Market Sector Update

• In the midst of a year of unprecedented events and records, it was refreshing to see the S&P 500 Index, the Fund’s benchmark, hit a new all-time high early in September. However, 2020 continues to be full of trials and stubbornly persistent concerns, which has dampened enthusiasm for the U.S. economic recovery and caused markets to pull back modestly as the quarter ended. Unfortunately, the number of cases and deaths resulting from the COVID-19 virus has continued to grow, albeit at a slower pace, which is first and foremost a tragic human loss and secondarily a continuing threat to the global economy.
• During the quarter, the index advanced 8.9% with the consumer discretionary, materials, industrials, information technology and consumer staples sectors leading the advance. The communication services sector performed roughly in line with the index return. The beleaguered energy sector posted the only negative return for the quarter while financials, real estate, health care and utilities trailed the index.

Portfolio Strategy

• The Fund performed well in the third quarter, exceeding benchmark performance for the period ended Sept. 30, 2020. For the quarter, outperformance was driven partly by individual stock selection, with notable strength in the health care (Danaher Corp.), consumer staples (Costco and Walmart), utilities (NextEra Energy, Inc.), and communication services (Charter Communications, Inc.) sectors. The majority of outperformance was driven by sector selection, particularly the portfolio’s underweight in the energy sector, which continues to trade near March 2020 lows. A significant oversupply of energy continues with transportation-related demand well below trend during a period of longer-term evolution toward a cleaner energy future that calls into question longer-run supply/demand characteristics.
• Stock picking within the information technology sector detracted from performance in the quarter, as cloud-related software and semiconductor stocks (salesforce.com and NVIDIA Corp.) performed well, but valuation concerns kept us from owning these names. While the portfolio has benefitted from holding a number of companies we believe are COVID-19 “beneficiaries,” we have not kept pace in the area of information technology, where valuations are stretched and momentum characteristics are near an all-time high.

Outlook

• The current economic climate in the U.S. and globally remains uncertain, primarily due to the evolution of the current pandemic, and how quickly/forcibly governments act to reopen their societies. Progress on the therapeutic and vaccination fronts appears to be very positive, though subject to an uncertain timeframe with governments having to react on the fly to new pockets of disease within their borders. Though our team spends a great deal of time trying to predict the most likely path of the disease and its implications, forecasting is highly uncertain.
• We remain confident that American businesses are unparalleled in their abilities to manage through a crisis, employing proper stewardship of their cost base and balance sheets. Like everyone else, we are on the lookout for businesses that have the potential to emerge from the current crisis with a stronger hand than they held before, companies that will be able to meet and exceed previous peak revenue levels with profitability that surpass prepandemic levels. On average, we believe, the current environment has taught many companies to do more with less, such as less travel, entertainment and perhaps even a smaller workforce. And while this may be to the detriment of long-run economic growth, it's likely the average company will find ways to enhance profitability through this crisis.
• Our playbook is somewhat akin to the immediate aftermath of the financial crisis, where we seek companies with discounted valuations that have durable competitive moats, allowing them to retain the benefits of working more efficiently. To that end, we have added names such as John Deere, a company that is now earning peak profit margins on less-than-peak volumes in its agricultural division because of its focus on precision agriculture (making farmers more productive). During the quarter, we also added a stake in Stanley Black & Decker, a company that bore the brunt of margin degradation following the implementation of higher tariffs from China. The company was forced to quickly adapt and now stands to benefit from a resurgence in housing-related demand that appears both structural (deurbanization) and cyclical.
• Between John Deere and Stanley, we have moved to an overweight position within industrials because we believe profit recovery will benefit the entire sector. The portfolio remains most overweight in financials, not due to a belief in an upward bias for interest rates, but because of idiosyncratic opportunities in alternative asset managers (Blackstone and KKR & Co., Inc.), cyclical opportunities in less spread-oriented lenders (Discover Financial), and business model strength in insurance (Aon and Progressive).
• Beyond financials, the portfolio remains well-diversified across sectors with our largest negative sector weight within energy. From a risk standpoint, the portfolio remains neutral to the benchmark as we have significantly reduced factor exposures (value versus growth and large cap versus small cap) over the past several years in favor of more company specific or idiosyncratic positions. Our current overall portfolio risk remains approximately equivalent to our benchmark. As always, we look forward to updating our stakeholders in the future and look to continue being strong stewards of your capital.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2020, 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 holdings (%) as of 09/30/2020: Microsoft Corp. 7.6, Apple, Inc. 5.4, Amazon.com, Inc. 4.7, Union Pacific Corp. 2.9, Mastercard, Inc. 2.7, NextEra Energy, Inc. 2.6, Facebook, Inc. 2.6, Zimmer Biomet Holdings, Inc. 2.5, Alphabet, Inc. 2.5 and Danaher Corp. 2.4.

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.

All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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. 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.