Market Sector Update
- Domestic markets continued to rally in the second quarter of 2019 despite a disappointing breakdown in trade
negotiations between the U.S. and China which introduced some volatility intra-quarter.
- The S&P 500 Index, the Fund’s equity benchmark, advanced 4% with financials, information technology, materials
and consumer discretionary sectors leading the way. Ten of the 11 sectors posted a positive return for the quarter, with
energy being the only sector with a negative return.
- The macroeconomic data, as well as the expectations for U.S. Federal Reserve (Fed) easing, caused the 2-year yield
to decline 51 basis points (bps) to 1.75% and the 10-year yield to decline 40 bps to 2%. The spread between the 10-year
U.S. Treasury note and the 3-month U.S. Treasury bill, which last quarter turned negative for the first time since 2007,
remains negative or inverted.Historically, an inverted yield curve has implied a forthcoming recession, but the time lag
can be significant. Another yield curve measure, the spread between the 10-year U.S. Treasury Note and the 2-year
U.S. Treasury Note steepened from 14 bps to 25 bps in the quarter, a small indicator that the Fed will rekindle growth
expectations with rate cuts.
- The Fund’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, increased 3.5% during
the quarter, as the Treasury market rallied due to an expectation that the Fed would begin to reduce the federal funds
rate. Options markets are currently pricing in a 100% probability of a 25 bps rate cut at the Fed’s July meeting and a
63% probability of another 25 bps of cuts through the remainder of 2019. In addition, investment Grade credit
spreads tightened by four bps during the quarter and contributed modestly to the benchmark’s positive return.
- The Fund had a positive return in the quarter that was slightly less than the return of its benchmark, but in-line with
its Morningstar peer group average.
- The Fund’s equity portfolio benefitted from an overweight position to the financials sector and strong stock selection
in the information technology and financials sectors, which positively impacted relative performance.
- With regard to the fixed income portion, the Fund’s relative underweight of corporate credit negatively impacted
performance in the quarter as credit spreads tightened. The Fund’s duration now stands at approximately 93% of the
- Positions in Qualcomm, Blackstone, Disney, Microsoft and Autodesk exhibited particularly positive results. Partially
offsetting this performance was a relative overweight of the energy sector and poor stock selection in the consumer
discretionary, industrials and health care sectors with positions in Core Laboratories, Intel, Philip Morris, Lowes and
Cimarex Energy being notable detractors.
- As we look ahead, global economic growth is very likely to decelerate over the next several months, but we expect
it to remain positive. As we have previously highlighted, individual and corporate tax reform was a meaningful positive
for the domestic economy which, along with lighter regulation and a generally more business-friendly political climate,
was supportive for growth.
- However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are
likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of
tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.
- As a result, we are closely watching inflation rates and inflation expectations which have been modest, and must
remain so, in order to allow our central bank to respond to slower growth. We have been encouraged by the Fed’s
recent shift toward an easing bias with cuts to the federal funds rate expected in the near future.
- While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality,
growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative
outperformance over the next 12 months. This approach has served investors well over time, and our confidence in it
has not waned.
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 June
30, 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.
All information is based on Class I shares.
The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It
is not possible to invest directly in an index.
The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have
a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest
directly in an index.
Top 10 Equity Holdings as a % of net assets as of 06/30/2019: General Mills, Inc. 1.9, Microsoft Corp. 1.9, Union Pacific Corp. 1.9, Autodesk, Inc. 1.8, PPG Industries, Inc. 1.8, Zimmer Holdings, Inc. 1.8, Las Vegas Sands,
Inc. 1.8, Qualcomm, Inc. 1.8, The Blackstone Group, 1.7, The Boeing Co. 1.6.
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. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. The lower-rated securities
in which the Fund may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which
the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale
and sometimes trade infrequently on the secondary market. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend
paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will
remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates
rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally
45 to 55). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities.
The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. These and other risks are more fully
described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.