Market Sector Update

• It’s a V-shaped recovery in the small-cap growth market, which means the magnitude of the recovery almost matched the severity of the decline. It’s important to distinguish between the growth and value style boxes within the small-cap universe given the record divergence in performance for the year-to-date. Value staged a modest run late in the second quarter, but fizzled out as a surge in COVID-19 cases threatened the economic recovery.
• The Russell 2000 Growth Index, the Portfolio’s benchmark, advanced 30.6% for the period, surpassing both largecap growth and value stocks. Within the benchmark, holdings under $500 million in market capitalization showed strong performance, gaining 40% for the quarter. Similarly, companies with low return on equity also performed well during the period.
• However, the fundamental backdrop remained very precarious as economic improvement was subdued, earnings growth expectations are still deep in negative territory and the threat of rising virus cases looms.

Portfolio Strategy

• The Fund delivered a positive return for the quarter, but underperformed its benchmark. On a year-to-date basis, the Fund has outperformed the benchmark.
• The Fund’s performance in comparison to the benchmark was driven in part by the outperformance of the smallest companies within the index. The Fund typically does not participate in companies under $500 million market cap due to liquidity concerns among these holdings.
• At the sector level, the performance of five sectors – consumer discretionary, communication services, information technology, health care and industrials – delivered double-digit returns for the Fund. Within the consumer discretionary sector, stock selection leaders included Wingstop, Inc., Installed Building Products, Inc. and Fox Factory Holding Corporation. The information technology sector was another positive contributor, with gains from Globant SA and Five9, Inc. leading the way.
• Conversely, the shortfall for the quarter came from the health care and financials sectors. Biotechnology posted a large gain during the period, which was difficult to match since the Fund is typically underweight to the segment. In addition, underperformance within financials was primarily due to a short-seller report on eHealth, Inc., which put pressure on that holding.
• The energy sector, which as one of the hardest hit sectors in the first quarter, was a strong performer for the benchmark for the period. However, the Fund had no direct exposure to the sector due to intermediate-term concerns over the viability of smaller companies during this depressed oil price environment.

Outlook

• The key message seems to be that a “low for longer” interest-rate environment as declared by the Federal Reserve casts a favorable light on the environment for small cap growth stocks. The Fund is also positioning for significant revisions to the benchmark, which includes increasing its biotechnology weighting to a record 23%. We believe the valuation backdrop for the biotechnology segment will be supports as interest rates remain in check.
• Accordingly, the Fund has increased its weighting in health care and the biotechnology segment, which combined with the large information technology weighting, will exceed 50% of the portfolio. Software and technology stocks are in a similarly favorable valuation situation such that the highest quality fast growers will continue to get stock market support.
• At the security level, the Fund continues to place emphasis on companies with strong balance sheets and an apparent ability to manage through the COVID-19 crisis. We believe these holdings will be in a position to maintain and/or accelerate growth once the virus crisis recedes.

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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, 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 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Top 10 holdings as a % of net assets as of 06/30/2020: Five9, Inc. 3.6, Wingstop, Inc. 3.1, Monolithic Power Systems, Inc. 2.6, Mercury Computer Systems, Inc. 2.4, Varonis Systems, Inc. 2.2, CareDx, Inc. 2.2, Proofpoint, Inc. 2.0, Globant SA 2.0, Knight Transportation, Inc. 2.0, LHC Group, Inc. 2.0.

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 stocks may carry more risk than investing in stocks of larger more well-established companies. 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 replicated in the future. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.