Market Sector Update

• The final installment of this unprecedented year did not disappoint as the fourth quarter registered the largest gain in the history of the Russell 2000 Index. After seeing the biggest drawdown ever in the first quarter this clearly supports the unprecedented assertion. While the market recovery began in earnest in April, the approval of two COVID-19 vaccines in November further accelerated the recovery as the perception grew that the pandemic’s grip was loosening and a return to normalcy is drawing closer.
• Add to this moving beyond a contentious U.S. presidential election, an additional $900 billion in fiscal stimulus by the U.S., continued global stimulus and central bank support, the idea of easy comparisons around the corner and the need to replenish inventories globally and investors can see a setup for tremendous economic reacceleration in 2021, a magnitude of which we have not experienced in years.
• After appreciating greater than 31% in the fourth quarter, the Russell 2000 Index finished up over 18% for the full year, something that seems unfathomable considering the events of the year. For the quarter itself, all sectors were up by more than 20% led by energy (+45.5%), materials (+39.9%) and technology (+37.5%) with utilities (+21.3%), real estate (+22.5%) and consumer staples (+23.0%) trailing on a relative basis.
• As the focus now turns to how the economy and companies continue their recovery in 2021 and beyond, it will be important to consider how far the market has come. With the index up 15% from its January 2020 highs and expectations for forward 12-month index earnings still 8.5% below estimates at that time, a decent amount of the recovery appears to be priced in.

Portfolio Strategy

• The Fund produced a positive return in the quarter but trailed its benchmark. The calendar year ended with only 11% of the category outperforming the benchmark, highlighting the challenging 2020 environment for active management.
• Performance for the quarter was driven by stock selection with allocation providing some positive offset. Once again, high beta, low return-on-equity, non-earning stocks outperformed as vaccine approvals drove another leg to the riskon rally. Given that the strategy tends to favor higher quality and lower beta stocks, the early-cycle behavior of the market continues to present challenges.
• Only one of the 11 sectors (utilities) delivered positive attribution in the quarter, with real estate and materials the next best performers. Detractors were led by technology, industrials, and consumer staples.
• Half of the top 20 average holdings brought positive attribution for the period, though the detractors outweighed the contributors as the group was just under a 100 basis points drag on performance. Strong performance out of Visteon Corporation, Element Solutions Inc, and Halozyme Therapeutics were the greatest positive contributors, while Switch, Inc., TreeHouse Foods and Chemed Corporation were the largest detractors in the period.
• The Fund has continued to selectively add more cyclical exposure to companies that stand to benefit from the continued recovery in the economy. The Fund’s predicted beta has also continued to migrate upward and is now close to 1 and one of the highest levels it has been in my tenure (the Fund’s 3-year realized beta has been just under 0.9), though remains below the index, which is where we would expect it to most often be due to our preference for stable, higher quality business models, and our more conservative nature.

Outlook

• How this recovery will manifest in the markets will likely be very different in 2021 than it has been in 2020. The reopening will drive many different end markets and will be fueled by a reallocation of consumers' wallets from goods to services as people get out of their houses after being cooped up for an extended period.
• We believe many businesses will forever be changed by this pandemic, and consumption trends are unlikely to be the same as they were pre-pandemic. All impacts are unlikely to crystalize immediately and will likely be figured out over a period of years. There should be tremendous disconnects between perceptions around the health and wellness of companies and reality, creating opportunities that hopefully we can exploit.
• There is no way to get around the fact that performance in calendar 2020 was certainly not up to our expectations, however our confidence and commitment to identifying quality, underappreciated companies coupled with thoughtful portfolio construction remains. We expect to recover and deliver results more in line with our history as the cycle progresses.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 2020, 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.

All information is based on Class I shares.

The Russell 2000 Index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. It is not possible to invest directly in an index. The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

Top 10 holdings as a % of net assets as of 12/31/2020: 2U, Inc. 4.1%, Coherent, Inc. 3.5%, Switch, Inc. Class A 3.3%, TCF Financial Corp. 3.1%, Element Solutions, Inc. 2.9%, Encompass Health Corp. 2.8%, Varonis Systems, Inc. 2.6%, Triton International Ltd. 2.6%, Envista Holdings, Corp. 2.5%, Skechers USA, Inc. 2.4%.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty,

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap growth and value stocks may carry more risk than investing in stocks of larger, more well-established companies. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. Value stocks are stocks of companies that may have experienced adverse developments or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Fund’s manager, undervalued. Such security may never reach what the manager believes to be its full value, or such security’s value may decrease. The Fund typically holds a limited number of stocks (generally 40 to 60). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. 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.