Market Sector Update

• We often are asked what type of market would be difficult to outperform. Third quarter 2019 proved to be one of those markets.
• The period was impacted by a number of factors: 1) small caps overall lagged both mid and large caps by a significant margin; 2) small-cap value outperformed small-cap growth by over 350 basis points; 3) within the small-cap growth group, the fastest growing revenue companies lagged the slowest growing companies; 4) the highest leveraged companies outperformed the lowest; and 5) the lowest P/E companies outperformed the highest.
• The magnitude of the rotation toward value was a historic one. Exchange-traded fund flows and algorithm trading exacerbated the move, which was thereby concentrated in a shorter period of time than historically might have occurred.
• As of quarter end, small caps now look quite attractively valued on a historic basis relative to large, and the cyclical “recovery” that would normally drive a continuation of the value trade remains an area of debate.
• After a run of seven straight quarters of outperformance, the Fund took a hit in the third quarter, which was magnified by this market rotation.

Portfolio Strategy

• The Fund delivered a negative return and lagged its benchmark for the quarter.
• The Fund had a few quarterly earnings reports that missed the mark either on results or guidance or in some cases, met the guidance but didn’t sufficiently beat the guidance to satisfy expectations. These shortfalls then were followed by the sharp market rotation in late August and September, resulting in an underperforming quarter.
• In assessing some of the larger quarterly detractors, we felt a review was warranted. Two such holdings were consumer discretionary names: Ollie’s Bargain Outlet and PlayAGS, Inc.
• The Fund has owned Ollie’s Bargain Outlet since its initial public offering (IPO) in 2015, and it consistently has met or exceeded expectations every quarter since. We significantly reduced the Fund’s position in April when the stock moved out of the benchmark. In third quarter, the company experienced the first miss and the stock reacted quite negatively. Despite the third quarter correction and the Fund’s reduced position in the holding, overall performance has been very positive. We currently maintain our position in Ollie’s Bargain Outlet as we believe the thesis hasn’t changed and renewed growth over the next few quarters could lead to a rebound.
• It was a similar situation with circumstance with PlayAGS, Inc. The casino game maker also missed its first quarterly earnings. We believe this performance does not damage the growth thesis and maintain our position in the company.
• The Fund suffered fundamental setbacks and negative stock price reactions on two information technology holdings: Pluralsight, Inc. and New Relic, Inc. Both offered weak forecasts due to sales force performance issues. When these types of execution problems arise, it can take several quarters to resolve and the stock is generally penalized.
• In the case of Pluralsight, Inc., we believe the issue is fixable within a reasonable timeframe. We elected to retain our position, but are not adding to it until we have greater confidence in the management’s revised plans. Alternatively, we sold our position in New Relic, Inc. We believe the company is beset by aggressive competition and faces a long period to work through its operational issues.
• Within the health care sector, CareDx , Inc. offers a new diagnostic test to alert kidney transplant failure and has been shown to be superior to the old standard of care. The company has been caught up in fears of a larger diagnostic company centering the market and disrupting its growth. We continue to hold our position in CareDx, Inc. as we believe it has more robust clinical data supporting its product and better relationships with the end market to maintain its dominance in the space.
• Inogen, Inc., which converts antiquated oxygen tanks to a new portable oxygen concentrator system, has been a strong performer for the Fund for many years. However, the company ran into operational issues from hiring sales reps too fast and distributors swapping out the company’s new technology with older product inventory. While we believe Inogen, Inc. eventually could convert the oxygen market to its superior technology, we sold our position based on its near-term growth projections and lack of visibility to smoother sales.

Outlook

• The recent volatility in the markets does not shake our long-term confidence in the growth strategy that defines our Fund. Historical market rotations such as experienced in the most recent period tend to be either short-term variation, such as occurred following the 2016 presidential election, or a more sustained value recovery coming out of a recession.
• The latter scenario doesn’t apply in today’s market environment as data such as the recently announced record low unemployment report showed a level not seen since 1969. Hopes for a grand trade deal to ignite an already healthy economy also are running into complications.
• The Fund remains focused on identifying high quality growth opportunities in the small cap universe, concentrating its portfolio on information technology, health care, and the consumer holdings. The Fund also has had a number of future opportunities from a healthy IPO market over the past two years.

---

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 Sept. 30, 2019, 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 equity holdings as a percent of net assets as of 09/30/2019: Teladoc Health, Inc. 3.3, Mercury Computer Systems, Inc. 2.6, Insulet Corp. 2.5, Proofpoint, Inc. 2.4, Nexstar Broadcasting Group, Inc. 2.3, InterXion Holding N.V. 2.0, Five9, Inc. 2.0, Grand Canyon Education, Inc. 2.0, Wingstop, Inc. 1.9, Monolithic Power Systems 1.9.

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.