Torrayresolute Concentrated Large Growth

QUARTERLY COMMENTARY

March 31, 2020

Before reviewing the results of the first quarter, we would like to say that our thoughts are with all those directly and indirectly impacted by COVID-19. We are particularly grateful to the healthcare workers and first responders who are putting their lives at risk for our well-being. During this strange period of self-quarantine, it has been particularly helpful to speak with our clients and partners as we all learn to navigate an unfamiliar environment. We would like you to know that our team has been able to maintain operations without interruption and as always, we welcome your questions and observations. We look forward to hearing from you and wish that you remain safe and well.

TorrayResolute Concentrated Large Growth

Market Overview

It would not be hyperbole to say the beginning of 2020 is proving to be among the most challenging periods for investors ever. The rapid spread of the coronavirus pandemic continues to produce historic market volatility, leaving investors with few scientific facts or economic precedents on which to base their decisions. It is something of a cliché to say that markets hate uncertainty, but true, nonetheless. It took just 17 trading days between February 19th and March 13th to bring the longest running bull market (11 years) to a conclusive end. In contrast to the financial crisis of ’08 and ’09, the monetary and fiscal The magnitude and duration of response has been swift and decisive. While the efficacy of these measures the economic downturn are not will be borne out in the coming weeks and months, the market’s direction will only dependent on how quickly be largely dictated by the trajectory of the disease. the world gets back to work, but how quickly it can do so safely. Portfolio Commentary

Amidst the extraordinary volatility and losses experienced during the first quarter, relative portfolio performance was strong. The Composite declined 11.06% (11.22% net of fees), outperforming the Russell 1000 Growth Index, down 14.10%, by 3.04 percentage points, and the S&P 500 Index, down 19.60%, by 8.54 percentage points. Security selection and sector allocation were both positive. Health Care, accounting for a quarter of the Composite’s value, was the stand out sector, down just 2%, followed by Real Estate, down 5%. Financials and Materials were the laggards, down 37% and 21% respectively, reflecting the sectors’ economic sensitivity. At the security level, top contributors included Lonza (LZAGY), Amazon (AMZN) and IDEXX Laboratories (IDXX). Primary detractors included O’Reilly Automotive (ORLY), Amphenol (APH) and Fiserv (FISV). Generally, we observed a flight to defensive industries and the sale of those with more cyclical characteristics.

Given the dramatic change in economic outlook and extreme market volatility, it should come as no surprise that it was an active period in which there were two purchases and two sales in the portfolio. Our initial response to the medically-induced bear market was to revisit the investment thesis of each portfolio holding and focus on the weaker

positions as candidates for sale. This analysis resulted in the sale of Check Point Software (CHKP) and Charles Schwab (SCHW). In spite of solid secular demand for cybersecurity products and services, Check Point has failed to lead with product innovation and sales execution. We believe this will continue to pressure top line growth and profitability as the company tries to play catch up in a highly competitive industry. With respect to Charles Schwab, a key part of the growth thesis was the company’s positive leverage to rising interest rates. Given the challenges of the macroeconomic environment and the Federal Reserve’s recent actions, we believe any sustained increase in interest rates has been pushed out for the foreseeable future.

While timing is one of the trickiest parts of investing, we are firm believers that market volatility creates proportional opportunity. The current environment is no exception. As we turned our attention to prospective investments, we focused on a few key characteristics; low economic sensitivity, strong balance sheets, high cash flow generation, and perhaps most important, a clear path to recovery as economic conditions normalize. In other words, we don’t believe this is an environment for bottom fishing or speculation. Our first purchase was Copart (CPRT), a familiar company held in our Small/Mid-Cap portfolio since 2008. Headquartered in Dallas, Texas, with more than $2 billion in annual revenues and a market capitalization of $15 billion, Copart is the dominant global auctioneer of “total loss” vehicles for insurance companies and fleet operators. The business is a volume game that has benefitted from four decades of strong secular trends in three factors; miles driven, accident frequency and total loss frequency. While the current economic downturn will temporarily impact miles driven, we believe the stock’s 30% correction discounts an appropriate amount of risk and creates an attractive entry point for a business that has performed well through prior economic contractions. Our second purchase was also a familiar company, one we had followed with interest for the better part of a decade, but did not buy due to valuation concerns. Based in Westbrook, Maine, IDEXX Laboratories (IDXX) sells diagnostic equipment and services to veterinary practices. Over the past decade, pet healthcare has been a particularly strong end market, growing at an annual rate of 8% and demonstrating little economic sensitivity. Younger generations are owning more pets and spending more on them. IDEXX has built an attractive business by offering these practices a means to retain more of their client’s spending by keeping diagnostic procedures in-house, rather than sending the tests out to reference labs. The result has been a consistent record of double-digit revenue, earnings and cash flow growth through varying economic conditions.

Outlook

The human and economic tolls of COVID-19 remain unknown. The magnitude and duration of the economic downturn are not only dependent on how quickly the world gets back to work, but how quickly it can do so safely. Some industries will recovery faster than others, some will thrive, and some may disappear. It is our job to differentiate between these outcomes as best we can and position your portfolios appropriately. Beyond the progression of the disease, safety and managing the “curve” will remain the key point of debate between policy makers and investors. The combination of policy actions taken and the healthcare industry’s tremendous record of innovation give us confidence that progress will be made in what we hope is a reasonable timeframe. In the interim, we will continue to do exactly what we have done over the past two decades; weigh both risk and opportunity with equal care.

As ever, we appreciate your interest and trust.

Nicholas C. Haffenreffer April 9th, 2020

Top Contributors & Detractors Top 10 Holdings

% Avg. % % of Security Sector Security Weight Contribution Holdings Lonza Group AG Unsp. ADR Health Care 4.7 +0.6 Amazon.com, Inc. 5.7 Amazon.com, Inc. Cons Disc 5.1 +0.4 Lonza Group AG Unsp. ADR 5.5 IDEXX Laboratories, Inc. Health Care 0.3 +0.3 Microsoft Corporation 5.3 Microsoft Corporation Info Tech 4.9 +0.1 Alphabet Inc. Class A 5.0 Roche Holding Ltd Sp. ADR Health Care 3.2 0.0 American Tower Corporation 4.9 O’Reilly Automotive, Inc. Cons Disc 3.6 -1.3 Fiserv, Inc. 4.6 Amphenol Corp. Class A Info Tech 2.8 -1.0 Apple Inc. 4.6 Fiserv, Inc. Info Tech 4.8 -0.9 Adobe Inc. 4.6 Motorola Solutions, Inc. Info Tech 2.9 -0.8 Visa Inc. Class A 4.3 Charles Schwab Corporation Financials 2.5 -0.8 Danaher Corporation 4.3 Percentage of total portfolio 48.7 Holdings are subject to change and are not recommendations to buy or sell a security. To obtain information about the calculation methodology used to select the largest contributors to and detractors from performance or to obtain a list showing every holding’s contribution to performance during the measurement period, contact [email protected].

Disclosures: This commentary is for informational purposes only and should not be viewed as a recommendation to buy or sell any security. There is no guarantee that the views expressed will come to pass. Torray LLC is an independent registered investment adviser. Registration of an investment adviser does not imply any level of skill of training. For additional information about Torray LLC, including fees and services, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. Total returns include the reinvestment of dividends and other earnings. Investing involves risk; principal loss is possible. Past performance is not indicative of future results. Source: FactSet and Torray LLC.