RS LARGE CAP GROWTH STRATEGY QUARTERLY COMMENTARY

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1 RS LARGE CAP GROWTH STRATEGY QUARTERLY COMMENTARY As of June 30, 2018 Quarterly Highlights The RS Large Cap Growth Strategy returned 6.40% gross (6.26% net) for the three months ended June 30, 2018, outperforming the Russell 1000 Growth Index, 1 which returned 5.76%. The Strategy s outperformance relative to the benchmark was largely driven by stock selection within the Consumer Discretionary, Consumer Staples, Financial Services, Energy, and Health Care sectors; stock selection in the Producer Durables, Technology, and Materials & Processing sectors offset a portion of the outperformance. Large-cap growth continued to outperform large-cap value during the second quarter, led by strong fundamentals, including higher sales and earnings growth among companies within the Russell 1000 Growth Index relative to large value companies. We believe the relative strength of the U.S. economy and attractive relative valuation of growth stocks versus value stocks (among the lowest valuation gaps since the inception of the Russell indices in 1979, from a forward price-to-earnings perspective) are supportive of the large-cap growth asset class. Market Performance / Fundamentals Snapshot Market Commentary U.S. equity markets were mixed in the second quarter, as growthoriented stocks as measured by the Russell 3000 Growth Index returned 5.87%, the eleventh consecutive quarter of positive returns, while value-oriented stocks as measured by the Russell 3000 Value Index returned 1.71%. Performance was strong across U.S. styles despite the increased uncertainty surrounding the potential tariff war and a flattening yield curve, as earnings continued to be supported by strong underlying economic conditions, favorable year-over-year earnings growth (aided by the largest corporate tax cuts in decades), and solid business execution. U.S. stocks were up in each month of the quarter, with the S&P 500 Index 2 returning 0.38% in April, 2.41% in May, and 0.62% in June. Despite this consistent positive performance, stock market volatility picked up toward the end of the quarter as concerns increased due to fears of retaliation from tariffs on China and uncertainty surrounding monetary policy under new Fed Chairman Jerome Powell, given that the yield curve has narrowed to its tightest level since August Despite the uptick in volatility, underlying fundamentals of U.S. companies continue to be supported by a strong economic environment, reflected by the fourth consecutive quarter of 2%+ Gross Domestic Product (GDP) growth and a continuation of the longest job growth streak in history, which has resulted in record earnings; expectations for the upcoming second quarter GDP release are very high. Small-cap stocks outperformed mid- and large-cap stocks during the quarter, as measured by the Russell family of indices, a continuation of a trend seen in the first quarter, while growthoriented investment performance was mixed, as small-cap value stocks outperformed in the quarter, while mid-cap and large-cap growth stocks outperformed in the quarter. Over the longer term, growth stocks as measured by the Russell 3000 Growth Index have outperformed value stocks as measured by the Russell 3000 Value Index by more than 3% per year over 1-, 3-, 5-, and 10-year time frames. Investment Strategy The RS Large Cap Growth Strategy (the Strategy ) is guided by our philosophy that sustainable earnings growth drives long-term 1

2 VICTORY RS GROWTH STRATEGY As of June 30, 2018 share price appreciation. Our investment process is focused on finding innovative companies whose core business can continue to grow over time. The team seeks companies with products and services that are growing organically, creating new markets or taking market share from existing companies. We are focused on finding companies whose business values can appreciate regardless of the underlying market environment. The Strategy is led by the team s chief investment officer, Scott Tracy, along with portfolio managers Steve Bishop, Melissa Chadwick-Dunn, Chris Clark, and Paul Leung. The five co-portfolio managers, as well as three research analysts, serve as sector specialists and are supported by three associates, drawing on strong relationships with industry experts and company management teams. Together, we conduct over 2,000 company meetings each year through in-person meetings, conference calls, and trade shows. We then back up our findings through discussions with industry leaders and third-party sources. We are long-term investors and seek to establish definable anchor points, which are quantifiable metrics that help determine a company s potential long-term growth trajectory. Anchor points arise from our analysis of a company s long-term capabilities and performance goals over three to five years. These long-term anchor points serve as guideposts to help us measure a company s progress as it executes its business strategy, regardless of what is taking place in the overall market, and help prevent distraction caused by shortterm stock price movements and inevitable market volatility. Performance Review The RS Large Cap Growth Strategy returned 6.40% gross (6.26% net) for the three months ended June 30, 2018, outperforming the Russell 1000 Growth Index, 1 which returned 5.76%. The outperformance relative to the benchmark was largely driven by stock selection within the Consumer Discretionary, Consumer Staples, Financial Services, Energy, and Health Care sectors; stock selection in the Producer Durables, Technology, and Materials & Processing sectors offset a portion of the outperformance. Top Contributing Sector: Consumer Discretionary Within the Consumer Discretionary sector, the largest driver of relative performance was Luxury Items holding Tiffany & Co. [2.47% Ending Weight]. Tiffany designs, manufactures, and retails jewelry and other items in the Americas, the Asia-Pacific, Japan, Europe, and internationally. Tiffany was purchased in light of its new management team, which includes a new CEO who was formerly at Bulgari and Diesel, a CFO from the private equity backed Canadian Pacific Railway, and a designer from Coach that we felt could re-energize the product initiatives and drive traffic. Our view was that the new team would be able to take the existing products and iterate broader price points to create a more aspirational shopping experience and revive sales. This strategy has played out well thus far, as the company reported their eighth straight quarter of positive earnings surprise, beating earnings expectations handily with strong sales in all regions, as well as gross margins that widened materially. We continue to believe in the turnaround and are excited about the company s prospects. Top Detracting Sector: Producer Durables Stock selection within Producer Durables was the largest driver of underperformance in the quarter, led by Commercial Services holding United Rentals [0.00% Ending Weight]. United Rentals is the world s largest equipment rental firm, with almost 1,000 locations in the United States and Canada. We initially purchased United Rentals given their emergence as the industry leader following their 2011 acquisition of RSC and the construction industry shift toward rentals following the financial crisis, as the rental model frees up balance sheet capacity and flexibility. As the leader, United Rentals benefits from scale, allowing the company to shift equipment to where it is most in demand, which we believe can further improve margins and profitability. The stock underperformed in the most recent quarter despite strong earnings growth given concerns over the impact a potential trade war may have on earnings, and we decided to close the position as we felt the company might be at peak earnings given recent industrial readings. Market and Strategy Outlook Looking ahead, we remain optimistic for U.S. economic growth and corporate earnings against an expected backdrop of positive employment trends, improving income growth, and moderate inflation. While we acknowledge potential headwinds from a less accommodative Fed, as well as international economic uncertainty, we would note that the U.S. economy is still expected to grow at a high rate, supported by the largest corporate tax reform in decades. Despite an expected uptick, U.S. interest rates are likely to remain low relative to history even with additional Fed tightening. We believe this overall environment remains supportive of largecap growth stocks, which have historically performed well through periods of rising rates. At the same time, we recognize that the performance of growth companies can be volatile from quarter to quarter. For this reason, we continue to focus less on quarter-toquarter fluctuations in share price and more on how our investments perform relative to the fundamental anchor points that track the progress of our long-term growth stories. When volatility returns, we will use these periods to add to our holdings in some of our favorite investments. We will also look to initiate new investments at attractive prices that we believe will result in an asymmetric upside potential to downside risk for each holding. We believe that this environment works to our strengths as stock pickers as we work to uncover companies with high-quality growth stories and reasonable valuations. We will focus on companies with strong balance sheets, healthy cash flows, and what we view to be long-term growth candidates supported by unique competitive advantages and attractive market positioning. We remain as committed as ever to disciplined risk management and spend extensive time on the road, visiting companies in person and seeing their operations from the ground up. We stress-test every investment we own, even as we maintain close contact with company managers, suppliers, and customers in our efforts to closely monitor each company s progress relative to our anchor points. We combine these efforts with our own financial modeling and risk-management tools designed to capture market upside while attempting to minimize downside risks. Working cohesively as a team helps us identify visionary and disciplined companies that we believe will be able to tap new 2

3 VICTORY RS GROWTH STRATEGY As of June 30, 2018 markets and grow their revenues at a healthy pace, regardless of the environment. Thank you for your continued investment. Sector Allocation 3 Top 10 Holdings 4 As of June 30, 2018 As of June 30, 2018 Sector % of Portfolio Holding % of Portfolio Technology 29.71% Amazon.com, Inc. 6.89% Consumer Discretionary 24.34% Apple Inc. 5.53% Financial Services 14.12% Facebook, Inc. Class A 5.40% Health Care 12.53% Visa Inc. Class A 5.24% Producer Durables 7.49% Alphabet Inc. Class C 3.86% Materials & Processing 6.21% Netflix, Inc. 3.34% Energy 1.49% Home Depot, Inc. 3.27% Consumer Staples 0.00% UnitedHealth Group Incorporated 3.06% Utilities 0.00% salesforce.com, inc. 3.05% Cash 4.11% Progressive Corporation 3.04% Performance Average Annual Returns as of June 30, 2018 RS Large Cap Growth Strategy Second Quarter Year 3-Year 5-Year 7-Year Since Inception (5/31/09) Gross of fees 6.40% 23.59% 14.54% 17.26% 15.47% 17.16% Net of fees 6.26% 22.70% 13.69% 16.38% 14.49% 16.12% Russell 1000 Growth Index % 22.51% 14.98% 16.36% 14.88% 16.78% Performance returns for periods of less than one year are not annualized. Please keep in mind that any high double-digit returns are highly unusual and cannot be sustained. 3

4 RS LARGE CAP GROWTH STRATEGY As of June 30, 2018 For purposes of compliance with the Global Investment Standards (GIPS ), the Firm is defined as Victory Capital Management Inc. Victory Capital Management Inc. claims compliance with the Global Investment Standards (GIPS ). To receive a list of composites and/or a GIPS compliant presentation, contact: Victory Capital Management Inc. is a registered investment adviser. RS Investments is a Victory Capital Management investment franchise. Except as otherwise specifically stated, all information and portfolio manager commentary, including portfolio security positions, are as of June 30, The Russell 1000 Growth Index is an unmanaged market-capitalization-weighted index that measures the performance of those companies in the Russell 1000 Index (which consists of the 1,000 largest U.S. companies based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values. Index results assume the reinvestment of dividends paid on the stocks constituting the index. You may not invest in the index, and, unlike the Strategy, the index does not incur fees and expenses. 2 The S&P 500 Index is an unmanaged market-capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 3 The Strategy s holdings are allocated to each sector based on the Russell Global Sectors Standard (RGS). If a holding is not classified by Russell, it is assigned a Russell designation by RS Investments. Cash includes short-term investments and net other assets and liabilities. 4 Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. Performance quoted represents past performance and does not guarantee future results. Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell individual securities. This information

5 RS LARGE CAP GROWTH STRATEGY As of June 30, 2018 should not be relied upon as research or investment advice regarding any security in particular. A complete list of all recommendations of security selection is available by request for the previous 12 months. V // Q RS Large Cap GRO Strategy COM