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Small Cap Focused Growth

Portfolio Manager Commentary 1st Quarter 2016

The recent phase of market volatility and challenging performance for the Focused Growth portfolio

persisted into the early part of 2016. The period from January 1st through February 11th mirrored

the panic we witnessed during the Global Financial Crisis. Gloom and doom were rampant, and the

consensus view was that the US was headed for (or was already in) a grave recession. While

sentiment and performance rebounded somewhat post February 11th, the Focused Growth portfolio

nonetheless lagged the benchmark materially for the quarter.

Q1 Review:

Portfolio Level: Two Large Holdings Report Disappointing 2016 Guidance

Later in this letter, we discuss the severe headwinds the portfolio faced from a thematic level in

terms of "what worked, what didn't" in Q1. In the quarter, those challenges were exacerbated as

two of the portfolio's top holdings – SPS Commerce and The Advisory Board – issued disappointing

2016 guidance. Both were severely punished, falling 39% and 33% respectively, representing 620

basis points of negative attribution for the quarter.

SPS Commerce (SPSC) provides cloud-based supply chain management solutions for

retailers and their trading partners. SPS had its first quarterly misstep after six straight years

without one. The company guided 2016 organic revenue growth to 18% compared with the

Street's expectations of 21%. SPS fell short of its goals for total number of sales reps, as a

tight labor market in its hometown of Minneapolis highlighted challenges in both recruiting

new reps and retaining existing reps. The company has undertaken a number of actions to

rectify the situation. Although the resolution will take some time, we believe there is a high

likelihood that the steps taken will correct the problem. We view the stock's 39% drop in Q1

as a severe overreaction, believe SPSC shares have a very attractive risk/reward (Expected

Return today is > 30% over the next 12 months), and have added to our position.

Advisory Board (ABCO) provides best practices research and IT tools for healthcare and

higher education industries. ABCO shares fell 33%, as the company guided to a

disappointing 8% core revenue growth (versus expectations of 15%) for 2016, as new

contract signings fell short of goals during the company's critical Q4 selling season. While

profit margins are running ahead of expectations, and thus EBITDA and net income

guidance was only modestly below prior expectations, the lower projected growth has

investors understandably concerned about the Company's long-term growth rate. We used

what we viewed as a severe over-reaction to purchase more ABCO shares. That said, as the

stock has rebounded from its lows, we have lightened our position. While Advisory Board

continues to have a valuable offering for its customers, our scenario-based approach to

valuation now includes a higher probability that the company's growth has permanently

slowed. We will continue to adjust our investment in ABCO shares accordingly.

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It is worth noting that we do not believe that these two stock hits were due to a failure in our process.

We view both SPS Commerce and Advisory Board as high quality, well-managed companies

offering strong customer value propositions, and generating strong free cash flow (that is, Desert

Island companies). Utilizing the Expected-Return framework stage of our process, we had

incorporated such downside scenarios. However, as noted above, investor psychology can play an

outsized role in short-term stock performance. When companies disappoint investors – especially

during a period in which investor confidence is fragile – the dislocations can be extreme, and the

impact to a concentrated portfolio equally as extreme.

In terms of meaningful positive Q1 contributors, EBIX (EBIX - software and services for the

insurance industry) rose 25% and contributed +136 basis points, as the company reported a good

Q4 and continued to plow its strong free cash flow into share buybacks. We believe the company's

prospects remain solid, that the stock's risk/reward continues to be attractive, and hence it remains

a large holding in the portfolio. Constant Contact (CTCT - email marketing platform for small

businesses) appreciated 9% and contributed +113 basis points, as the previously-announced

acquisition by Endurance International (EIGI) was consummated despite difficult market conditions

and a great deal of skepticism.

Thematic Level: Longer Duration Secular Growth Out of Favor

As we've discussed in the past, Wall Street can be quite manic, and over a short period of time,

sentiment (as distinct from a company's earnings power) can heavily influence a stock's valuation.

This was the case in the first quarter, as investor sentiment turned decidedly negative toward the

types of high secular growth stocks that are held in the Focused Growth portfolio. Investors favored

low-valued, low ROE, slower growth and lower volatility stocks. These are not the types of

companies in which we invest in the Focused Growth portfolio. Rather the portfolio is skewed

toward high secular growth companies that, on the whole, are early in their life cycles, investing

heavily, and in many cases generating losses or depressed profits. Investors typically value such

companies on an Enterprise Value/Sales (EV/Sales) or Discounted Cash Flow (DCF) basis. In Q1,

as investor psychology shifted sharply from "Glass Half Full to Glass Half Empty," there was a

severe contraction in the EV/Sales valuation ratios of such innovative growth companies, along with

an accompanying rise in the discount rate investors applied to their future earnings. This affected a

number of the portfolio's larger holdings and had a meaningful negative impact on performance.

The impact was felt both with respect to companies that reported results/guidance generally in-line

with expectations, as well as companies that reported results/guidance that were ahead of

expectations.

Below we list some examples along with their Q1 portfolio impact. Of note is that each of these

businesses has substantial cash and no debt, and we believe each is making high return investments

that will pay off well in future periods.

Companies reporting Q4 results: In-line with Consensus Expectations:

Cvent (-137 basis points)* Demandware (-211 basis points)

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Companies reporting Q4 results: Ahead of Consensus Expectations:

HubSpot (-55 basis points) 2U (-44 basis points) Paylocity (-45 basis points) Instructure (-38 basis points) MINDBODY (-30 basis points)

* As this letter was heading to press, Cvent (CVT) entered into an agreement to be purchased by

the private equity firm Vista Equity Partners. The cash purchase price of $36 per share

represented a 69% premium to CVT's closing price at the end of the previous trading day, and an

Enterprise Value/Revenue multiple of 6.3X. This transaction underscores the point made above

regarding the inherent value we seek in desert island companies.

Guided by our investment process, in the quarter we took advantage of volatility and shifts in

risk/reward to add to some of these stocks that declined amidst good earnings; these adjustments

were rewarded in the latter part of the quarter. We also seek to capitalize on volatility to initiate

new positions in stocks of companies on our Desert Island monitor list as their risk/reward becomes

more attractive. Examples in the quarter include Lending Tree - TREE, Wix.com - WIX, and

GoDaddy – GDDY.

Perspective: Short-term Volatility Notwithstanding, Long-term Growth and Earnings Power

Will be Rewarded

The good news is that we've seen this movie before and know it is unlikely to last forever – although

at mid-movie, it usually feels like it will never end. The graph below is one we like to reference as

it captures the Focused Growth philosophy and process: Focus on companies capable of sustaining

>15% growth, and using our disciplined process centered on probability-weighted expected returns,

own the stocks of those companies when risk/reward is attractive. This is a way to think about

individual stocks, and it is also a lens through which the Focused Growth portfolio can be viewed.

That is, the companies in the portfolio are growing faster than the broad economy, and while over

time a stock follows the company’s growth trajectory, sometimes investors favor long-term high

secular growers, and other times not.

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We remain steadfast in our belief that the philosophy and process underlying Focused Growth is

one which can generate good returns over most intermediate-to-long term time frames. While

investor psychology will undoubtedly ebb and flow, the value of these growing enterprises will

ultimately shine through. It also bears remembering that history has taught us that when investor

sentiment decides to shift back in favor of small cap secular growth stocks, such moves can be very

swift and quite extreme.

I'd again like to thank you for your interest and encourage you to reach out if you have any questions.

Andrew L. Beja, CFA

dbeja@granahan.com

(781) 890-4412

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 March 31, 2016

GIM Small Cap Focused Growth Russell 2000 GrowthAs of March 31, 2016

Selected Portfolio Statistics

At a GlanceProduct Assets: $163 MillionMinimum Investment : $3 MillionStatus: OpenInception Date: August 1, 2007Benchmark: Russell 2000 GrowthCapitalization: Typically, $200 Mil - $2 Bil at purchasePortfolio Manager: Andrew L. Beja, CFATypical Number of Holdings: ± 40

Distinguishing Factors• By investing in businesses with sustainable growth,

we reduce the risk of significant capital loss.• We invest in exceptional businesses – those with

solid balance sheets, high incremental margins and strong customer value propositions.

• Our expected return methodology is a mechanism for mispricing and has proven successful over the course of several investment cycles.

• We believe conviction leads to outperformance, 60%-80% portfolio held in top 15 holdings.

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.

Within this philosophy we seek to own companies with large open ended opportunities, a favorable competitive landscape, products or services providing a significant value proposition to the customer, and that have clean balance sheets.

This company analysis is combined with a rigorousvaluation discipline centered on a stock's expectedreturn and risk/reward. The net result is a portfolio of 40-50 attractively priced stocks of some of the most excitingand innovative companies in the economy, and aportfolio that has generated consistent, strong risk-adjusted returns over time.

Firm HistoryFounded in 1985, Granahan Investment Management,Inc. is a 100% employee-owned firm specializing insmaller cap equity investments for large institutions andwealthy individuals. The firm utilizes fundamental,bottom-up research to uncover and invest in fastgrowing companies under $6 billion in market cap. Thefirm manages $3 billion in institutional assets and thefounding principals are part of an investment team whichnow totals eleven professionals.

Trailing 5-years through March 31, 2016Quarterly Returns - Gross of Fees

Annualized Alpha 3.32%Upside Capture 109.94%Downside Capture 87.13%Tracking Error 8.65Information Ratio 0.40Beta 1.06

Source: eVestment

Characteristic Portfolio Russell 2000 Growth

Median Market Cap $1,317.4 mil $699.1 mil

Weighted Avg. Market Cap $2,532.4 mil $2,027.3 mil

Active Share 97.59% -

Est 3-5 Yr EPS Growth 20.0% 15.0%

Forward P/E Ratio 39.1x 19.8x

Dividend Yield 0.09% 0.81%

Price to Book 4.28x 3.86x

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.

March 31, 2016Small Cap Focused Growth Product

Source: FactSet

March 31, 2016Top Ten Holdings

Security Percent of Portfolio

AFFILIATED MANAGERS GROUP 7.7%

COSTAR CORP 7.6%

2U INC 7.2%

ULTIMATE SOFTWARE GROUP 7.1%

SPS COMMERCE 6.3%

EBIX 5.7%

ADVISORY BOARD 5.4%

DEMANDWARE 5.4%

IMAX CORP 3.4%

CVENT 3.4%

Composite FootnotesGranahan Investment Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report incompliance with the GIPS standards. Granahan Investment Management has been independently verified for the periods January 1, 1993 through December 31,2014. 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 productutilizes fundamental, bottom-up research and analysis to invest in companies in the small cap sector of the market that exhibit sustainable high earnings growth, witha focus on the technology services, internet, consumer, and business services sectors. The benchmark for the Small Cap Focused Growth product is the Russell2000 Growth. The composite, created in December 2011, is calculated by asset-weighting the performance of each account on a monthly basis. The compositeincludes returns from the portfolio manager’s prior firm, from inception of August 1, 2007 through December 31, 2011. Accounts are included beginning with the firstfull month under management and terminated accounts are included in the composite. Performance calculations, expressed in U.S. dollars, produce a total returnincluding cash and the reinvestment of dividends and interest. The dispersion is a standard deviation using equal-weighted total returns for accounts in the compositethe entire year. The three-year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-monthperiod. Leverage is not utilized. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Returnsare gross of investment management fees, which when included, reduce investment returns. Beginning 10/31/2012, net returns are total returns reduced by actualinvestment management fees. Prior to 10/31/12 and for accounts which pay no management fee, the standard management fee applicable is applied to calculate thenet 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 ANNUALrate 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 acompounding 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 completelist and description of all of the firm's composites is available upon request. Past performance is no guarantee of future results.

March 31, 2016

Date Small Cap Focused Growth Composite

As of 3/31/16

CompositeGross Return

Russell 2000 GrowthReturn

Composite Assets$ Mil

Composite# Accts

Composite3-Yr.

Std. Dev.

Russell 2000Growth

3-Yr. Std. Dev.

CompositeDispersion

CompositeNet Return

Non-Fee Assets

FirmAssets$ Mil

YTD -12.14% -4.68% $163.6 5 19.42 16.42 NA -12.31% 0.4% $2,849.2

2015 -8.86% -1.38% $206.7 5 17.34 14.95 NA -9.38% 0.4% $3,041.7

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