INVESTING IN MICROCAPS

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1 INVESTING IN MICROCAPS September 12, 2017 Steve Solomon, CFA Senior Portfolio Manager

2 Why Invest in Microcaps Microcaps historically have offered returns that are comparable to private equity, but generally offer much better liquidity. As a group they are generally under-covered and, consequently, remain one of the least efficient market classes. Microcaps have historically done well in low-growth environments. They historically have a high degree of insider ownership. Corporate insiders on average hold about 1/3 of all stock, which helps align management and investor interests. Tend to have low correlation to other capitalizations. Microcaps can benefit disproportionately from positive developments such as new products or takeover bids. Since 1993 over 50% of all Pubic M&A transactions occurred in the Microcap space. Small Cap managers tend to have very small allocations to Microcaps due to the size of their assets which makes it difficult to establish positions in this space without them becoming too large. While passive indexing works better in the efficient Large Cap universe it does not work nearly as well in the inefficiently followed microcap space. 2

3 Ownership by Insiders and Private Investors 3

4 Public Equity vs. Private Equity Returns 4

5 Public Equity vs. Private Equity Returns 5

6 Public Equity vs. Private Equity Cash Flows 6

7 The Cross Section of Expected Stock Returns by Fama and French 23.45% 6.05% 9.77% 9.61% Still inefficient space due to lack of coverage Outsized gains from new products Takeover premiums can be can be significantly higher in this space 7

8 Micro Value Beats All Other Equity Variations 8

9 Micro Caps Provide Higher Highs and Higher Lows 20 year Rolling Return Periods 9

10 Micro Beats Large over the Long Term Microcap stocks had an annualized return of 11.7% over this period vs. Large Cap an annualized returns of 9.4% for Large Caps. Over a long period of time this results in an incredible difference in market value growth. 10

11 Micro Caps Outperformed Over Time Cumulative Returns 1/1/ /31/

12 Micro Caps Offer Low Correlation to Other Equity Asset Classes 12

13 Micro Caps Delivered Strong Risk Adjusted Returns Annualized Alpha 1/1/ /31/2016 From 1926 thru 2015 the standard deviations of Microcaps vs. Large Caps was 29% vs.18%, respectively. Looking at monthly returns Microcaps beat Large Caps 56% of the time. 13

14 Small Cap Leadership and the Dollar 14

15 Small Cap Returns during a Fed Tightening Campaign Source: Perritt Capital Management and Russell Investments. Performance data quoted represents past Performance and does not represent future results. 15

16 Hancock Horizon Microcap Fund Investment Management Team Steven G. Solomon, CFA, CFP Vice President Senior Portfolio Manager Steve is responsible for equity and fixed income research, and individual portfolio management for Hancock Horizon Investments. Steve manages client portfolios with a commitment to maximizing investment returns, while creating a portfolio that fits each client s goals and lifestyle needs for both the short and long term. He serves as a senior analyst in the technology and telecom sectors and also manages the Hancock Horizon Microcap Fund. Steve has over 18 years of experience in investments. He has a B.S. in Finance from the University of New Orleans, holds the Chartered Financial Analyst designation and is a Certified Financial Planner. Anthony Slovick, CFA Vice President Senior Portfolio Manager Anthony is a portfolio manager for Hancock Horizon Investments. He develops, recommends and executes investment strategies that meet the investment objectives of individual or family relationships. He has more than fifteen years experience managing investment activities for personal trusts, foundations, retirement and estate accounts. He serves as a senior analyst in the consumer discretionary and consumer staples sectors and also manages the Hancock Horizon Microcap Fund. Prior to the Bank, Anthony worked for Northern Trust where he served as 2nd Vice President and managed portfolios for high net worth clients. He earned a B.S. in Finance from Gannon University and holds the Chartered Financial Analyst designation. 16