Market Sector Update

• Domestic markets surged in the first quarter of 2019, with the S&P 500 Index, the Fund’s benchmark, up over 13% for the quarter. This follows a dismal performance in the previous quarter, where the benchmark declined nearly 14%.
• We attribute this dramatic rebound to the Federal Reserve (Fed) and its pivot on interest rate increases. The Fed indicated it will likely leave rates unchanged this year due to weaker global growth and benign inflationary pressure.
• In another surprising move, Fed Chairman Jerome Powell announced in March plans to halt the Fed’s program of reducing bonds and mortgage-backed securities holdings on its balance sheet in September. The best performing sectors for the first quarter included information technology, real estate, industrials and energy as the market took a decidedly pro-cyclical turn. Real estate, while not typically pro-cyclical, performed well thanks to the downward move in 10-year Treasury interest rates in late March. The worst performing sectors for the quarter included health care and financials.

Portfolio Strategy

• The Fund delivered a positive return for the quarter, but underperformed its benchmark (based on Class I shares).
• The largest detractor from relative performance was the larger-than-normal cash balance. Additional negatives included stock selection in the communication services sector (ownership of Take Two Interactive and lack of ownership in Netflix and Facebook). The portfolio’s underweight and stock selection in energy also detracted from relative performance. The largest positive contributor to relative performance came from stronger stock selection within financials.
• With regard to individual holdings, top performers included Microsoft, First Data, and Citigroup. Holdings that were detractors to performance included Take-Two Interactive, CME Group and Vail Resorts.
• From a style perspective, it should be noted that over the past nine months we have materially decreased the portfolio’s weighting of high growth stocks as their valuation levels have increased relative to the broad market.
• We anticipate that through the course of 2019, investors will feel somewhat better about growth prospects outside of the U.S. and more value-oriented investments could see a good tactical run. We have and will continue to pivot the portfolio to companies with valuation characteristics that are more favorable. Often these moves will come at the expense of some longtime winners in the portfolio.
• Looking at portfolio composition, the information technology and consumer discretionary sectors are the Fund’s largest sector overweights as we are adding positions in which there has been growth in earnings and/or free cash flow while trading at valuation levels below their historical norms. The Fund continues to be underweight expensive bond proxy groups including real estate and utilities. We saw large opportunities to invest in companies following the recent correction, so the Fund’s cash levels are down over the previous quarter.

Outlook

• As we look ahead, the pace global economic growth is very likely to slow, but remain positive in the near term. There are signs that policy makers globally are responding to slowing growth and a lack of inflation. Chinese policymakers are stimulating, while eurozone officials continue a policy of negative interest rates and the Fed’s signal of no further near-term rate hikes.
• 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.

Top 10 holdings (%) as of 03/31/2019: Microsoft Corp. 5.3, Boeing Co. 3.6, UnitedHealth Group, Inc. 3.6, Citigroup, Inc. 2.8, Amazon.com, Inc. 2.7, Analog Devices, Inc. 2.7, Lockheed Martin Corp. 2.6, Mastercard, Inc. 2.5, Alphabet, Inc. 2.5, Nike, Inc. 2.4.

Gus C. Zinn, CFA, served as a portfolio manager on the Fund until Dec. 3, 2018.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.