Shareholder Letter

July 22, 2020

Dear Shareholder,

During the second quarter of 2020, the Osterweis Emerging Opportunity Fund (the Fund) generated a total return of 45.94% while the Russell 2000 Growth Index (the Index) returned 30.58%. The Fund’s annualized total returns over the one-year, five-year, and since inception (10/1/2012) periods ending June 30, 2020 were 22.83%, 14.78%, and 17.19%, respectively, compared to 3.48%, 6.86%, and 11.33% for the Index over the same periods.

Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling (866) 236-0050. An investment should not be made solely on returns. The Fund’s gross expense ratio was 1.27% and net expense ratio was 1.16% as of March 31, 2020. The net expense ratio is applicable to investors. The Adviser has contractually agreed to waive certain fees through June 30, 2021.

Equity markets rebounded strongly during the second quarter, as fears about the virus receded and government stimulus programs delivered relief to both consumers and businesses. The Fund benefited from the improved sentiment, as well as several factors that are specific to our strategy.

Most importantly, we maintained our focus on growth stocks, as we believe they will outperform value stocks for the foreseeable future. Our thesis again proved correct during the second quarter rally, as investors continue to favor companies that can demonstrate robust top line sales and revenue growth, particularly given the current economic slowdown. The fastest growing firms come from sectors like technology and health care (our two largest sectors by weight), whereas value stocks come from sectors like retail and energy, which have been hit hardest by the pandemic.

Within technology, we have been focusing on eCommerce companies and firms that support telecommuting, both of which clearly benefited from Covid-19. We discuss both secular trends in our latest blog post, "Steepening the (Adoption) Curve."

Our two best performing stocks during the quarter were both eCommerce firms. First was Fiverr International, an online marketplace that brings together freelancers and employers. The site has experienced substantial growth since the pandemic began, which drove up both revenues and the company’s stock price. Our second-best performing stock was Etsy, Inc., an eCommerce site for handmade arts and crafts. Buying activity surged in the spring, and their share price also appreciated substantially. 

Infrastructure companies that support remote working arrangements also did well for us, led by Bandwidth Inc., a software firm that sells a cloud-based communications platform. The company licenses its voice technology to Zoom, the now ubiquitous online meeting platform, among other large customers, and demand has been surging.

The pandemic has also had a transformative effect on the health care sector – particularly how care is delivered. For safety reasons, providers have migrated swiftly toward virtual visits and telemedicine. This particularly benefited Livongo Health, Inc, a leader in virtual health care. The company provides remote monitoring to patient groups that are particularly susceptible to the coronavirus, and the company has seen an uptick in demand from both employers and health plans.

Additionally, we had success with our “survivor stocks,” which are companies we expect to grow during the downturn by taking market share from smaller, local competitors that are struggling. Two companies that did particularly well in this category were Wingstop, a fast food chain that specializes in delivery and to-go orders, and Floor & Décor, a home improvement firm specializing in flooring.

Nearly every sector in which we were invested beat the benchmark. Our only laggard was financials, which was dragged down by two stocks – eHealth and Meta Financial. We still like both stocks and remain invested in each.

Given our strong results this quarter, we have started taking profits and trimming some positions. Thus far, the markets have mostly brushed off the bad news related to the pandemic’s recent resurgence, but the situation is fluid and we are expecting significant volatility in the coming months. As always, we intend to use that volatility to add positions at attractive valuations.

We thank you for your continued confidence in our management.

Regards,

Jim Callinan

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Investment Team

James L. Callinan

Chief Investment Officer – Emerging Growth

James L. Callinan

Chief Investment Officer – Emerging Growth

Jim Callinan was the Co-Founder & Chief Investment Officer at RS Investments. He also co-founded the RS Growth Group LLC in 1996 and managed the RS Emerging Growth Fund from 1996 until 2010. In 1999 Mr. Callinan was named Morningstar’s Domestic Stock Manager of the Year*.

He served as portfolio manager for the Putnam OTC Emerging Growth Fund from 1994 to 1996 and began his career at Putnam Investments as an equity research analyst in 1987. He joined Osterweis Capital Management in 2016 and brought with him the Emerging Growth Partners, LP, a concentrated small cap growth strategy he founded at RS.

Mr. Callinan is an Executive Committee member of the Weatherbie Capital (an Alger Company) Advisory Board and the Friends of Harvard Football Board.

He is equity owner in the firm and a Portfolio Manager for the emerging growth strategy. He is also a Portfolio Manager for the flexible balanced strategy.

Mr. Callinan graduated from Harvard College (B.A. Economics), New York University (M.S. Accounting) and Harvard Business School (M.B.A.). Mr. Callinan holds the CFA designation.

*Morningstar Managers of the Year are determined by a combination of qualitative research by Morningstar’s manager research analysts; risk-adjusted medium- to long-term performance track records; and performance in the calendar year.

Matthew C. Unger

Vice President & Analyst

Matthew C. Unger

Vice President & Analyst

Prior to joining Osterweis Capital Management in 2016, Matt Unger spent three years at RS Investments as a Research Associate covering small cap growth companies in the medical technology and industrial sectors. Before graduate school, Matt worked at Platte River Capital covering the medical device sector from 2008-2010.

He is an equity owner in the firm and an Analyst for the emerging growth strategy.

Mr. Unger graduated from Trinity University (B.S. Finance, cum laude) and Southern Methodist University, Cox School of Business (M.B.A.). Mr. Unger holds the CFA designation.

Bryan Wong

Vice President & Analyst

Bryan Wong

Vice President & Analyst

Prior to joining Osterweis Capital Management in 2014, Mr. Wong was a member of the investment team managing the endowment of the David and Lucile Packard Foundation. Before that, Mr. Wong was an Analyst from 2005 to 2009 at two long/short hedge funds.

He is an equity owner in the firm and an Analyst for the emerging growth strategy.

Mr. Wong graduated from Yale University (B.A. in Political Science and International Studies with distinction) and the University of California Berkeley, Haas School of Business (M.B.A., Investment Management Fellow). Mr. Wong holds the CFA designation and is a member of the CFA Society of San Francisco.

Performance prior to December 1, 2016 is that of another investment vehicle (the Predecessor Fund) before the commencement of the Fund’s operations. The Predecessor Fund was converted into the Fund on November 30, 2016. The Predecessor Fund’s performance shown includes the deduction of the Predecessor Fund’s actual operating expenses. In addition, the Predecessor Fund’s performance shown has been recalculated using the management fee that applies to the Fund, which has the effect of reducing the Predecessor Fund’s performance. The Predecessor Fund was not a registered mutual fund and so was not subject to the same operating expenses or investment and tax restrictions as the Fund. If it had been, the Predecessor Fund’s performance may have been lower.

This commentary contains the current opinions of the author as of the date above, which are subject to change at any time. This commentary has been distributed for informational purposes only and is not a recommendation or offer of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

The Russell 2000 Growth Index is a market capitalization weighted index representing those stocks within the approximately 2000 smallest companies in the universe of U.S. equities that exhibit growth characteristics. It is not possible to invest in an Index.

The Russell 2000 Value Index is a market capitalization weighted index representing those stocks within the approximately 2000 smallest companies in the universe of U.S. equities that exhibit value characteristics.

Holdings and allocations may change at any time due to ongoing portfolio management. References to specific investments should not be construed as a recommendation to buy or sell the securities. Current and future holdings are subject to risk.

The Osterweis Emerging Opportunity Fund’s top 10 holdings may be viewed by clicking here.

The Osterweis Funds are available by prospectus only. The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information about the Funds. You may obtain a summary or statutory prospectus by calling toll free at (866) 236-0050, or by visiting www.osterweis.com/statpro. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance.

Mutual fund investing involves risk. Principal loss is possible.

The Osterweis Emerging Opportunity Fund may invest in unseasoned companies, which involve additional risks such as abrupt or erratic price movements. The Fund may invest in small and mid-sized companies, which may involve greater volatility than large-sized companies. The Fund may invest in IPOs and unseasoned companies that are in the early stages of their development and may pose more risk compared to more established companies. The Fund may invest in ETFs, which involve risks that do not apply to conventional funds. Higher turnover rates may result in increased transaction costs, which could impact performance. From time to time, the Fund may have concentrated positions in one or more sectors subjecting the Fund to sector emphasis risk. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets.

While the fund is no-load, management fees and other expenses still apply. Please refer to the prospectus for more information.

Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC.