Download MARKET REVIEW U.S. equity markets closed out 2016 with a post

PIONEERS IN SMALL AND MID CAP INVESTING
F OURTH Q UARTER 2016 C OMMENTARY
M ARKET R EVIEW
U.S. equity markets closed out 2016 with a post-election rally fueled by expectations of expanded pro-growth fiscal policies, lower taxes
and regulations, and higher interest rates. Economic indicators released during the quarter continued to show a U.S. economy that
was growing modestly, with steady job growth, and improving consumer sentiment. The Federal Reserve raised interest rates in
December, supporting their decision with the current condition and improving outlook for the U.S. economy.
For the full year 2016, stocks posted another year of positive returns. While there have been some ups and downs along the way, the
bull market that began in March 2009 has remained on track. The duration of the bull market, coupled with absolute valuations that
are above long-term averages, has caused some speculation on the prospects for U.S. equities. While it is true that U.S. equity price-toearnings (PE) ratios are above their long-term averages, valuations relative to other opportunities may still favor stocks. Bond yields,
which did move higher in the last months of the year, and cash do not appear to provide compelling potential returns relative to U.S.
equities.
Small capitalization stocks outperformed large capitalization stocks, and value stocks outperformed growth stocks in 2016. Both large
and small capitalization bank stocks, which are typically considered value stocks, were among the stronger performers for the year. This
was especially true as the long-awaited increase in interest rates started to become reality. Also in 2016, stocks with higher returns on
equity (ROE), one of Conestoga’s key investment criteria, outperformed stocks with lower-ROEs. Generally speaking, stocks with
higher-quality characteristics outperformed those with lower-quality characteristics.
In a year filled with surprises around the world, we at Conestoga have remained focused on that which we always have. Our team of
five investment professionals have conducted company meetings and research on many prospective investments, which led to eight new
companies being purchased into client portfolios. Six companies were removed in their entirety, two of which occurred after being
acquired by other companies. The existing companies in the portfolio are subject to the same ongoing due diligence and valuation
analysis. During the year, our fundamental and valuation reviews led us to trim positions on 27 occasions, while we added to positions
23 times.
Returns for the composite versus its benchmarks are provided below:
0%
4Q 2016
1 Year
CCA Small Cap Growth (Net)
3 Years
5 Years
10 Years
Russell 2000 Growth
Russell 2000
8.14%
6.24%
11.10%
7.07%
9.66%
14.46%
7.76%
6.74%
5.05%
4.60%
5%
3.57%
5.25%
10%
11.32%
8.83%
15%
13.95%
15.57%
20%
13.74%
21.31%
25%
Since Inception
12/31/1998
** Sources: Conestoga, Russell Investments. Periods Longer than One Year are Annualized. Composite Inception is December 31, 1998. Please see additional
important disclosures in the fully compliant GIPS presentations at the end of this commentary.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
F OURTH Q UARTER 2016 C OMMENTARY
C ONESTOGA C APITAL A DVISORS , LLC
F IRM U PDATE
 We are pleased to announce the launch of a SMid Cap Growth institutional separate account! One of our existing Small
Cap Growth clients has converted to our SMid Cap Growth strategy. The transition occurred in January 2017, and allows
for the inception of a SMid Cap Growth separate account composite. This composite will complement our existing SMid
Cap mutual fund, which is approaching its 3-year track record. The SMid Cap Growth strategy follows a similar investment
approach as our flagship Small Cap Growth strategy, and is managed by the same five-person investment team. Companies
with market capitalizations between $250 million and $12 billion are eligible for purchase, and portfolios are benchmarked
against the Russell 2500 Growth Index. The Co-Portfolio Managers are Bob Mitchell and Derek Johnston.
 Conestoga’s total assets under management were $1,813.2 million as of December 31, 2016. Small Cap Growth assets
under management were $1,750.6 million at year-end. Our mutual fund, the Conestoga Small Cap Fund, experienced net
inflows of $121.9 million in 2016. Over the course of 2016, Conestoga added 15 new separate accounts totaling $20.9
million, while losing 4 accounts totaling $4.7 million. Conestoga continues to monitor our pipeline for new business to
manage capacity in the Small Cap Growth strategy. We still estimate total capacity of $2.5 billion in the Small Cap Growth
strategy. If you have any questions about prospective placements into the Small Cap Growth strategy, please don’t hesitate
to contact us.
P ERFORMANCE
AND
A TTRIBUTION
In the fourth quarter, the Conestoga Small Cap composite rose 5.25% net-of-fees, versus the Russell 2000 Growth Index return
of 3.57% and the Russell 2000 Index return of 8.83%. For the calendar year 2016, the composite returned 15.57% net-of-fees
versus the Russell 2000 Growth Index return of 11.32% and the Russell 2000 Index return of 21.31%. (Please note that
individual account performance will vary modestly due to slight individual issue weighting differences, cash flows and clientspecific guidelines.)
F OURTH Q UARTER R ELATIVE
TO THE
R USSELL 2000 G ROWTH
The Small Cap strategy’s outperformance in the fourth quarter was driven by stock selection while sector allocations detracted
from returns. Companies in the Health Care and Consumer Discretionary sectors provided the strongest stock selection
effects. A significant underweight to the Financial Services sector had the largest impact on the strategy’s negative allocation
effects and stock selection in the Technology sector also detracted from relative performance.
In Health Care, positions in Neogen Corporation (NEOG) and Vascular Solutions Inc. (VASC) were the largest contributors
to relative returns. NEOG reported solid revenue and earnings growth for the quarter and benefited from improved operating
margins. VASC announced an agreement to be acquired by Teleflex Inc. (TFX), and experienced price appreciation over the
course of the fourth quarter. In addition to strong stock selection in the sector, a large underweight to the biotechnology and
pharmaceutical industries was additive to results as both of these groups were down over 10% for the quarter.
Consumer Discretionary generated positive gains with Grand Canyon Education Inc. (LOPE) and Stamps.com Inc. (STMP)
providing the largest benefits to the portfolio. Shares of LOPE rallied on expectations of a less onerous regulatory
environment for the for-profit education industry. STMP was the beneficiary of a material earnings beat highlighted by robust
organic growth.
Financial Services stocks were buoyed by the prospect of future interest rate hikes and were up over 10% for the quarter. A
large underweight to the sector, particularly a lack of exposure to the diversified banks industry group was a headwind for the
strategy.
In the Technology sector, stock selection proved the most challenging with Tyler Technologies Inc. (TYL) and SPS Commerce
Inc. (SPSC) being the largest detractors. TYL gave back some gains from earlier this year as revenue growth is likely to be
lower than the last several years, while SPSC gave back some gains after being one of the strongest performers for the portfolio
in the third quarter.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
F OURTH Q UARTER 2016 C OMMENTARY
F ULL Y EAR R ELATIVE
TO THE
C ONESTOGA C APITAL A DVISORS , LLC
R USSELL 2000 G ROWTH
Capital markets had to absorb a number of shocks in 2016 including a steep sell-off in equities during the first six weeks of the
year, the U.K. referendum to exit the European Union (aka “Brexit”), the U.S. Presidential election and subsequent “Trump
Rally”. Despite the noise, Conestoga outperformed the benchmark Russell 2000 Growth Index for the full calendar year.
Excess returns were generated primarily through stock selection while allocation effects added moderately to outperformance.
Relative performance was in-line with our expectations throughout the year as the market oscillated between periods of higher
volatility and uncertainty with periods of muted volatility and more risk taking.
Stock selection was strongest in the Health Care, Consumer Discretionary and Materials & Processing sectors. In addition, our
large underweight to the biotechnology and pharmaceuticals industries benefited relative results as these were two of the weaker
areas of the market in 2016. High conviction positions in Vascular Solutions Inc. (VASC), Trex Company Inc. (TREX), and
Dorman Products Inc. (DORM), were the largest contributors to performance as these companies were up over 50% for the
year.
The portfolio experienced three takeouts in 2016, and these stocks added to relative return over the course of the year.
Fleetmatics Group PLC (FLTX) was acquired in August, and its stock rose roughly 40% from its pre-announcement level.
Vascular Solutions Inc. (VASC) and Press Ganey Holdings Inc. (PGND) were also acquired during 2016, although these stocks
experienced more price appreciation in the months leading up to the announced acquisitions. It is important to note that
Conestoga does not select companies based on their potential for acquisition, and in many ways, we view these events negatively. Our preference is for the portfolio holdings to generate long-term returns for our clients, rather than for the acquiring companies.
There were a few challenging areas for the portfolio with Technology and Producer Durables detracting the most from relative
returns. Stock selection effects were the primary drivers of underperformance in Technology with Rubicon Project Inc. (RUBI),
Tyler Technologies Inc. (TYL) and Bottomline Technologies Inc. (EPAY) all trading lower for the year. Additionally, our lack of
exposure to Semiconductors provided a headwind as this group was up almost 40% for the year.
P ERFORMANCE R ELATIVE
TO THE
R USSELL 2000
Conestoga underperformed the Russell 2000 in the fourth quarter and over the full year 2016. While our stock selection
added to relative return, sector allocations detracted from returns.
The sector allocation differences between the Russell 2000 and Russell 2000 Growth indices, and the dispersion of returns
among the sectors, was significant in 2016. The Financial Services sector, which includes bank stocks, has become a large
weight in the Russell 2000 (nearly 30% of the Index). This sector, and especially the banks industry, experienced stellar returns
in 2016 as prospects for increasing interest rates fueled expectations that financial services companies could finally start to
improve profitability. Conestoga is typically underweight Financial Services, and currently has only one holding in the sector.
(It is difficult for banks and other financial services companies to meet our long-term sustainable growth criteria.) As the Financial Services sector rallied sharply, Conestoga’s relative return suffered.
This same type of effect occurred in the Health Care sector, which was the year’s weakest performing sector. Health Care
posted a negative return for 2016, led by very weak biotechnology and pharmaceutical industry returns. Conestoga’s overweight
to this sector acted as a drag on relative returns. (Conestoga has identified many companies in the Health Care sector which we
believe satisfy our investment criteria.) Offsetting the negative impact of the sector overweight, Conestoga’s Health Care
holdings did generate significant positive stock selection effects.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
C ONESTOGA C APITAL A DVISORS , LLC
F OURTH Q UARTER 2016 C OMMENTARY
T OP 5 C OMPOSITE L EADERS
B OTTOM 5 C OMPOSITE L AGGARDS
1.
1.
2.
3.
4.
5.
Grand Canyon Education Inc. (LOPE): This company is
an accredited university based in Phoenix, AZ, that offers
both online and campus-based Bachelor’s and Master’s
degree programs. LOPE started the quarter strong with an
earnings report that demonstrated a continued acceleration
in online enrollments and free cash flow generation. Just a
few days later, the election of Donald Trump caused a
significant rally in LOPE as investors speculated that
regulations and oversight in the for-profit education sector
would ease significantly.
Neogen Corporation (NEOG): NEOG reported solid 3Q
2016 results in late December, with revenue and earnings
growth of 17% (9% organic) and 26.9%, respectively. The
quarter also showed an improved operating margin, a
metric that investors have paid close attention to recently
given its decline over the last 18 months. NEOG also
announced two small niche acquisitions that are consistent
with its growth strategy. Also during the quarter, one of
NEOG’s partners (Senestech Inc.) went public, and the
market may be showing optimism about the long-term
potential of Senestech’s rat control population product.
Stamps.com Inc. (STMP): STMP is the leading provider of
internet-based mailing and shipping solutions with roughly
two-thirds of revenue coming from shippers and one-third
from small businesses. The company reported another
material earnings beat in its 3Q 2016 results, with
particularly impressive organic growth (+25-30%). This
contributed to investor enthusiasm as entering the peak
holiday shipment season and its high-volume shipping
activity.
WageWorks Inc. (WAGE): This company is a leading
provider of consumer-directed benefit accounts which allow
employees to use pre-tax income to pay for out-of-pocket
expenses such as healthcare, dependent care and
commuting. WAGE reacted favorably to the company
acquiring the Consumer Health and Cobra business of
Automatic Data Processing Inc. (ADP), and adding ADP as
a channel partner for selling WAGE consumer directed
benefit services. While the acquired business will contribute
at a lower profitability level, it is meaningfully accretive and
WAGE has a long history of acquiring lower margin
businesses and moving them to the corporate average post
integration.
Sun Hydraulics Corp (SNHY): Based in Sarasota, FL,
SNHY announced a major strategic shift in early
November, with a $1 billion goal for sales by 2025.
Additionally, SNHY announced its first major acquisition
in its history by purchasing Enovation Controls, a provider
of electronic control, display and instrumentation controls.
SNHY announced the deal would be accretive to 2017
GAAP EPS by a minimum of $.25 per share. Given the
company is expected to record approximately $200 million
in revenues and $.90 per share in earnings in calendar
2016, this strategic goal and accretive acquisition was wellreceived by the market.
Source: FactSet Research Systems.
2.
3.
4.
5.
Omnicell Inc (OMCL): OMCL provides medication control
solutions and adherence packaging to hospitals and long-term
care facilities. Although reported 3Q 2016 results were solid,
shares retreated given concerns that the current generation of
medication control cabinets is approaching saturation. This
will likely cause a pause in growth until the next generation
ramps in the back half of 2017. In addition to the next
generation of cabinets, the company is introducing other
exciting products. OMCL is the clear technology leader in its
markets and we believe the company is well positioned to
deliver healthy growth for the next several years.
Tyler Technologies Inc. (TYL): Despite posting strong 3Q
2016 results, TYL was a laggard in the portfolio in the last
three months of the year. A portion of the poor relative
performance is due to the technology sector not fully
participating in the Trump rally. Additionally, the company’s
management team has recently emphasized that it is more
comfortable with revenue estimates in the 10% range which
may disappoint some investors. While this growth rate is
consistent with TYL’s long-term growth rate, the company has
posted mid-teens revenue growth rate over the past several
years. TYL has also been the subject of several negative
newspaper articles concerning implementation problems in
two California counties.
Proto Labs Inc. (PRLB): PRLB’s weaker-than-expected
guidance for 4Q 2016 caused the shares to decline. The
company has been faced with a weaker macro environment in
its industrial markets. It also has decided to maintain its high
level of sales and marketing spending. As discussed in
previous commentaries, PRLB is undergoing a reorganization
of its sales approach and management. We reduced our
weighting in the company during the last three months and
continue to evaluate the company’s long-term growth
prospects.
HealthStream Inc. (HSTM): HSTM reported disappointing
3Q 2016 results and its outlook for the 4Q 2016 was below
consensus estimates. There were three issues that negatively
impacted HSTM’s results and outlook: 1) growth within the
Workforce Development Solutions was driven by low-margin
product, 2) the Patient Survey business was adversely affected
by two customers moving from a telephone based surveying to
on-line based surveying which comes at significantly lower
price point and 3) an inability to implement new business
wins within the provider solutions division which caused a $5
million backlog.
iRadimed Corp (IRMD): In early October, this provider of
MRI-compatible IV pumps announced disappointing
guidance for the remainder of 2016. Sales are being
negatively impacted by a drop in replacements of a former
competitor’s product (the company has ceased operations)
and an extended sales cycle due to a revised marketing
strategy. While early results as measured by quote activity are
encouraging, longer overall approval times and conversion of
quotes into purchase orders are still major risks. We are
closely monitoring managements’ progress with the new
strategy and may adjust this smaller position accordingly.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
F OURTH Q UARTER 2016 C OMMENTARY
C ONESTOGA C APITAL A DVISORS , LLC
F OURTH Q UARTER B UYS & S ELLS
B UYS
1.
Descartes Global Systems (DSGX): This company is a cloud-based company that uses technology and networks to simplify
complex business processes in the logistics and supply chain management industry. Descartes’ technology unites retailers,
transportation carriers, logistics intermediaries, shippers, government agencies and financial institutions. Descartes has
over 13,000 customers worldwide, processes over 4.5 billion messages per year and manages over 30 million routes per
year. Conestoga believes that increased border security and regulations along with continued growth in ecommerce create
two secular tailwinds that will enable DSGX to outperform over our investment horizon. Descartes was founded in 1981
and is based in Waterloo, Canada. Its shares trade on the U.S. and Canadian exchanges.
2.
John Bean Technologies (JBT): Based in Chicago, IL, JBT is a leading global food processing and air transportation
solutions provider, recognized for its technology and service leadership. Food technology (75% of profits) is a highlyfragmented industry that benefits from several secular trends including protein consumption in emerging economies, food
safety and the rise of fresh fruit and yogurt based packaged beverages. Under the stewardship of CEO Tom Giacomini,
who joined in late 2013, JBT has experienced accelerating organic growth, profitability and ROIC gains while also
expanding its market-leading niche position through consolidation. We expect JBT will continue to experience low double
digit revenue and high double digit annual earnings growth over the next several years.
S ELLS
1.
Fleetmatics Group PLC (FLTX): Based in Waltham, MA, this company is a market leader in providing software that allows
companies to better manage its vehicle fleets. FLTX has 20% top and bottom line growth, double digit ROE, a
differentiated and proprietary product, and a strong balance sheet. Given the high growth and returns of FLTX business,
Verizon Communications Inc. (VZ) decided on August 1, 2016, to acquire FLTX for a 40% price premium. VZ paid a high
multiple of 5 times forward revenue and 30 times forward earnings for FLTX. The deal closed in the fourth quarter and
the stock was sold.
2.
Press Ganey Holdings Inc. (PGND): PGND is the market leader in measuring patient experience, primarily through
patient surveys. PGND’s market dominance is evident in their customer statistics, which include 26,000 healthcare
facilities, 62% of acute care hospitals (81% of those over 100 beds), over 75% of medical practices with more than 50
physicians, and 89% of major teaching hospitals. PGND was acquired in the fourth quarter by the Swedish private equity
firm EQT for $2 billion, or $40.50 per share.
Also in the fourth quarter, Conestoga added to positions in 7 companies: Descartes Systems Group Inc. (DSGX); EXA Corp.
(EXA); Fox Factory Holding Corp. (FOXF); MGP Ingredients Inc. (MGPI); SiteOne Landscaping Supply Inc. (SITE); Sotheby’s
Class A (BID); and WageWorks Inc. (WAGE).
Conestoga reduced positions in 9 companies: Abaxis Corp. (ABAX); Balchem Corp. (BCPC); Dorman Products Inc. (DORM);
Neogen Corp. (NEOG); Omnicell Inc. (OMCL); Proto Labs Inc. (PRLB); Rogers Corp. (ROG); Trex Co. (TREX) and Vascular
Solutions Inc. (VASC).
For the full calendar year 2016, Conestoga added a total of 8 new stocks, and removed 6 stocks from the portfolio in their
entirety.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
C ONESTOGA C APITAL A DVISORS , LLC
F OURTH Q UARTER 2016 C OMMENTARY
S ECTOR W EIGHTINGS ( AS
OF
12/31/16)
30%
25%
20%
15%
10%
5%
0%
Consumer Consumer
Discretionary
Staples
Energy
Financial
Services
Health Care Materials &
Processing
CCA Small Cap Growth
Producer
Durables
Russell 2000 Growth
Technology
Utilities
Cash
Russell 2000
Source: FactSet Research Systems and Conestoga.
T OP T EN E QUITY H OLDINGS ( AS
OF
12/31/16)
SYMBOL
COMPANY NAME
SECTOR
% OF ASSETS
CMD
Cantel Medical Corp.
Health Care
3.30%
AAON
AAON Inc.
Materials & Processing
3.23%
NEOG
Neogen Corp.
Health Care
3.18%
MLAB
Mesa Labs Inc.
Producer Durables
3.10%
STMP
Stamps.com Inc.
Consumer Discretionary
2.99%
OMCL
Omnicell Inc.
Health Care
2.99%
SPSC
SPS Commerce Inc.
Technology
2.97%
BLKB
Blackbaud Inc.
Technology
2.95%
VASC
Vascular Solutions Inc.
Health Care
2.89%
SSD
Simpson Manufacturing Co. Inc.
Materials & Processing
2.78%
Total within the Composite:
30.38%
The positions represent Conestoga Capital Advisors largest equity holdings based on the aggregate dollar value of positions held in the client accounts that
are included in the Small Cap Composite. All information is provided for informational purposes only and should not be deemed as a recommendation to
buy the securities mentioned.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
DISCLOSURES: Fully Compliant GIPS ® Presentation for the Period Ending December 31, 2016
Conestoga Small
Russell 2000
Total Assets at
Total Firm
Year
Russell 2000
No. of
Composite
% of Firm
Cap Total Net
Growth Total
End of Period $
Assets $
Return
Total Return
Accounts
Dispersion
Assets
Return
Return
(Millions)
(Millions)
2016
15.57%
11.32%
21.31%
111
0.49%
$833.518
46%
$1,813.242
2015
7.83%
-1.38%
-4.41%
99
0.51%
$867.804
54%
$1,598.843
2014
-8.16%
5.60%
4.89%
114
0.56%
$928.258
55%
$1,691.288
2013
50.55%
43.30%
38.82%
119
1.30%
$883.516
51%
$1,745.419
2012
11.51%
14.59%
16.35%
120
0.72%
$566.309
60%
$944.941
2011
5.05%
-2.91%
-4.18%
106
0.83%
$339.702
58%
$582.530
2010
25.29%
29.09%
26.85%
88
1.03%
$271.079
57%
$471.132
2009
30.08%
34.47%
27.18%
86
0.77%
$199.001
58%
$345.395
2008
-28.00%
-38.54%
-33.80%
86
0.70%
$131.463
58%
$224.803
2007
6.14%
7.05%
-1.57%
94
0.73%
$159.284
58%
$275.368
2006
10.07%
13.35%
18.37%
95
1.14%
$163.521
60%
$271.483
2005
4.60%
4.15%
4.55%
70
0.93%
$105.755
50%
$211.667
2004
19.04%
14.31%
18.33%
39
1.26%
$55.559
34%
$165.497
2003
30.96%
48.54%
47.25%
37
2.35%
$35.554
25%
$140.624
2002
-15.29%
-30.26%
-20.48%
17
2.67%
$11.176
12%
$96.392
2001
20.93%
-9.23%
2.49%
17
4.95%
$11.399
11%
$103.627
2000
0.18%
-22.43%
-3.02%
22
8.36%
$14.404
1%
$1,440.440
1999
43.52%
43.09%
21.26%
18
9.38%
$11.664
3%
$388.133
Annualized Rate of Return for the Period Ending December 31, 2016
Time Period
Conestoga Small Cap Total Net Return
Russell 2000 Growth Total Return
Russell 2000 Total Return
1 Year
15.57%
11.32%
21.31%
3 Years
4.60%
5.05%
6.74%
5 Years
13.95%
13.74%
14.46%
10 Years
9.66%
7.76%
7.07%
Since Inception (12/31/98)
11.10%
6.24%
8.14%
Conestoga Capital Advisors claims compliance with the Global Investment Performance Standards (GIPS) and has prepared and presented this report in
compliance with the GIPS standards. Conestoga Capital Advisors has been independently verified for the periods December 31, 1998 through March 31, 2002 by
KPMG and for the periods March 31, 2002 through March 31, 2015 by BBD, LLP. The verification reports are available upon request. 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. Verification does not ensure the accuracy of any specific composite
presentation. Performance data after March 31, 2015 is currently under examination by BBD, LLP.
A complete list and description of all composites and policies for valuing portfolios, calculating and reporting returns, and preparing compliant presentations are
available upon request. Performance results are presented after all actual investment management fees, custodial fees, commissions and other trading expenses.
Computations assume the reinvestment of all dividends and capital gains. Portfolios are valued monthly and returns are weighted by using beginning-of-quarter
values plus weighted cash flows. Annual returns are calculated by geometrically linking the monthly returns. Performance results for the full historical period are
total return, time-weighted rates of return expressed in U.S. dollars. Trade date accounting is used for all periods. No leverage has been used in the accounts
included in the composite. The actual return and value of an account will fluctuate and at any point could be worth more or less than the amount invested.
Individual account performance will vary according to individual investment objectives.
All fee-paying discretionary portfolios will be assigned to an appropriate composite according to investment objective. Composites will include new portfolios at the
start of the next performance measurement period (i.e. the beginning of the next month) after the portfolio comes under management and will exclude terminated
portfolios after the last full calendar month period the portfolios were under management (i.e., the end of the last full calendar month), but composites will continue
to include terminated portfolios for all periods prior to termination.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000®
Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a
combination of their market cap and current index membership. The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the
U.S. equity universe. It includes those Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values. The Russell 3000 Index
measures the performance of the largest U.S. companies based on market capitalization. The volatility of the Russell 2000 Index and Russell 2000 Growth Index may
be materially different from that of the performance composite. In addition, the composite's holdings may differ significantly from the securities that comprise the
Russell 2000 Index and the Russell 2000 Growth Index. For comparison purposes, the Conestoga Small Cap Composite is measured against the Russell 2000 and
Russell 2000 Growth Indices.
The current management fee schedule is as follows: Up to $25,000,000 = 1.00%; Over $25,000,000 = Negotiable.
The dispersion of annual returns is measured by the standard deviation across equal-weighted portfolio returns represented within the composite for the full year.
The dispersion calculation shown, "asset weighted dispersion", is calculated as the annual standard deviation of individual portfolio gross returns weighted by the
beginning of period portfolio size for the composite members. Dispersion is shown as "N/A" for periods less than one year and for periods with 5 or fewer composite
members for the entire year.
As of December 31, 2016, the three-year standard deviation, calculated net of fees, for the Conestoga Small Cap Composite was 16.36% and the Russell 2000
Growth was 16.67%, and the Russell 2000 was 15.76%. As of December 31, 2015, the three-year standard deviation, calculated net of fees, for the Conestoga Small
Cap Composite was 15.48% and the Russell 2000 Growth was 15.22%, and the Russell 2000 was 14.29%. As of December 31, 2014, the three-year standard
deviation, calculated net of fees, for the Conestoga Small Cap Composite was 14.63% and the Russell 2000 Growth was 13.82%, and the Russell 2000 was 13.12%.
Conestoga Capital Advisors is an independent investment management firm founded in 2001 that manages equity and balanced portfolios for primarily U.S.
institutional and retail clients. Performance results prior to June 30, 2001 have been achieved by Martindale Andres & Company, Inc., William Martindale and
Robert Mitchell's prior investment advisory firm. The Conestoga Small Cap Composite creation date (since inception) is 12/31/98. This composite contains
portfolios which primarily invest in small cap equities. In addition, for an account to be included in the composite, no more than 10% of the assets can either (i)
have a market capitalization that exceeds $4 billion (due to the expansion of the small cap market capitalization range, Conestoga has increased the market
capitalization from $2 to $4 billion as of June 2016); or (ii) be outside of the small capitalization model. In addition, the weighting of an individual security within a
given account cannot exceed 10% (or 2.5 times the target weighting defined in the small capitalization model portfolio) of the equity assets. Portfolios that are less
than $250,000 in size at inception are not included in this composite. Portfolios will not be removed from the assigned composite if they fall below the minimum
simply due to market depreciation. Prior to September 30, 2003, portfolios greater than $100,000 were included in this composite. There have not been any material
changes in the personnel responsible for managing accounts during the time period. Past performance is not indicative of future results.
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.
C ONESTOGA ’ S I NVESTMENT T EAM
Robert M. Mitchell Managing Partner, Portfolio Manager, Research Analyst
Bob is a Co-Founder and Managing Partner of Conestoga Capital Advisors, and Co-Portfolio Manager for the Small and SMid Cap strategies. Bob serves as Chief
Investment Officer of the firm, overseeing all aspects of the portfolio management and investment processes. Prior to Conestoga, Bob was a Portfolio Manager/
Analyst and Director of Equity Research at Martindale Andres & Company. Bob's portfolio management and research expertise was focused on small
capitalization companies. While at Martindale Andres & Co., he was responsible for $100 Million in individual and institutional small cap accounts. Before his
employment at Martindale Andres, Bob worked with the U.S. Department of Justice Antitrust Division where he analyzed the economic and financial aspects of
various industries for evidence of antitrust violations. Bob received his M.B.A. from Indiana University's Kelley School of Business in 1995; in 1991, he received a
B.A. from the University of Notre Dame.
Joseph F. Monahan, CFA Managing Partner, Portfolio Manager, Research Analyst
Joe is a Managing Partner and Co-Portfolio Manager for the Small Cap strategy. He also serves as an analyst for the firm’s SMid and Mid Cap equity strategies. Joe
is Conestoga’s Director of Research, where his responsibilities include coordinating the firm's fundamental research approach to selecting securities. He joined
Conestoga in December 2008 from McHugh Associates, where he was Senior Vice President/Portfolio Manager and a member of the firm’s Investment
Committee. Prior to joining McHugh in 2001, Joe was a Vice President and Portfolio Manager at Pitcairn Trust Company. He is a graduate of the Pennsylvania
State University, where he earned a Bachelor of Science degree, and he earned a Masters of Business Administration from Temple University. He is a CFA
Charterholder and a member of the CFA Society of Philadelphia.
Derek S. Johnston, CFA Portfolio Manager, Equity Research Analyst
Derek joined Conestoga Capital Advisors in May 2015 and became Co-Portfolio Manager for the firm’s SMid Cap Growth strategy on February 1, 2016. He also
provides equity research across the Small- to Mid-Cap universe. His has over twenty years of experience in the financial investment industry. Prior to joining
Conestoga, Derek worked as a Co-Portfolio Manager for Small and SMid Cap portfolios at 300 North Capital, LLC, located in Pasadena, CA (2007-2015). He
also served as an Equity Research Analyst for Small Cap equities at Engemann Asset Management for two years, and as an Equity Research Associate at Banc of
America Securities for three years. Earlier in his career, Derek worked at Thomson Financial, Caspian Securities, Inc., and Smith Barney, all based out of New
York. Derek received a Bachelor of Science in 1995 from Boston College, and an M.B.A. from University of Southern California’s Marshall School of Business.
He has been a CFA Institute Charterholder since 2003.
David R. Neiderer, CFA, CPA Equity Research Analyst
David joined Conestoga Capital Advisors in July 2013 and is responsible for providing equity research for both the small and mid cap equity strategies. Prior to
Conestoga, David had similar responsibilities as a Research Analyst at both Penn Capital and Chartwell Investment Partners. While at Penn, David worked across
the capital structure, making recommendations for both the equity and high yield credit portfolios. Earlier in his career, David was an Assistant Vice President
with Deutsche Bank, where he worked with the Distressed Products trading group, and an Audit Associate at Deloitte and Touche. David earned his Bachelor of
Science degree in Economics and Accounting from the University of Richmond. He also earned a Master of Business Administration from The Wharton School
at the University of Pennsylvania. He is a CFA Charterholder and a member of the CFA Society of Philadelphia. David is also a Certified Public Accountant.
Larry Carlin, CFA Equity Research Analyst
Larry joined Conestoga Capital Advisors in May 2015, and is responsible for researching Small-to-Mid Capitalization companies. His experience spans over
sixteen years in the investment management industry. Throughout his career, his focus has been primarily on Small and Mid Capitalization equity research. Prior
to joining Conestoga, Larry worked with Columbia Partners in suburban Philadelphia, providing fundamental research for long-only portfolios and a hedge fund
for six years. From 2004 to 2008, he served as an Equity Analyst at Redstone Investment Management. Earlier in his career, he spent six years as a Portfolio
Manager/Equity Analyst at Kalmar Investments, Inc. He was also a Financial Analyst/Project Manager at Investment Counseling, Inc. Larry earned a Masters of
Business Administration from Georgetown University, as well as a Masters of Arts in Economics from the University of Maryland, and a Bachelor of Science from
Villanova University. He has been a CFA Institute Charterholder since 1997.
Mark S. Clewett, CFA Managing Partner, Director of Institutional Sales and Client Service
Mark joined Conestoga Capital Advisors in January 2006 as Director of Institutional Sales and Client Service. In this role, he oversees the business development
and client servicing functions of the firm. Mark also oversees the firm’s finances. Prior to joining Conestoga, Mark was the Senior Vice President of Consultant
Relations for Delaware Investments in Philadelphia, PA, overseeing institutional consultant relationships, as well as developing new business opportunities and
servicing clients. During the years 1990 through 1996, Mark was an Investment Analyst at SEI Investments in Oaks, PA. He served in SEI's Investment
Management Unit, selecting and overseeing sub-advisory managers for the firm's institutional mutual funds. Mark received a Bachelor of Science degree in 1990
from the Pennsylvania State University. He has been a CFA Institute Charterholder since 1997, and currently holds the FINRA Series 6, 26 and 63 Licenses.
Jeffrey A. Riggs, CAIA, CIMA Institutional Sales and Client Service Officer
Jeff joined Conestoga Capital Advisors in August 2016 as Institutional Sales & Client Service Officer. In this role, he is responsible for business development and
client service. Prior to joining Conestoga, Jeff held research positions with Lincoln Financial Group and Nationwide Fund Advisors. At Nationwide, he was
Director of Manager Research with responsibility for manager selection and oversight for the firm’s U.S. and International Equity Funds. From 2006 to 2010 he
was a Quantitative Analyst at Turner Investments providing research and analysis for the firm’s investment strategies. Earlier in his career Jeff served as a Product
Specialist for Brandywine Global Investment Management and a Marketing Associate at Delaware Investments. Jeff earned a B.A. in Finance from Western
Michigan University and an M.B.A from La Salle University. He holds the Chartered Alternatives Investment Analyst (CAIA) and Certified Investment
Management Analyst (CIMA) designations. He currently holds the FINRA Series 6 license.
Conestoga Capital Advisors
CrossPoint at Valley Forge
550 E. Swedesford Road, Suite 120
Wayne, PA 19087
PIONEERS IN SMALL AND MID CAP INVESTING
Phone: 484-654-1380
Web: www.conestogacapital.com
Contact: Mark S. Clewett at [email protected]
or
Jeff Riggs at [email protected]
*Please note: the specific securities identified and described in this report do not represent all of the securities purchased, sold or recommended for advisory clients, and you should not
assume that investments in the securities identified and discussed will be profitable in the future. As you are aware, one cannot assume that past results are indicative of future performance.