Large/Mid Growth 1Q19

Macroeconomic Update

The U.S. economy is decelerating, with Gross Domestic Product (GDP) expected to have softened in 04. The Atlanta Federal Reserve’s GDPNow™ estimates 04 2018 growth at 2.6%; this compares with 3.4% growth in 03, and 4.2% in 02. On the supply side, business confidence deteriorated as 04 came to a close. Although both the Institute for Supply Management Manufacturing and Non-Manufacturing (services) indices (December 2018 Report On Business® ) registered continuing expansion readings, both indices were below expectations In fact, the ISM® Manufacturing index fell to its lowest level in two years The New Orders, Production and Order Backlog components fueled the index decline as continuing trade uncertainties and slowing of growth in key industrial countries negatively impacted the sector outlook. The ISM® Non-Manufacturing (services) index, while softening, held on better into quarter end with the pace of new orders remaining firm. On the demand side, strong employment gains in the quarter, an acceleration in average hourly earnings, and increasing labor participation rates showed that consumers are on a solid ground

As we noted in our last quarterly piece, the above-trend growth in the second and third quarters of 2018 was unsustainable, fueled by a dramatic increase in government spending, particularly in military/defense spending A higher level of business investment, driven by the recent 2016 tax cuts, also had an impact Whether that level of spending can be sustained is uncertain. A return to more moderate, on-trend growth is anticipated in the near term. While we do not see any apparent upside risks to our outlook, there are downside risks lurking

Overly aggressive Federal Reserve interest rate hikes, an extended government shutdown or a particularly messy United Kingdom exit from the European Union could bite into our near term growth outlook.

Q1 2019 Performance Update

Equity markets saw significant gains in 01 2019, with most domestic equity indices delivering double-digit returns. While growth stocks handily beat value stocks, market capitalization was not a significant factor for generating alpha However in the growth space, smaller names beat out larger names by about 100 bps Each sector in the Russell 1000 Growth had positive returns for the quarter, but Technology was the stand out, delivering 19.7% and comprising 1/3 of the index. Health Care had the lowest return at 7.2%. The Large/Mid Growth Portfolio returned 15.4% for the quarter, just shy of the Russell 1000 Growth at 16.1%. The portfolio slightly beat our model portfolio by about 30 bps7 When returns are as strong as they were this quarter, any amount of cash will drag performance versus a benchmark, and underperformance to the benchmark is easily attributed to cash, which averaged 5%.

Contributors

Rapid 7, RPD, (2 4%, +62 4%) 2 produces software that helps enterprises assess their vulnerabilities, detect and respond to attacks, and gather and analyze security related data across their network. They reported a phenomenal 04, with revenues, bookings and earnings easily exceeding expectations Their guidance for full year 2019 was surprisingly strong as well.

Service Now, NOW (2 2%; +38 4%) provides enterprise cloud computing solutions. Its customers are in the fields of Health Care, Education, Government, and Financial Institutions. The company has put together a stellar record of growth, and yet it is widely believed that a significant runway remains for both growth and additional margin expansion in a $60B+ total addressable market Remarkably, according to some analysts, NOW could achieve durable organic growth of 20%+ for several years without hiring a new sales person, as a significant portion of new volume comes from up-sells Fourth quarter adjusted subscription billings increased 39% and beat the consensus by $50 million, by far the largest beat in 2018.

Detractors

Intercontinental Exchange, ICE (2 3%; +15%) is a global exchange and data services company In its 04 earnings report, the company introduced 2019 guidance for the first time. Data revenue guidance came in at constant-currency growth of 4-6%, a deceleration from the expected growth rate previously expressed by management ICE’s 2019 guidance reflects the reality that data services ultimately posted 5% organic growth in 2018 due to headwinds in desktops/connectivity that are expected to persist into 2019. Additionally, transaction volumes were below previous forecasts, especially trading on interest rates and energy futures.

Henry Schein, HSIC (16%, -2 3%) is an international dental and medical products distributor. Unfortunately dental utilization trends in the US, which is Henry Schein’s largest market, continue to be quite anemic; therefore while Henry Schein is outperforming its competitors, the overall market growth is disappointing We have sold the position because we find more attractive investment opportunities elsewhere.

Market Outlook

The strong equity market returns in 01 rewarded investors that were able to patiently endure the surprising selloff in 04 2018. The investor psychology has shifted significantly, with most investors now interpreting every datapoint with a ‘glass half full’ perspective Given the dramatic psychology swings that we have witnessed over the past year, we are careful to avoid being overly influenced by the most recent data point, or the most recent market swing Staying objective and unemotional has become critical when making investment decisions. We continue to find compelling investment opportunities; there is not any one specific theme, instead we are finding unique companies that are experiencing exceptional growth We remain focused on generating alpha and producing the strongest investment results we can for you over the long run. We thank you for your continuing support and investment.

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The Index returns are provided to show an example of alternate return potential during the relevant time periods; however, indices may possess different investment attributes that may make comparisons difficult such as volatility, liquidity, market capitalization, and security types. The statistical data regarding the indices has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the portfolios are subject. This report assumes the reader has sophisticated knowledge of investing and the markets. If you require more information about the information presented, including the portfolio characteristics and risk statistics, please contact us.

Manager views expressed herein were current as of the date indicated above and are subject to change. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this commentary. A copy of the calculation methodology and the full list of recommendations made in the preceding year is available upon request. The performance data quoted represents past performance and does not guarantee future results. Performance returns quoted are gross of fees which were calculated on a time weighted basis and do not give effect to investment advisory fees, which would reduce such returns. Please see Chartwell’s Form ADV, Part II for a complete description of investment advisory fees. The following statement demonstrates the compound effect advisory fees have on investment returns: For example, if a portfolio’s annual rate of return is 15% for 5 years and the annual advisory fee for a client is 100 basis points or 1.00%, the gross cumulative 5 year return would be 101.1% and the five year return net of fees would be 92.5%. Actual fees charged to portfolios may be different due to various conditions including account size, calculation method and frequency, and the presence of a performance or incentive fee. The deduction of performance and incentive based fees will have similar, yet often larger, impacts to performance and account values than standard management fees. To receive a complete list and description of Chartwell Investment Partners’ composites, performance attribution for all securities, and/or a presentation that adheres to the GIPS® standards, please contact Lynette Treible by phone (610)407-4870, email [email protected], or by mail to 1205 Westlakes Drive, Suite 100, Berwyn, PA 19312.