We believe a fundamentally driven investment process, focused on identifying smaller-cap companies with differentiated business models and sustainable competitive advantages, will drive outperformance relative to our benchmark and peers over time. Identifying small-cap companies with the potential to grow into the mid-cap space allows us the flexibility to hold our positions and capture a longer growth period in a company’s life cycle.

Investment Approach

1 Unique Business Models: Seeks small-cap companies that stand out from competitors - through differentiated business models, innovative approaches or unique products or services - that are using their competitive advantages to grow over a multi-year time frame.
2 Deep, Specialized Team: In-depth fundamental research supported by analysts and small-mid cap specialists who look for small-cap companies early in their life cycle that have the potential to grow into mid-sized companies.
3 Moderate Approach to Growth: The portfolio offers the potential for capital appreciation through exposure to small companies having the potential to quickly grow into mid-size companies with a focus on resilient business models positioned to weather a variety of market environments.

Performance

Past performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. Returns greater than one year are annualized. Returns are expressed in U.S. dollars. Composite returns are net of transaction costs and gross of non-reclaimable withholding taxes, if any, and reflect the reinvestment of dividends and other earnings.

The gross performance results presented do not reflect the deduction of investment advisory fees and returns will be reduced by such advisory fees and other contractual expenses as described in the individual contract and Form ADV Part 2A.

Net performance results do not reflect the deduction of investment advisory fees actually charged to the accounts in the composite but they do reflect the deduction of model investment advisory fees based on the maximum fixed fee rate in effect for the respective time period. Actual advisory fees may vary among clients invested in the strategy shown and may be higher or lower than model advisory fees. Composites may include accounts with performance-based fees. Returns for each client will be reduced by such fees and expenses as negotiated in any client contract as discussed in Form ADV Part 2A.

For a complete list of holdings as of the most recently available disclosure period, contact us.

Prior to 2008, net returns shown are net of all fees and expenses.

Manager Comments (For the quarter ended 12/31/2016)

We take a high-quality approach to investing in small caps, focusing on companies we believe have more predictable, growing revenue streams. The companies we favor typically generate a high return on invested capital or demonstrate a proven ability to expand profit margins. We seek to outperform the benchmark over full market cycles, with the bulk of our relative outperformance coming in weak or uncertain market environments, when the stability of the businesses we invest in is more appreciated. In sharp market rallies driven by expectations of a stronger economy, we would not be surprised to trail the benchmark as companies we view as economically dependent or lower quality outperform.

Small-cap ETFs experienced large inflows after the November election in anticipation of better U.S. economic growth and corporate tax reform, issues that should disproportionately benefit to small-cap companies. Those inflows created market distortions, driving up the smaller, less liquid stocks in the index. Our portfolio is structurally skewed to own larger small-cap companies, many of which have more stable business models and more defined competitive advantages. That structural positioning hurt performance in the period following the election.

There was a pronounced shift in the performance of Barra risk factors after the election, with volatility performing particularly well. We tend be underexposed to volatility as a risk factor. That hurt performance this quarter, but we don't expect to change our positioning.

Stock selection in the energy sector contributed to relative performance. We held a pipeline company that was up significantly after natural gas liquids (NGLs) prices rose. Evidence that U.S. shale production volumes were growing again also helped lift the stock.

Stock selection in the technology sector detracted from relative performance. Within the technology sector, we tend to invest in companies providing must-have business solutions to companies outside the sector. The services these companies provide are often subscription based and provide recurring revenues for the company. Some investors likely rotated out of these stocks to chase some of the more cyclical growth companies during the quarter.

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