Market Sector Update

• After a choppy first quarter 2018 and a rather lackluster start to year, the second quarter roared back as the Russell 2000, the Fund’s benchmark, was up 7.74%. A combination of stronger domestic growth (relative to global growth), a stronger dollar and an asset class that greatly benefited from looser regulations and lower taxes drove this performance.
• The key question going forward is how sustainable is this tremendous market strength that was exhibited in the second quarter. We believe momentum could continue for a while longer, but it should not be overlooked that once the benefit of the corporate tax cut is backed out, the underlying growth is far less impressive. In addition, it is highly likely that U.S. earnings growth is close to peaking – if it has not peaked already.
• Taking these factors into account, one must also consider the fact that absolute valuations are not inexpensive and we are over nine years into a bull market. It is probably best to have more measured expectations for the remainder of the year.
• With this backdrop in mind we have continued to look to improve the overall quality of the portfolio (for example better balance sheets), while also selectively trimming some bigger winners whose valuations have become more expensive.

Portfolio Strategy

• The Fund outperformed its benchmark (before the effect of sales charges) for the quarter, reversing the headwind we faced last quarter.
• Stock selection was the key factor of the Fund’s outperformance. We not only did well at the top of the portfolio, but also had minimal missteps combined with some big winners for the quarter.
• Across the 11 sectors in our benchmark, we had positive performance attribution in seven with technology, consumer discretionary and financials performing the best, and negative attribution in four as energy performed the worst, followed by real estate and consumer staples.
• In terms of individual stock performance during the quarter, 11 holdings contributed to performance attribution greater than 25 basis points (bps) and three greater than 50 bps. From a negative performance perspective, only two holdings detracted greater than 25 bps.

Outlook

• Our outlook for 2018 remains consistent: expectations for the remainder of the year should be more measured the longer the current bull market persists given the aforementioned factors.
• 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 U.S. Federal Reserve, difficult comparisons 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 June 30, 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.

Scott Sullivan served as a portfolio manager on the Fund until May 8, 2018.

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.