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Small Cap Focused Growth

Portfolio Manager Commentary

4th Quarter 2014

2014 - A Tricky Year

After the remarkably high returns in 2013, we postulated in last year’s 4th quarter letter that 2013 would

be a hard act to follow (Focused Growth 4Q2013 Commentary). Well, that turned out to be an accurate

forecast. While the strong end to 2014 enabled both the Focused Growth strategy and the Russell 2000

Growth Index to finish the year in positive territory, neither posted gains worthy of writing home to

Mom (and yet she's an investor and will read this...so apologies Mom). For the 2014 calendar year, the

Focused Growth strategy lagged the benchmark for the first time since 2010, rising just 1.6% compared

to the benchmark's 5.6%.

The year was difficult for our portfolio's positioning both in terms of style and sector footprint. From

a style perspective, 2014 favored dividend payers, low valuation and low beta – all headwinds for the

Focused Growth’s emphasis on secular growth companies. Sector exposure also was a headwind,

primarily due to strong performance by the Biotech and Medical Equipment sub-sectors within

Healthcare, areas in which the strategy does not typically invest. Somewhat offsetting the negative

impact of our underweighting in Healthcare was the positive effect of our lack of exposure to Energy,

the weakest performing sector within the Russell.

Exacerbating the sector headwinds was the flight from the more conceptual technology names in the

early part of the year, including many of the software-as-a-service pioneers in the portfolio. While the

deficit was partially made up in the second half of the year, the end result was negative Stock Selection

for the year. Technology was the primary culprit, as the portfolio showed positive selection in the

Consumer and Producer Durables sectors.

Composite Performance Chart

---Annualized---

4Q2014 1-Year 3-Year 5-Year Since Inception

Small Cap Focused Growth –

Net of Fees 11.0% 1.6% 27.3% 24.4% 15.1%

Russell 2000 Growth 10.1% 5.6% 20.1% 16.8% 8.7%

*Small Cap Focused Growth strategy inception August 1, 2007. Performance prior to 12/31/2011 is from PM’s prior firm. Composite Performance reported Net of Fees. Past performance is not indicative of future returns. Full performance disclosure is attached in the Product Snapshot and also available upon request.

4th Quarter 2014 Review

In the fourth quarter, U.S. equity markets rose nicely with most indices up 5%-10%. The Focused

Growth strategy rose 11%, exceeding the Russell 2000 Growth benchmark’s 10% return for the

quarter, though not by enough to catch the benchmark for the year.

In terms of attribution, overall sector exposure represented a tailwind for the portfolio in the quarter.

The portfolio’s lack of exposure to the poor performing energy sector was a positive for the portfolio,

and more than offset the negative attributed to the lack of exposure to the Healthcare sector, the best

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performing sector for the Russell 2000 Growth benchmark. Stock selection was modestly negative for

the fourth quarter. The standouts on the negative side were Power Solutions International (PSIX),

Stratasys (SSYS) and Pandora (P). Power Solutions International is a manufacturer of alternative-fuel

engines; the stock price fell as investors anticipate business will contract in the wake of lower energy

prices. We continue to hold the name, as estimates for 2015 are reasonable, and the company’s long-

term prospects make the stock's risk/reward attractive. The share price of Stratasys, a manufacturer of

3D printers, declined 31% on a modest estimate reduction due to a dilutive acquisition along with

investor fears of increasing competition. We have scaled back this position to a modest size. Pandora,

streaming music provider, fell due to concerns about slowing subscriber growth and uncertainty

regarding the upcoming Copyright Royalty Board (CRB) decision regarding the royalty rates Pandora

will pay to the music industry for the next 5 years. This decision, due in December 2015, has critical

implications on Pandora's profitability over the next 5 years. Given these uncertainties, we have scaled

back our investment in Pandora for the time being.

Biggest Positive Impact Average

% Port

4Q

Return

4Q Portfolio

Effect Russell Sector

Taser International 5.8% 71.2% 3.0% Producer Durables

Constant Contact 7.2% 35.2% 1.6% Consumer Discretionary

Paylocity Holding Corp. 1.0% 36.6% 0.4% Producer Durables

Biggest Negative Impact Average

% Port

4Q

Return

4Q Portfolio

Effect Russell Sector

Power Solutions Int’l 2.5% -25.2% -1.0% Producer Durables

Stratasys Ltd. 1.7% -32.1% -0.8% Technology

Pandora Media 1.6% -27.2% -0.8% Consumer Discretionary

On the positive side, Taser International (TASR - electric shock weapons and on-officer video systems)

rose in the wake of strong earnings and broad-based interest in the company's on-officer video

products. We retain a significant position as we believe the weapons business has solid prospects for

extended double-digit growth, and that on-officer video – for which Taser is the dominant market

leader – remains in the very early stages of market penetration. The shares of Constant Contact (CTCT

- Leading cloud-based marketing services provider for small businesses) rose as the company reported

good third quarter results and gave strong initial guidance for 2015. We continue to believe the shares

have attractive risk/reward and retain a solid investment despite having harvested a fair amount of

gains. Another positive contributor, though to a lesser degree, was Paylocity (PCTY). This provider of

cloud-based payroll and human capital management software for small-medium-sized businesses rose

nicely on strong September quarter results and broader exposure to the investment community. We

continue to own shares in Paylocity.

Outlook

With the U.S. economic recovery in its sixth year, it is reasonable to wonder about its duration. And

yet, both the depth of the 2008 crisis and the tepid pace of this recovery suggest the expansion could

persist. From our perspective, the current fundamental backdrop is, at minimum, benign. The trickier

thing at this juncture is the juxtaposition of valuations, which are above average historical norms, and

interest rates, which are very low from a historical perspective (and thus et pluribus argue for higher

valuations).

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As bottom up investors, we don’t spend a lot of time trying to forecast the macro economy, but rather,

we remain focused on executing our proven process. This brings to mind a story shared with us a

couple of years ago by Scott Scherer (Founder and CEO of Ultimate Software – ULTI, one of our

desert island companies). Scherer had asked Miami Heat President Pat Riley how he kept a roster of

such superstars as LeBron James, Dwayne Wade, and Chris Bosh aligned. I believe Riley's answer

has applicability to every business and most aspects of life. It is permanently etched on my E Ink office

wall:

"The Main Thing, is to Make Sure that the Main Thing, Remains the Main Thing"

-Pat Riley, President

Miami Heat

For us "The Main Thing" is sticking to our process of: a) identifying and spending time on companies

that we believe can grow 15%+ per annum for an extended period of time (Desert Island Companies);

and b) applying our disciplined risk/reward and expected return methodology as a key tool to managing

a stock portfolio of those companies. If we execute on this process, we are likely to achieve our goal

of providing attractive investment returns for our clients during most intermediate to long-term

environments. With the modest gains in 2014, the set-up for 2015 feels a bit better than a year ago. We

estimate that the companies in the Focused Growth portfolio grew their earnings 25% in 2014, and that

earnings will grow an additional 26% in 2015. All else equal (and, of course, all else is never equal),

this is a positive entering 2015.

On behalf of the entire team at Granahan Investment Management (which just expanded in a terrific

way with the addition of David Rose from our friends at Furey Research), we appreciate your continued

interest in GIM and our small cap equity strategies.

In closing, if you're looking for a book or two I'd recommend Peter Theil's Zero to One which provides

some excellent insights into what we'd call "desert island" characteristics, and Amanda Palmer's The

Art of Asking which provides some excellent insights into...well the art of asking (and a whole lot

more).

Best wishes for a happy, healthy, interesting, enjoyable and prosperous 2015, and please don't hesitate

to pick up the phone if you wish to chat.

Andrew L. Beja, CFA

dbeja@granahan.com

(781) 902-1409

Life Cycle Diversification: Adds stability

Annualized Performance: Net of Fees

Graphs and Statistics are Supplemental Information.

Please reference fully compliant GIPS Presentation on reverse side.

Small Cap Focused Growth Product December 31, 2014

GIM Small Cap Focused Growth Russell 2000 Growth As of December 31, 2014

Selected Portfolio Statistics

At a Glance Product Assets: $237 Million Minimum Investment : $3 Million Status: Open Inception Date: August 1, 2007 Benchmark: Russell 2000 Growth Capitalization: Typically, $200 Mil - $2 Bil at purchase Portfolio Manager: Andrew L. Beja, CFA Typical Number of Holdings: ± 40

Distinguishing Factors • Experienced portfolio manager with a demonstrated

record of success. • Seeks capital appreciation through investment in a

limited number of sustainable growth companies using a strict risk/reward discipline.

• Research centered on the manager’s areas of expertise.

Investment Philosophy Granahan Investment Management (GIM) believes that small dynamic companies provide excellent potential for superior long-term performance. GIM’s Focused Growth strategy is grounded in the belief that superior long term returns are best achieved through a select portfolio of smaller companies poised to grow at 15% or more with clean balance sheets.

Within this philosophy we seek to own companies with large open ended opportunities, a favorable competitive landscape and products or services providing a significant value proposition to the customer. This company analysis is combined with a rigorous valuation discipline centered on a stock's expected return and risk/reward. The net result is a portfolio of 40-50 attractively priced stocks of some of the most exciting and innovative companies in the economy, and a portfolio that has generated consistent, strong risk-adjusted returns over time. Firm History Founded in 1985, Granahan Investment Management, Inc. is a 100% employee-owned firm specializing in smaller cap equity investments for large institutions and wealthy individuals. The firm utilizes fundamental, bottom-up research to uncover and invest in fast growing companies under $6 billion in market cap. The firm manages over $3.5 billion in institutional assets and the three founding principals are part of an investment team which now totals ten professionals.

Trailing 5-years through December 31, 2014 Quarterly Returns - Gross of Fees

Annualized Alpha 8.41% Upside Capture 114.27% Downside Capture 59.38% Tracking Error 7.29 Information Ratio 1.17 Beta 0.96

Source: Informais

Performance prior to 12/31/2011 is from PM’s prior firm.

Characteristic Portfolio Russell 2000 Growth

Median Market Cap $1,302.9 mil $835.6 mil

Weighted Avg. Market Cap $2,450.0 mil $2,092.7 mil

Active Share 96.23% 0.00%

Est 3-5 Yr EPS Growth 20.4% 15.3%

Forward P/E Ratio 36.9x 23.5x

Dividend Yield 0.08% 0.69%

Price to Book 4.86x 4.36x

Granahan Investment Management, Inc. Small Cap Equity Specialist Since 1985

404 Wyman St., Suite 460, Waltham MA 02451 781-890-4412 www.granahan.com info@granahan.com

Holdings and Characteristics are Supplemental Information. Please reference fully compliant GIPS Presentation above.

December 31, 2014 Small Cap Focused Growth Product

Source: FactSet

December 31, 2014

Top Ten Holdings

Security Percent of Portfolio

LIVEPERSON 8.3%

AFFILIATED MANAGERS GROUP 6.8%

IMAX CORP 6.8%

TASER INTL INC 6.6%

ADVISORY BOARD 5.2%

CONSTANT CONTACT 5.1%

COSTAR CORP 4.9%

ACTUA CORP 4.8%

MONOTYPE IMAGING 4.7%

IROBOT 4.0%

Composite Footnotes Granahan Investment Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Granahan Investment Management has been independently verified for the periods January 1, 1993 through December 31, 2013. 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. GIM is an independent, SEC- registered investment firm that oversees small and mid-cap equity portfolios for large institutions and wealthy individuals. The Small Cap Focused Growth product utilizes fundamental, bottom-up research and analysis to invest in companies in the small cap sector of the market that exhibit sustainable high earnings growth, with a focus on the technology services, internet, consumer, and business services sectors. The benchmark for the Small Cap Focused Growth product is the Russell 2000 Growth. The composite, created in December 2011, is calculated by asset-weighting the performance of each account on a monthly basis. The composite includes returns from the portfolio manager’s prior firm, from inception of August 1, 2007 through December 31, 2011. Accounts are included beginning with the first full month under management and terminated accounts are included in the composite. Performance calculations, expressed in U.S. dollars, produce a total return including cash and the reinvestment of dividends and interest. The dispersion is a standard deviation using equal-weighted total returns for accounts in the composite the entire year. The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period. Leverage is not utilized. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Returns are gross of investment management fees, which when included, reduce investment returns. Beginning 10/31/2012, net returns are total returns reduced by actual investment management fees. Prior to 10/31/12 and for accounts which pay no management fee, the standard management fee applicable is applied to calculate the net return. The standard fee for accounts managed in the Small Cap Focused Growth style is payable quarterly in arrears and is calculated by applying the ANNUAL rate of 1.00% times the average value of the assets in the account on the last day of each month in the quarter. Fees are collected quarterly, which produces a compounding effect on the total rate of return net of management fees. Market value is based on trade date and security pricing is supplied by Telemet. A complete list and description of all of the firm's composites is available upon request. Past performance is no guarantee of future results.

Date

Small Cap Focused Growth Composite

Composite

Gross Return

Russell 2000

Growth Return

Composite

Assets $ Mil

Composite

# Accts

Composite

3-Yr. Std. Dev.

Russell 2000

Growth 3-Yr.

Std. Dev.

Composite Dispersion

Composite Net Return

Non-Fee Assets

Firm

Assets $ Mil

2014 2.17% 5.60% $211.8 6 15.87 13.82 NA 1.61% 0.4% $3,516.6

2013 65.19% 43.30% $93.0 <5 16.73 17.27 NA 64.49% 1% $4,056.7

2012 24.55% 14.59% $26.5 <5 21.23 20.72 NA 23.36% 2% $3,049.4

2011 13.19% -2.91% $0.4 <5 23.12 24.31 NA 12.07% 100% $2,741.5

2010 30.06% 29.08% $5.4 8 29.56 27.70 0.15 28.81% 7%

2009 53.80% 34.47% $4.2 8 NA 24.85 0.06 52.33% 10%

2008 -46.34% -38.54% $1.9 6 NA 21.26 NA -46.91% 10%

2007* 18.24% 3.27% $.4 <5 NA 14.23 NA 17.76% 100%

NA – Dispersion information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year; Standard deviation

information has fewer than three years’ data. *Partial year performance: August 1, 2007 through December 31, 2007

December 31, 2014