Meridian Growth Fund Portfolio Performance 2014

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Mar 01, 2015

According to the Chinese lunar calendar, 2014 was the year of the horse, and the stock market certainly cooperated by galloping higher. Equities, both large and small, continued to set record highs on the heels of an improving economy and company fundamentals.

Against this backdrop, we are pleased to report that the Meridian Growth Fund Legacy Class shares returned 7.62% for the six-month period ending December 31, 2014, outperforming its benchmark, the Russell 2500® Growth Index, which returned 2.97%.

As we noted in our first letter one year ago, our primary objective is to create an “all-weather” small and mid cap growth portfolio that has the potential to outperform in a variety of market conditions. Our approach was rewarded as the 2014 market environment encountered several different weather patterns, which resulted in notably higher volatility than the prior year. The VIX index (a key measure of market volatility, and generally considered an indicator of fear in the market) wavered repeatedly between unusually calm, very tumultuous, and back to calm within a matter of weeks. This is not unexpected given the magnitude and duration of the current bull market, coupled with uncertain Fed policy and rising interest rates. We not only welcome volatility but embrace it, as we believe this creates opportunities to position the portfolio for long-term success. First, we seek to protect capital on the downside, which has historically led to outperformance in more volatile markets. In addition, we opportunistically look to put new capital to work when the market sells off, thereby establishing positions at more favorable prices. Given the power of compounding, we believe this is a formula that has should lead to long-term investment success.

During the course of the year, we had four separate occasions in which small cap stocks pulled back more than 5%, which helped us generate outperformance for the year. During these market pullbacks, our downside capture ratio averaged 73% in the Meridian Growth Fund, which led the way to full year outperformance.

The top contributors to Fund performance this period were Cimpress, SS&C Technologies and Carter’s.

• Cimpress (CMPR, Financial), formerly Vistaprint, offers online marketing products and services to small businesses. The company performed well after moving to more standard pricing for a broader range of customers. After doubling since the summer’s lows driven by continued execution of the company’s turnaround strategy, we trimmed the holding due to what we perceive as a less favorable risk/reward profile at these levels.

• SS&C Technologies (SSNC, Financial) is a technology provider to the financial industry. Approximately 90% of revenues come from subscriptions services, which provides a stable source of revenue for the company. SS&C has made several acquisitions that help secure its dominance in the industry.

• Carter's (CRI, Financial), the leading manufacturer of infant and toddler apparel, was a top contributor during the period. Carter’s continues to benefit from its strong brands, low-cost scale position, ubiquitous distribution and global footprint. Due to the company’s dominant competitive position and strategic growth initiatives, we believe the fundamental outlook remains favorable. The top detractors from Fund performance this period were CHC Group, Clean Harbors and RigNet.

• CHC Group (HELI, Financial) is a helicopter service company that specializes in transportation to offshore oil and gas platforms. The company has underperformed recently due to the drop in oil prices. We believe the company is still wellpositioned for the long term, but its exposure to large exploration and production companies will likely continue to be a drag on performance in the short term.

• Clean Harbors (CLH, Financial) underperformed during the period due to concerns around falling lube oil prices and exposure to the Canadian energy sector. We believe that some of the company’s assets are irreplaceable, but the company may underperform during this period of weak demand from its energy customers.

• RigNet underperformed due to declining oil prices and fears around excess supply of offshore drilling rigs. We are patient investors and believe the risk/reward profile from this price is very favorable.

On the positive ledger, the overall U.S. economy continues to demonstrate signs of strengthening due to several factors. First, the overall employment picture continues to brighten, housing continues to mend, corporate profits are at record levels and reinvestment plans are set to accelerate. In addition, the steep decline in energy and commodity prices should result in higher disposable income and provide further momentum for consumer spending. Given record low interest rates, reasonable valuations and improving fundamentals, equities currently find themselves in a favorable position. However, we have begun to see recent deceleration in some European and Asian economies, which could potentially present challenges to the overall global growth picture. We will continue to monitor these events and position the portfolio in companies that we believe have the ability to grow and create shareholder value regardless of the macro environment.

As always, our key objectives will center on building an “all-weather” small and mid cap growth portfolio: seeking to protect capital on the downside; finding companies that can grow and create their own economic destiny; and, finally, putting ourselves in a position to take advantage of market volatility when opportunities present themselves.

Thank you for your confidence and investment.

Chad Meade and Brian Schaub,

Arrowpoint Asset Management LLC

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. It should not be assumed that an investment in the securities mentioned will be profitable in the future. This information is not a recommendation to buy or sell. Past performance is not predictive of future performance. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares and do not reflect the imposition of a 2% redemption fee on shares held 60 days or less to deter market timers. If reflected, the taxes and fees would reduce the performance quoted. Net asset value, investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than their original cost. *On November 1, 2013, the Fund's benchmark changed from the Russell 2000® Index to the Russell 2500® Growth Index. The primary reason for this change is to compare the Fund to a benchmark that more closely aligns with the Fund's current strategy.