Semi-Annual Shareholder Letter

March 31, 2016

Dear Shareholder:

Your Fund ended the first quarter of 2016 with modestly negative returns, leaving our year-to-date performance and trailing six month returns behind those of the Russell 1000 Growth and S&P 500 Index.

Risk assets suffered a sharp correction during the first six weeks of the New Year, before staging a strong rally into quarter-end. The initial selling blizzard was kicked off by truly awful price action in commodities, assisted by consternation over softening corporate earnings estimates, frightening price declines in global bank shares, a smattering of disappointing economic data points, and confusion over the Fed’s stance on rate hikes. The result was classic “risk off” trading action, characterized by wider credit spreads and generally lower stock prices. After commodity prices put in at least a short-term bottom on February 11, markets rallied in what we think was a combination of short-covering and bargain-hunting. The resulting bull run allowed the S&P 500 to erase an 11% correction to end the quarter roughly flat on the year.

After “threading the needle” to generate competitive returns compared to the broader market in 2015, our Fund has faced some tough sledding so far in 2016. We believe our portfolio’s short-term performance has suffered from an inflection point in investor sentiment. Often, when fear levels rise and volatility spikes, faster-growing companies tend to see greater multiple compression compared to shares of companies with “slow but steady” growth rates. With this in mind, we note that Telecommunications Services, Utilities, and Consumer Staples were the three best performing sectors of the market during the market’s correction in early 2016. Each of these groups are characterized by a tendency to deliver slow but steady revenue and earnings growth. We did not have enough portfolio exposure to participate fully in these sectors, as our investment discipline makes it nearly impossible for us to justify paying 20-25x earnings for single-digit earnings growth rates. Almost always, we prefer to own faster growing companies trading at reasonable prices over owning slow-growing companies that trade at exorbitant valuations. This preference costs us relative returns during market environments similar to what we are facing so far in 2016, but long experience makes us confident it will pay off in the fullness of time.

To wit, we remain overweight Technology and Consumer Discretionary stocks, as we believe they offer an attractive combination of growth, fundamental strength, and reasonable valuations. Notably, we have increased our exposure to leading Industrials and Materials stocks and are now moderately overweight each of these sectors. We see signs of improvement in a number of these more cyclical end markets, forward earnings estimates are turning up, and
valuations are quite attractive. On the other hand, we have lightened our exposure to Health Care and biotechnology stocks, as this group now appears to face a variety of political and fundamental headwinds related to drug pricing.

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