Market Sector Update
- Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted
positive returns during the quarter, with energy outperforming and materials underperforming the broader equity
- Volatility continued in the oil markets. Crude oil prices rebounded significantly higher in the quarter. West Texas
Intermediate, the U.S. benchmark, was up about 30% after falling 45% in the fourth quarter and Brent, the global
benchmark, was up slightly more.
- The OPEC supply reduction announced in December 2018 provided a positive stimulus for the oil market. OPEC’s
policy change was in response to waivers granted by the U.S. that allowed Iran to continue exporting oil to approved
nations. As a result of the decreased supply from OPEC, global oil inventories declined in the quarter. Political
disruptions and geopolitical issues led to lower production from Venezuela and Libya.
- The Trump Administration is set to decide by early May if waivers that allowed countries to buy crude oil from Iran –
despite U.S. sanctions – will be extended. The waivers were the initial reason the oil market became oversupplied.
- The U.S. continued to grow oil production in the quarter, even as the rig count declined slightly. Lower rig count was
driven by lower oil prices in the prior quarter as well as lower capital expenditures as producers aimed to generate
more free cash flow.
- The Fund posted a positive return for the quarter but trailed the positive return of its benchmark index.
- The five greatest equity contributors to performance relative to the benchmark were Propeto Holdings Corp.,
Enterprise Products Partners, Parsley Energy, Inc., Patterson UTI Energy, Inc. and Contiental Resources, Inc.
- The five greatest detractors to relative performance were Exxon Mobil Corp., Chevron Corp., Kinder Morgan, Inc.-
Class P, Williams Companies, Inc. and Oneok, Inc.
- About 41% of the equity holdings in the Fund were allocated to the Oil & Gas Exploration & Production industry
segment, followed by about 23% to Oil & Gas Equipment & Services and 12% to Oil & Gas Refining & Marketing. The
Fund’s allocation to domestic equity was about 83% of net assets.
- The focus of the energy strategy remains on investing in companies that can create value over the full course of the
energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability
to grow profitably and have strong return on capital.
- We expect the oil market price rebalancing that occurred in the quarter to continue, with OPEC expected to maintain
production cuts into the summer. U.S. production growth is expected to decelerate but still grow in excess of 1 million
barrels per day in 2019. U.S. supply growth is expected to be roughly in-line with global oil demand.
- U.S. rig count, after declining in the quarter, is likely to remain flat as producers show spending discipline even with
higher oil prices. Exploration and production companies are seeing more pressure from investors to be more prudent
in allocating capital in order to generate better investor returns. This discipline could be tested in the second half of
2019 if oil prices remain in the current range or higher.
- We believe the worldwide demand growth rate continues to be the greatest risk to oil prices going forward. Demand
growth for this year has been better than expected, despite a synchronized global economic slowdown.
- Infrastructure constraints continue in the Permian Basin for crude oil and natural gas, with some relief forecast for
the fourth quarter, based on an expected increase in pipeline capacity.
- Energy equities have lagged the appreciation in oil prices this year, but we think that gap will be reduced throughout
the year as equities gain back some ground versus the commodity.
The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March
31, 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.
Top 10 equity holdings as a percent of net assets as of 03/31/2019: Concho Resources, Inc., 5.41%; Continental Resources, Inc., 4.26%; Pioneer Natural Resources Co., 4.00%; Valero Energy Corp., 3.63%; Diamondback
Energy, Inc., 3.63%; Phillips 66, 3.61%; EOG Resources, Inc., 3.44%; WPX Energy, Inc., 3.41%; Marathon Petroleum Corp., 3.37%; Halliburton Co., 3.29%.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy
sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost
assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all
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