This sector represents nearly 25% of the Fund and was up over 24% during the period. For perspective, the average health care stock in the benchmark was up just over 4%. The strength was concentrated in following companies: Tactile Systems Technology, AxoGen, Intersect ENT and Aerie Pharmaceuticals. In the case of the first three companies, business trends were more robust than originally anticipated by management when providing annual financial objectives; and in the case of Aerie, shares continued to advance due to positive clinical trial data on its glaucoma drug.
• Technology was the second biggest contributor to absolute returns; however, as mentioned above stock selection caused relative performance to fall below the Russell Microcap Growth Index. PDF Solutions was the primary cause of this weakness due to negatively revised annual financial guidance. While this was clearly a disappointment, it appears to be more a question of timing rather than a structural problem with the business model or a significant change in the competitive landscape.
• Materials and industrials were the biggest performance detractors on an absolute basis. Persistent concerns over supply growth and elevated crude inventories pushed oil prices lower in the quarter. As a result, energy chemical maker, Flotek Industries’, dropped meaningfully due to investor concerns about future cuts to growth and profitability estimates.
• Within industrials, MYR Group, a provider of electrical infrastructure projects, missed first quarter financial targets due weather related delays and project execution issues, which pushed the stock lower.

Outlook

• We think global economic growth remains on solid ground and equity returns for the first half of 2017 are reflective of this strength. Not only has this positive growth trajectory caught the attention of investors, but central bankers are also keenly aware. Toward the end of the second quarter, comments from U.S. and European central bank officials signaled that the highly accommodative monetary policy that has been in place for so many years will most likely wind down in the coming quarters. We believe this means that investors are going to have to deal with the transition from synchronized global growth to synchronized global tightening. While the impact of this change won’t be fully known in advance, we will be paying close attention to the labor market and inflation, which should provide clues to the pace at which central bankers will act. In the interim, we expect another solid earnings season when second quarter results are reported.
• Quarterly reports should offer an excellent opportunity to get an update on a company’s growth and profitability objectives; and to make changes where necessary. The investment landscape for premier early-stage growth companies remains dynamic and market weakness will be used to better position the Fund for meaningful long-term capital appreciation.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 06/30/2017: Aerie Pharmaceuticals 4.3, Tile Shop Holdings, Inc. 4.2, 8x8, Inc. 4.0, Mimecast Ltd. 3.4, GTT Communications, Inc. 3.3, SPS Commerce, Inc. 3.3, K2M Group Holdings, Inc. 3.3, Q2 Holdings, Inc. 3.2, Nautilus Group, Inc. (The) 3.1 and Kornit Digital Ltd. 3.0.

Note: On July 5, 2017, the Fund’s prospectus language with regard to market capitalization will be updated. The new language states that the Fund considers a company to be a micro-capitalization company if its market capitalization, at the time of acquisition, is less than the greater of $2 billion or the market capitalization of the largest company in the Russell Microcap Growth Index. The new range this update creates is dynamic rather than static and should allow for greater portfolio management flexibility going forward. Class R6 shares were renamed Class N on March 3, 2017.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell Microcap Growth Index measures the performance of the micro-cap growth segment of the U.S. equity market. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Market risk for small-sized companies may be greater than that for medium or large companies. Smaller companies are more likely to have limited financial resources and inexperienced management. Stocks of smaller companies, as well as stocks of companies with high-growth expectations reflected in their stock price, may experience volatile trading and price fluctuations. Furthermore, when the economy enters a recession, there tends to be a “flight to quality,” which may exacerbate the increased risk and greater price volatility normally associated with smaller companies. The Fund’s performance may be more susceptible to a single economic, regulatory, or technological occurrence than if it had a more diversified investment portfolio. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be sustainable. . An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.