Eagle Insight. Small Cap Growth. Fourth Quarter l 2018

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1 Bert L. Boksen, CFA Managing Director and Portfolio Manager Eric Mintz, CFA Portfolio Co-manager Chris Sassouni, DMD Portfolio Co-manager Healthcare Clay Lindsey, CFA Senior VP, Client Portfolio Manager Market Overview 1 Small-cap stocks declined sharply as the Russell 2000 Growth Index (down 21.7 percent) and the Russell 2000 Value Index (down 18.7 percent) both endured their worst quarter in several years. Sector returns across the Russell 2000 Growth Index were substantially negative during the quarter, as the energy sector (down 41.4 percent) reflected significant weakness in oil prices, while materials (down 25.5 percent), healthcare (down 25.1 percent) and industrials (down 22.5 percent) all weighed heavily on benchmark returns. Nominally weighted utilities was the sole positive-performing sector within growth, up a dismal 1.8 percent in the quarter. For the full year, the Russell 2000 Growth Index (down 9.3 percent) as well as the Russell 2000 Value Index (down 13.0 percent) landed solidly in negative territory as the above-referenced challenges of the fourth quarter appeared to sabotage what had been an otherwise respectable year for small-cap stocks through the end of September. Within the Growth Index, returns within energy were very notably weak (down 47.4 percent), while materials (down 24.6 percent) and industrials (down 20.5 percent) also saw meaningful declines. Information technology (up 3.6 percent) remained a small bright spot for the Growth Index during the year, while consumer staples (up 0.9 percent) and nominally weighted utilities (up 0.6 percent) were the only other positively performing sectors over the course of Portfolio Review 2,3 Eagle portfolios outpaced the benchmark Russell 2000 Growth Index on a gross and net basis during the fourth quarter. Outperformance was driven by solid relative returns within industrials, healthcare and energy as the portfolios holdings within those sectors fared better than those of the benchmark during the quarter. Soft relative results within the information technology and real estate sectors offset a portion of the portfolios broader outperformance during the quarter. For the full year, the Eagle portfolios were effectively in-line with the benchmark Russell 2000 Growth Index. Strong relative returns were posted within the healthcare and industrials sectors, while outperformance within energy also contributed to the portfolios relative returns during the period. However, weak absolute and relative results within the information technology sector weighed substantially on performance while, to a lesser extent, belowbenchmark returns within the financials and consumer discretionary sectors combined to largely offset the previously mentioned positive relative returns in Nutrisystem sells prepared meals primarily to individuals looking to manage their weight. Shares rose as the firm was announced to be acquired by Tivity Health during the quarter at a sizable premium. Tandem Diabetes Care has been successful in leveraging the value proposition of its insulin pump systems to drive increased unit growth (both domestically and overseas) while gaining a substantial amount of market share left up for grabs by Johnson & Johnson, which recently discontinued its insulin pump system product offerings. Tableau Software, which sells business-intelligence analytics software, saw shares rise due in part to the new pricing tiers, which include lower prices for more infrequent or casual users. The changes have resulted in an increase in the number of large deals with more firms opting to E8970-7/16 E exp. 10/31/16 4/30/19

2 deploy the software for all employees. Aerojet Rocketdyne develops solutions for the aerospace and defense industries. The company benefitted from strong and increasing demand within its core end markets. Management continues to improve the firm s operational efficiency to support margin expansion and drive growth moving forward. Intercept Pharmaceuticals engages in the development of drug therapies used to address liverrelated diseases. The firm has been developing a treatment candidate for patients with nonalcoholic steatohepatitis (NASH), which, if successful, would be the first approved treatment available for NASH patients, who represent a very sizable addressable market. Penn National Gaming owns several casino properties under different brand names. Greater-than-expected competitive pressures within parts of Penn s Midwestern and Southern markets ultimately weighed on results during the quarter. We would expect Penn National Gaming management s disciplined focus on cost controls, coupled with the recently closed strategic merger between Penn National and Pinnacle Entertainment, to support improved results in the approaching periods. Teladoc Health is a telemedicine provider. After a very strong multi-year run, shares of Teladoc declined along with several of its high-flying peers as investors increasingly struggled with lofty valuations during the period. Moving past the reset in the shares, we continue to believe Teladoc is benefitting from an increasing awareness of its compelling value proposition, while leveraging strategic acquisitions to expand its customer base and drive growth. Coherent manufactures laser systems used for multiple industrial processes. Following success in 2017 driven by a new laser integral to producing organic light-emitting diode (OLED) displays, shares have been pressured in recent periods in the wake of an underwhelming launch of Apple s iphone X series smartphones, which utilize OLED displays. The stock was further hurt when the firm reduced guidance based on a slowdown in China. Despite the setback, we believe the OLED cycle will pick back up in 2020 and the stock is poised to recover. John Bean Technologies provides food processing technology solutions (packaging/sterilization of food products). Uncertainty regarding the ongoing tariff and trade-related discussions on the global stage have plagued end market visibility for John Bean s end market customers, which led to some temporary softness in equipment orders. We are cautiously optimistic that the United States and China will arrive at a resolution, which should support a re-acceleration of order growth. Cognex, which sells systems used to monitor manufacturing processes and enable factory automation, saw shares pressured in part due to its vision system equipment s exposure to the Chinese end market, which is encountering economic headwinds and tariff/trade war disruptions in the near term. Going forward, we believe the firm possesses solid positioning as a key player within the growing factory and industrial automation and logistics markets. Outlook 2 The final quarter of 2018 was a challenging one for investors. The market selloff seemed to be precipitated by surprisingly hawkish comments from Federal Reserve Chairman Jerome Powell, and the ongoing trade war with China. Fears of a recession quickly crept into investors psyches. As of this writing, equity markets have rebounded Top 10 Holdings Waste Connections Planet Fitness Class A Quaker Chemical Pool Woodward Casey's General Stores Chart Industries Trex Company Cognex Cornerstone Ondemand The information provided above should not be construed as a recommendation to buy, sell or hold any particular security. The data is shown for informational purposes only and is not indicative of future portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time without prior notice. Past performance does not guarantee future results. Please note that the holdings identified do not represent all of the securities purchased, sold or recommended for the composite. They are provided for informational purposes only. Eagle, its affiliates or their respective employees may have a position in the securities listed. Please contact your financial advisor to obtain the calculation s methodology and/or a list showing every holding s contribution to the overall composite s performance during the measurement period.

3 Top Securities Average Weight (%) Security Contribution to Return Bottom Securities Average Weight (%) Security Contribution to Portfolio Return Nutrisystem, Inc Penn National Gaming Tandem Diabetes Care Teladoc Health Tableau Software Class A Coherent Aerojet Rocketdyne John Bean Technologies Intercept Pharmaceuticals Cognex *As of Dec. 31. The information provided above should not be construed as a recommendation to buy, sell or hold any particular security. The data are shown for informational purposes only and are not indicative of future portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time without prior notice. Past performance does not guarantee future results. Please note that the holdings identified do not represent all of the securities purchased, sold or recommended for the composite. They are provided for informational purposes only. Eagle, its affiliates or their respective employees may have a position in the securities listed. Please contact your financial advisor to obtain the calculation s methodology and/or a list showing every holding s contribution to the overall composite s performance during the measurement period. Investments in small-cap companies generally involve greater risks than investing in larger capitalization companies. These companies often have narrower commercial markets and more limited managerial and financial resources than larger, more established companies. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a fund s portfolio. Additionally, small-cap companies may have less market liquidity than larger companies. Growth companies are expected to increase their earnings at a certain rate. When these expectations are not met, investors may punish the stocks excessively, even if earnings showed an absolute increase. Growth company stocks also typically lack the dividend yield that can cushion stock prices in market downturns. The companies engaged in the technology industry are subject to fierce competition and their products and services may be subject to rapid obsolescence. The values of these companies tend to fluctuate sharply. somewhat, based on new comments by Chairman Powell indicating a more dovish tone, with further rate hikes in 2019 no longer a given. Trade talks with China are ongoing, and we are hopeful that a resolution will be reached sooner rather than later. The March 1 deadline for large and onerous tariffs on goods imported from China still looms over equity markets, although we do not believe these tariffs will actually be implemented. Crushing the Chinese economy would also be a large headwind for other world economies, including our own. The energy sector is in the midst of another painful period of recalibration between oil supply and demand. The decision not to enforce the sanctions against Iran caught the industry wrongfooted as producers had ramped up production in anticipation of a supply disruption. This overshoot on the supply side has been further exacerbated by a slowdown in demand stemming from lower economic growth in China and Europe. As a result, oil prices fell precipitously to levels that will effectively halt growth from North American shale, which effectively serves as the marginal producer in the global oil market. While we think oil prices will remain lower as the market recalibrates, we expect oil prices to grind higher as the year unfolds assuming the global economy avoids a prolonged slowdown. In this context, we continue to embrace our investment strategy of focusing on names we believe can outperform through the cycle and will continue to hold low-cost producers with conservative balance sheets. The outlook for the industrials and materials sectors is clouded by exceptionally high levels of uncertainty in the global economy due to the ongoing trade policy negotiations between the United States and China. As a result, the trajectory for earnings growth in the coming year in the cyclical areas of the market is even more difficult to project than usual. Not surprisingly, investors have heavily discounted this uncertainty with sharply lower multiples across the industrials and materials sectors of the market. Volatility driven by political brinksmanship during trade policy negotiation will likely remain high. In light of the current depressed valuations and pervasive negative investor sentiment, we believe stocks are poised for substantial gains from year-end levels in the event of a positive outcome. In this environment, we maintain a balanced approach to our positioning and continue to favor companies that have secular growth tailwinds and strong balance sheets. Housing-related stocks were one of the first industries to show signs of weakness during the second half of By the end of the year, housing industry data showed clear evidence of a slowdown stemming from the combined effects of higher mortgage rates and a sharp rise

4 in home prices. More recently, mortgage rates have retreated and, encouragingly, housingrelated stocks have begun to show improving relative strength. Given that housing was one of the first groups to break down, we believe this more recent relative outperformance could be indicative of the start of the bottoming process for the market. In our view, the current environment within healthcare remains poised to support greaterthan-gdp growth rates given the combined tailwinds of an aging population, longer lifespans, the crippling impact of chronic conditions and new medical innovations. The adoption of highdeductible health plans, coupled with health savings accounts (HSAs), has forced employees to shoulder a much larger burden of their insurance premiums and other out-of-pocket healthcare expenses, ultimately encouraging patients to scrutinize their care-related decisions. We also believe that consolidation through mergers & acquisitions (M&A) activity is likely to continue throughout the healthcare industry. We strive to identify healthcare companies that offer disruptive technologies or services that will drive significant revenue growth for these companies for years to come. One example of this is the disruptive nature of telemedicine: This care innovation continues to see rapid adoption by managed care and health care systems, particularly due to the convenience of improved access to quality care at a lower cost compared to in-person primary care office visits. In addition, we continue to like companies that provide cash-pay products and services (e.g., aesthetics, veterinary products and services, as well as dental and orthodontic procedures). The products and services that these types of companies provide are targeted directly at the consumer and subsequently tend to have little regulatory or reimbursement risk from the federal government. Finally, we continue to seek opportunities within the explosive innovations taking place within the biotechnology industry. The outlook for the financials sector is mixed. The flattening of the yield curve, lower expected interest rates and weaker loan demand are all weighing on bank fundamentals. As we expect the economy to slow somewhat, we would not be surprised to see an increasing occurrence of credit blips. We are cautious on the banking space. Beyond the banks and in a slower growth economy, the environment for mergers and acquisitions remains relatively favorable. We see opportunities for boutique investment banks to grow and take share from the much larger bulge bracket firms. We are also seeing opportunities in the consumer payments space as payment methods evolve in response to millennials banking behavior. Finally, we believe select domestic U.S. consumer pawn operators possess the potential to leverage their business models abroad, with expansion into Latin America providing growth prospects to complement their more mature core domestic operations. We remain optimistic regarding technologyrelated spending as unemployment rates remain at multi-decade lows and consumer confidence and small business optimism indicators remain healthy. With lower tax rates flowing through corporate America, technology spending should remain robust both at the enterprise and consumer levels. Despite the small rise in interest rates, we expect merger & acquisition activity to continue given strong balance sheets at the very large technology companies, and a sympathetic political environment in Washington. We remain focused on high-quality companies with strong management teams that are well-positioned to gain market share. Additionally, we are looking for names that benefit from long-term secular growth trends with themes that include cloud computing, artificial intelligence, mobility, e-commerce/digital payments, smart home, factory/industrial automation, security software, e-gaming, and alternative energy. Consumer stocks look poised to continue a strong rebound. Unemployment is at record lows, wages are moving up, gas prices are down and tax refunds should be well above average due to higher withholdings. We believe retailers should do well in the current environment as demand is strong and they are now largely positioned to participate in online shopping. Millennials continue to prefer experiences such as travel and leisure. With interest rates backing down, we believe the worst is over for housing, and the long-projected downturn in autos still hasn t begun. Restaurants also continue to benefit from the strong consumer. As always, potential headwinds include higher labor costs, sharply higher freight costs and potential sourcing issues for those companies that source from China. Although volatility returned to the market in the fourth quarter, we believe that the U.S. economy will continue to grow at a healthy pace in We believe fears of a recession are overblown. In our view, the consumer is healthy, as is consumer spending. Together, consumer and healthcare spending represent well over half of GDP with no slowdown expected in either. Even following the recent rally, valuations appear very reasonable, the economy is strong and earnings are expected to be positive although guidance from companies with Chinese exposure could be cautionary. Ultimately, we believe the trade issue will be resolved and the recent pullback will prove to have been a good buying opportunity. 1. 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5 2. References to specific securities are intended to illustrate the types of securities Eagle may hold in this portfolio. They are not intended as representations of specific investment recommendations that would have been profitable to an investor. Past performance is not a guarantee of future results. Opinions and estimates offered constitute Eagle s judgment and are subject to change without notice as are statements of financial-market trends, which are based on current market conditions. Investing involves risk, including the possible loss of principal. This information is not intended to serve as investment, tax, legal or accounting advice. It should not be considered a recommendation to engage in or refrain from taking a particular course of action and is not an endorsement, recommendation or sponsorship of any securities, services or other investment property. It has been prepared for informational purposes only and you should consult your own investment, tax, legal and/ or accounting advisors before engaging in any transaction. Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under federal tax laws. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or any of its or their respective affiliates. Views expressed are as of the date indicated and may change based on market and other conditions. The accuracy of the content and its relevance to your particular circumstances is not guaranteed. 3. Source: FactSet.