Small-Cap Growth – June 30, 2018

Small-cap stocks posted strong returns in the second quarter, with the Russell 2000® Growth Index returning 7.23% for the three month period. The Hood River Small-Cap Growth strategy returned 8.17% net of fees, outperforming the benchmark by 94 basis points (“bps”). Year-to-date, Hood River’s Small-Cap Growth strategy is up 9.95% net of fees, ahead of the benchmark by 25 basis points.

Small growth edged out bigger stocks as investors avoided companies with exposure to trade disputes and tariffs. First quarter earnings were generally strong in small-cap, with the economy seeming to have some near-term momentum. At the same time, concerns are emerging among investors as to the durability of the current expansion. In particular, during the quarter an already flat yield curve flattened further, suggesting investors harbor significant skepticism regarding the sustainability of the current economic strength; the potential for trade disputes escalating is often cited as a potential negative catalyst. While we cannot rule out a macro downturn, our recent conversations with executives suggest a bullish near-term outlook for the economy.

Within the Russell 2000® Growth Index, every sector had positive returns. The best sectors included consumer staples (+16.7%), energy (+13.4%) and consumer discretionary (+10.2%). Consumer was helped by a strong job market and high consumer confidence. Energy benefited from a strong global economy boosting oil prices. Materials (+1.1%) and industrials (+1.8%) were the weakest sectors, and despite generally strong earnings, were held back by investor uncertainty as to the sustainability of the economic up-cycle, as well as rising concern around raw materials costs and wage pressures.

Hood River’s Small-Cap Growth strategy benefited from wide spread strength in its bottom-up stock-picking, with positive stock selection in nine out of ten sectors during the quarter. Overall, our stock selection was +168 bps in the quarter, somewhat offset by -80 bps of sector allocation effect. Our best sectors for stock selection were healthcare (+75 bps), financials (+30 bps), and energy (+24 bps). Within healthcare, our biggest winners were Tabula Rasa Healthcare and Teledoc, both of which benefited from a combination of strong earnings and rising investor interest in new healthcare technologies. Performance in the financial sector benefited from a handful of stocks, including Curo Group and Firstcash Inc. Within energy, our best name was Penn Virginia Corp., which surprised the Street with stronger production and better margins than others expected. Our one negative sector was telecommunications, which was hurt by Boingo Wireless. Boingo was one of our better stocks over the past six quarters, but underperformed in 2Q as the company’s guidance was just in-line. We think Boingo could have considerable upside to 2019 estimates as carriers will continue to try to debottleneck their networks using Boingo’s networks and we continue to like its 10x ‘19E EV/EBITDA valuation. Other negative stocks in the quarter included Magellan Health, Lumentum Holdings, Knight-Swift Transportation and Tivity Health.

Entering the third quarter our portfolio remains positioned in a typical manner, with sector allocations all within 600 bps of the benchmark. Our largest sector variance is in industrials, where we are roughly 570 bps overweight. We continue to be underweight the biopharma industry. Our best estimate is that our beta remains in-line with to slightly more conservative than the benchmark.

We are pleased to report that our research team is keeping our phone lines busy making more research calls than ever, and we are enthusiastically working to build on our long track record.

Thank you for your continued support,

David Swank, Brian Smoluch & Rob Marvin


Investors in Hood River’s Small-Cap Growth strategy acknowledge and agree that (I) any information provided by the Firm is not a recommendation to invest in the strategy and that the Firm is not undertaking to provide any investment advice to the investor (impartial or otherwise), or to give advice to the investor in a fiduciary capacity in connection with an investment in the strategy and, accordingly, no part of any compensation received by the Firm is for the provision of investment advice to the investor and (II) Hood River has a financial interest in the investor’s investment in the strategy on account of the fees and other compensation the Firm expects to receive from the client.

Hood River Capital Management LLC, a Delaware limited liability company, offers investment advisory services to individuals, pension and profit sharing plans, trusts, estates, corporations, as well as other institutional clients. Hood River has an arms-length service level agreement with mar Vista Investment Partners, a registered investment adviser, to provide back and middle office services. For purposes of compliance with GIPS®, Hood River has defined itself to not include bundled/WRAP fee accounts in the firm’s assets. Hood River maintains a complete list and description of firm composites, which is available upon request.

On 01/01/13, Brian Smoluch, Robert Marvin and David Swank formed Hood River to manage a small-cap growth strategy. Brian Smoluch, Robert Marvin and David Swank were dual employees until 05/31/13 when all of the assets under their management at Roxbury transitioned to Hood River through a sub-advisory arrangement. On 1/20/15, Hood River finalized an agreement that put 100% of its equity in the hands of Hood River’s three Principals, divided equally among them. All assets under management are managed by Hood River. Information provided for the period from June 2002 through December 2012 represents the performance of portfolios managed by Mr. Smoluch, Mr. Marvin and Mr. Swank while employed by Roxbury. Hood River claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS® standards. Hood River has been independently verified for the periods 01/01/13 through 12/31/17. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS® standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS® standards. The Small-Cap Growth composite has been examined for the periods 6/30/02 through 12/31/17. The verification and performance examination reports are available upon request. Benchmark returns are not covered by the report of independent verifiers. For the entire period presented, Mr. Smoluch, Mr. Marvin and Mr. Swank have been substantially responsible for the all the investment decisions of the small-cap growth strategy. Performance prior to 01/01/13 meets GIPS® portability requirements. ACA served as the verifier, conducted a verification and examined the composite’s performance history that was ported over to Hood River prior to 1/1/13.

The Small-Cap Growth composite was created in 2002 with an inception date of 06/30/02. On 01/01/13 the name of the composite changed from Small-Cap Growth (Portland Team) to Small-Cap Growth. All returns are based in U.S. dollars and are computed using a time-weighted total rate of return. The composite is defined to include all fully discretionary, fee paying, taxable and tax-exempt portfolios with a minimum portfolio value of $500,000 managed in accordance with Hood River’s Small-Cap Growth strategy and that paid for execution on a transaction basis. Any account crossing over the composite’s minimum threshold due to contributions shall be included in the composite at the end of the month it increased in value. Any account which drops below 65% of the composite’s minimum threshold because of considerable cash withdrawals and not due to manager performance will be removed from the composite at the beginning of the month it declines in market value. One non-fee paying portfolio is included in the composite for the following period: 0.2% of the composite assets year end 12/31/03.

The benchmark is the Russell 2000® Growth Index, defined as an unmanaged, capitalization weighted index of those Russell 2,000 companies with higher price-to-book ratios and higher forecasted growth values. Index returns include dividends and/or interest income and do not reflect fees or expenses. In addition, unlike the composite, which periodically maintains a cash position, the Russell 2000® Growth Index is fully invested. Investors cannot directly invest in an index.

The dispersion in composite returns shown herein was measured using an asset-weighted standard deviation formula. Gross performance is net of all transaction costs. Net performance is net of transaction costs, the maximum performance-based fees if applicable and actual management fees, but before any custodial fees. All returns are calculated net of withholding taxes on dividends and interest. Actual results may differ from composite results depending upon the size of the portfolio, investment objectives and restrictions, the amount of transaction and related costs, the inception date of the portfolio and other factors. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Past performance is no guarantee of future results.

Attribution information is as of 6/30/18 in an account of a client that Hood River believes to be representative of the Small-Cap Growth accounts Hood River manages. Clients of Hood River managed with different investment objectives or restrictions may have different sector performance and daily beta than those listed. Information is provided for supplemental purposes only. A complete list of portfolio holdings and specific securities transactions for the investment strategy during the preceding 12 months, the top contributors and underperformers calculation methodology, and a list of every holding’s contribution to the overall performance during the period is available upon request. The securities listed in this letter should not be considered a recommendation to purchase or sell any particular security. The reader should not assume that investments in the specific securities identified herein were or will be profitable. Past performance is no guarantee of future results. Not FDIC insured, no bank guarantee, may lose value.

Hood River Capital Management LLC serves as the advisor to the Fund.