SMID Portfolio Commentary 2019 03 ACB-1904-10 Donotuse.Indd

Small/Mid Cap Equity 1Q 2019 Commentary

Markets Review Performance Scorecard First Quarter 2019 The small/mid cap segment of the equity market, as measured by the Russell 2500 Index, produced a total return of 15.82% in the first quarter, good for its best start to a year since 1991 and best Small/Mid Cap Equity Composite, gross 13.29 quarter overall since the third quarter of 2009. The recovery in Small/Mid Cap Equity Composite, net 13.23 the U.S. equity market was a welcome one following the historic sell-off at the end of 2018, which saw small/mid cap companies Russell 2500 Index 15.82 fall more than 20% over the last three months of the year. More Russell 2500 Growth Index 18.99 recently, equities have been boosted by signals that the Federal Reserve will demonstrate more patience in regards to further rate Russell 2500 Value Index 13.12 increases and optimism surrounding trade negotiations between the 14.00 U.S. and China. In our view, these positive factors have generally Russell 1000 Index overshadowed potential areas of concern, such as slowing earnings 0 5 10 15 20 25 growth and mixed economic indicators. Total Return (%)

It is perhaps no surprise that in a rapidly rising market set against Sources: SS&C Advent; Russell Investments a backdrop of global economic growth concerns, higher growth Past performance is not indicative of future results. Returns are presented gross and net of companies regained their performance advantage in the first quarter investment advisory fees and include the reinvestment of all income. Aristotle Boston (while value outperformed growth on the downside in the fourth Composite returns are preliminary pending final account reconciliation. Please see important quarter of last year, value leadership has been a rare occurrence in disclosures at the end of this document. recent years). In general, growth outperformed value, in large part due to the strong relative performance of loss-making companies Portfolio Review (companies with negative earnings), particularly within higher beta For the first quarter of 2019, the Aristotle Small/Mid Cap Equity growth areas like biotechnology and software. This lower quality, Composite generated a total return of 13.29% gross of fees (13.23% higher growth leadership has been a frequent headwind for active net of fees), underperforming the 15.82% total return of the Russell management over the last several years. 2500 Index. For the five-year period ended March 31, 2019, the Small/Mid Cap Equity Composite gained 8.68% gross of fees (8.04% net of fees) annualized, outperforming the 7.78% return of Sector Returns the Russell 2500 Index. First Quarter 2019 Relative performance for the quarter was driven by security selection and sector allocation. At the sector level, the portfolio’s holdings Information Technology 24.72 within the Consumer Discretionary, Materials, Energy and Real Health Care 19.17 Estate sectors added the most value on a relative basis. Holdings Energy 17.83 within the Information Technology, Health Care, Consumer Staples Real Estate 16.58 and Industrials sectors detracted from relative performance. Materials 15.78 Industrials 14.88 Relative Contributors Relative Detractors Communication Services 13.88 HEICO Herbalife Nutrition Consumer Discretionary 12.08 Euronet Worldwide Nu Skin Enterprises Utilities 10.45 1-800-FLOWERS.COM MEDNAX Financials 10.06 Rogers Corporation Dycom Industries Consumer Staples 6.96 Monro Newell Brands 0 10 20 30 CONTRIBUTORS Total Return (%) At the sector level, security selection within the Consumer Discretionary, Materials and Energy sectors had the largest Source: FactSet positive impact on relative performance. At the company level, Past performance is not indicative of future results. Please see important disclosures at the HEICO and Euronet Worldwide were two of the largest end of this document. contributors during the quarter.

Boston | Los Angeles | Newport Beach | New York 1 1Q 2019 Small/Mid Cap Equity Commentary Aristotle Capital Boston, LLC

• HEICO Corporation Class A (HEI.A), a producer of FAA- Recent Portfolio Activity certified after-market aircraft parts, benefited from strong growth in its two core business segments. Better-than-expected Buys/Acquisitions Sells/Liquidations performance in its Flight Support Group segment was driven IPG Photonics Benefi cial Bancorp by new product introductions and increased penetration of WSFS Financial its existing parts. We maintain a position, as we believe the opportunity for increased penetration of non-OEM after- BUYS/ACQUISITIONS market parts is significant, and that the company’s high barriers to entry and consistent operating profile should provide for • IPG Photonics Corporation (IPGP), a manufacturer of additional value creation. high-performance fiber lasers, amplifiers and laser systems for a variety of applications including materials processing, • Euronet Worldwide, Inc. (EEFT), an electronic transaction medical applications and telecommunications, was added to processing company, benefited from continued momentum the portfolio. We believe the company’s strong competitive across all three of its business segments: EFT processing, position in a growing fiber laser market and the potential to e-pay and money transfer. Expansion of the company’s ATM participate in new market opportunities can lead to long-term network and execution of new non-mobile agreements in its value creation for shareholders. e-pay business are among the recent drivers of the company’s strong operating performance. We maintain a position, as we • WSFS Financial Corporation (WSFS), a Delaware-based believe the company’s own fundamental execution efforts and financial services company that offers commercial and retail positive secular trends for most of its business segments will banking products and services, was added to the portfolio by continue to create value for shareholders. virtue of its acquisition of Beneficial Bancorp. DETRACTORS SELLS/LIQUIDATIONS Security selection within the Information Technology, • Beneficial Bancorp (BNCL), a Philadelphia-based regional Health Care and Consumer Staples sectors had the largest bank, was removed from the portfolio after being acquired by negative impact on relative performance. Lack of exposure to WSFS Financial. biotechnology and higher beta software and service names also created a performance headwind. At the company level, Outlook and Positioning Herbalife Nutrition and Nu Skin Enterprises were two of the largest detractors during the quarter. While the equity market continues to be driven by macroeconomic and geopolitical issues in the short term, we believe business • Herbalife Nutrition Ltd. (HLF), a multi-level marketer of fundamentals will ultimately determine equity values in the long nutritional and personal care products, declined during the run. As such, we remain optimistic on the prospects for small/mid quarter despite beating earnings expectations and maintaining cap equities going forward, given our views on overall fundamentals guidance. Most of the decline can likely be attributed to the at this stage in the market cycle. While the significant rebound regulatory overhang in China, where the government has been in equity prices in the first quarter may limit further appreciation investigating business practices of direct sellers. While this in 2019, we view the fundamental outlook as positive, driven by a may create near-term uncertainty for investors, we believe the domestic economy that appears stronger relative to other markets company should continue to benefit from its momentum in (recall that smaller capitalization companies derive a greater portion other markets. We maintain a position, as we believe recent of their revenues domestically compared to large cap companies), operational changes implemented by the firm will enhance corporate earnings growth that remains compelling, and valuations member and customer retention rates, which should create near post-recession lows. With that said, there are certain areas of additional value for shareholders. the market which appear to be stretched in terms of balance sheet quality and valuation levels, and the small/mid cap market continues • Nu Skin Enterprises, Inc. (NUS), a multi-level marketer of to have a high percentage of negative earning companies. We believe primarily personal care products, declined during the quarter due these conditions, along with the heightened market volatility, will to regulatory uncertainty for direct selling companies in China, provide opportunities for active management to add value over the where the company has temporarily halted its operations as it next few years. awaits the resolution of an investigation from the government into direct selling practices of health products. While Nu Skin Our current positioning is a function of our bottom-up security was not specifically targeted in the investigation, it will likely selection process and our ability to identify what we view as attractive nevertheless impact the company’s operating performance investment candidates, regardless of economic sector definitions. in the near term. We maintain a position, as we believe the While we do not position our portfolio for macroeconomic issues or company will continue to benefit from momentum surrounding events, we will attempt to incorporate these factors into our bottom- recent product introductions and strong end-market demand, up fundamental analysis whenever possible. Given our focus on both domestically and in emerging markets. long-term business fundamentals, patient investment approach

Boston | Los Angeles | Newport Beach | New York 2 1Q 2019 Small/Mid Cap Equity Commentary Aristotle Capital Boston, LLC and low portfolio turnover, the strategy’s sector positioning does We believe it is important to remain patient in identifying investment not change significantly from quarter to quarter. Overweights in opportunities to ensure they offer a compelling risk-reward trade-off Industrials and Information Technology are mostly a function of and a sufficient margin of safety. Furthermore, we remain focused the performance of our holdings in these sectors over the past few on trying to understand the risks associated with each investment years. Conversely, we continue to be underweight in the Health position within the context of our fundamentally oriented research Care sector due to our lack of exposure to early-stage biotechnology process and managing those risks through a disciplined approach to companies, which generally do not fit our discipline due to their elevated levels of binary risk. The strategy also remains underweight portfolio construction and management. Overall, with a reasonably in Consumer Discretionary, as we have been unable to identify favorable fundamental backdrop for small/mid cap companies, we compelling opportunities that fit our discipline given the rising risk continue to identify what we believe to be attractively valued, long- profiles associated with many businesses due to the “Amazon effect.” term investment opportunities.

The opinions expressed herein are those of Aristotle Capital Boston, LLC (Aristotle Boston) and are subject to change without notice. Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Boston's Small Cap Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Aristotle Boston makes in the future will be profitable or equal the performance of the securities discussed herein. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations for the last 12 months are available upon request. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. For example, a 0.5% annual fee deducted quarterly (0.125%) from an account with a ten-year annualized growth rate of 5.0% will produce a net result of 4.4%. Actual performance results will vary from this example. The Russell 2500® Index measures the performance of the small/mid cap segment of the U.S. equity universe. The Russell 2500 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2500 Growth® Index measures the performance of the small/mid cap companies located in the United States that also exhibit a growth probability. The Russell 2500 Value® Index measures the performance of the small/mid cap companies located in the United States that also exhibit a value probability. The Russell 1000® Index measures the performance of the large cap segment of the U.S. equity universe. The Russell 1000 Index is a subset of the Russell 3000 Index, representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market capitalization and current index membership. The volatility (beta) of the composite may be greater or less than the benchmarks. It is not possible to invest directly in these indices. Aristotle Capital Boston, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Boston, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACB-1904-10

Boston | Los Angeles | Newport Beach | New York 3 1Q 2019 Small/Mid Cap Equity Commentary Aristotle Capital Boston, LLC

Aristotle Small/Mid Cap Equity Composite Performance All Periods Ended March 31, 2019

20

16.78 15.82 16.06 16.22 15 13.29 13.23 12.56 11.80 11.79 11.24 11.02 11.36 9.61 10 9.01 8.68 8.55 8.04 7.78 Total Return (%) Return Total 4.48 5

1.93 1.55

0 Since 1Q191 Year 3 Years 5 Years 7 Years 10 Years Inception1 Small/Mid Cap Equity Composite (Gross) Small/Mid Cap Equity Composite (Net) Russell 2500 Index

Small/Mid Cap Equity Composite Small/Mid Cap Equity Composite Russell 2500 Index Year (Gross, %) (Net, %) (%) 2019 YTD 13.29 13.23 15.82 2018 -10.22 -10.56 -10.00 2017 13.98 13.24 16.81 2016 22.73 21.89 17.59 2015 3.77 3.17 -2.90 2014 2.91 1.78 7.06 2013 38.34 37.41 36.82 2012 16.49 15.27 17.88 2011 0.00 -1.11 -2.51 2010 28.17 28.07 26.70 2009 28.88 28.88 34.38 2008 -30.53 -30.53 -36.78

Sources: SS&C Advent, Russell Investments Composite returns for periods ended March 31, 2019 are preliminary pending fi nal account reconciliation. 1The Aristotle Small/Mid Cap Equity Composite has an inception date of January 1, 2008 at a predecessor fi rm. During this time, Jack McPherson and Dave Adams had primary responsibility for managing the strategy. Performance starting January 1, 2015 was achieved at Aristotle Boston. Past performance is not indicative of future results. Performance results for periods greater than one year have been annualized. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Please see important disclosures enclosed within this document.

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