Market Sector Update

• The volatility in broader equity markets has picked up considerably in the beginning of 2018. After a quiet 2017, the S&P 500 saw 23 sessions with more than one percent moves in the first quarter, as compared to eight sessions in the entirety of 2017. While 2017 is far more the anomaly (being that there are very few instances of this low volatility in recent history), the shift in volatility off record lows is still striking, and also unlikely to abate based on what would seem to be greater uncertainty moving forward.
• The combination of being near record highs in both the stock market and leading indicators, while being later into the economic cycle (a nine-year-old bull market), further into the U.S. Federal Reserve’s (Fed) tightening actions of rising rates and pulling back quantitative easing (QE), and with a non-traditional leader in the oval office has finally seemed to put the market on edge. While unclear what exactly the final catalyst was, it would seem that the big question that everyone is now grappling with is how far out until growth slows, and what will happen after we work through the tailwinds of the tax cuts in 2018. These are tough questions with less than clear answers.
• Generally, we believe in positioning a little more defensively until there is greater clarity. We have sold several names that have higher controversy surrounding their fundamentals and lowered our exposure to companies with lower quality balance sheets. On the margin we have also added to more “defensive” oriented names.

Portfolio Strategy

• In Q1 of 2018 the Fund underperformed the Russell 2000 Index (its benchmark) by several hundred basis points (bps) for the quarter. While sector allocation did not help performance, the primary driver of the shortfall was driven by poor stock selection. The quarter was particularly difficult in that we not only struggled at the top of the portfolio, but that our missteps had fewer offsets and generally we lacked some big winners.
• Across the 11 sectors in our benchmark, we had positive performance attribution in five with health care, industrials, and telecommunications performing the best, and negative attribution in six as consumer discretionary performed the worst, followed by consumer staples and financials.
• In terms of individual stock performance during the quarter, we had five holdings that contributed greater than 25 bps to performance and none greater than 50 bps.
• From a negative performance aspect, we had six holdings that were greater than 25 bps four of which were greater than 50 bps. A number of the bigger detractors also were found at the top of the portfolio, where the top 10 served as roughly a 160 bps headwind to performance in the quarter. While frustrated by the slow start to the year we remain consistent and committed to our process and look to regain ground through the remainder of the year.

Outlook

• Our outlook for 2018 remains consistent: we believe that 2017 was characterized by lower than normal volatility and consistent returns throughout the year. Economic data largely surprised to the upside, inflation was held in check and political reform was largely beneficial (tax reform). This will surely be a difficult act to follow.
• We continue to be hopeful that deregulation, tax reform and strong gross domestic product growth will spur another leg to the rally; however, we are cognizant of a more hawkish Federal Reserve, difficult comparison and high historical valuations.
• Regardless of how the market performs in 2018, we remain committed to the Fund’s process of identifying quality underappreciated companies, and believe we have good balance in the portfolio’s construction that should stand to perform well versus our peers and benchmark independent of the environment over time.

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 March 31, 2018, 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.

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.

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.