Market Sector Update

• The action-packed second quarter of 2020 felt more like a year than a 90-day period. The numbers showed a strong rally with the S&P 500 Index, the Fund’s benchmark, up 20.6% for the quarter, and a sharp rebound for many stocks that tumbled in February and March. In addition, old leadership continued to perform well in the quarter. Information technology stocks seem to be a group for all seasons as the pandemic has only accelerated many of the technology trends already in place. While economists continue to debate whether the shape of the broad economic recovery will be a V, W, L or Swoosh, what is very clear is that when describing the shape for the stock market we have had a very narrow V recovery. Technology stocks are a key reason for this V recovery, as the market is increasingly narrow with five stocks now comprising over 22% of the S&P 500 Index. Amazingly, these stocks have seen their businesses relatively unaffected or helped due to the current COVID-19 pandemic. The phrase used in last quarter’s update that the “stock market is not the economy” continues to be a very relevant observation. While the quarter started with a free-falling economy and uncertain virus outlook, the worst case scenarios were averted with government assistance, renewing investors’ appetites for risk at the beginning of April. Those areas most beaten down in the market’s March decline had strong rebounds in the second quarter, led by consumer discretionary, energy and materials. As expected during a strong move higher for the market, areas of safety were penalized, with utilities, consumer staples and real estate lagging. Information technology continued its strong relative performance. It seems almost a perfect group for whatever the market’s mood, offering attractive size and growth characteristics, which have been and continue to be in favor. On the other end of the spectrum, financials continued to lag as worries around interest rates, government regulation and pending credit losses overwhelmed the “risk on” market environment. Overall, the outlook entering third quarter is significantly improved for the economy, but the stock market outlook is more uncertain than a quarter ago due to the recent dramatic increase in equity prices.

Portfolio Strategy

• The Fund performed roughly in line with the benchmark in the second quarter. Our best performing sector was financials, where avoiding banks and other spread-based businesses paid off. Tradeweb, S&P Global, Inc. and KKR & Co.were the portfolio leaders within financials. Our health care stocks, led by DexCom, also outperformed their index counterparts. The biggest detractor from a sector standpoint was communication services, where holdings in Live Nation Entertainment and Charter Communications disappointed. Cash was also a significant detractor in such an up quarter.

Outlook

• The following are some thoughts on potential opportunities in the market, given changes in market sentiment caused by the sharp rebound in the second quarter. COVID-19: This is a primary driver of the economy and the markets. Entering the second quarter, the economy was in lockdown and infections, hospitalizations and deaths were on the rise. Throughout the quarter, curves flattened, lockdowns ended and a number of treatment and vaccine trials began to provide hope that solutions were on the horizon. These were all important positives that helped propel markets higher. Looking forward, we expect the market will continue to focus heavily on such developments for at least the remainder of 2020. As a large-scale vaccine may still be years away, therapeutic treatments that serve as a bridge to a vaccine will get much of the attention in the near term. As states and businesses reopen, a rise in cases might cause a start/stop recovery for the economy and stall the market’s momentum. The reopening of schools is critical and will have a ripple effect across the economy, as working parents will be kept from their jobs if kids are unable to attend classes in person. For now, the market is cautiously comfortable with slowly rising case counts, in part because many new cases are in the younger demographic, where hospitalization requirements are minimal. Renewed broad-based shutdowns could easily derail the market’s recent strength, but we don’t believe this scenario is likely. Stimulus: We believe the unprecedented levels of fiscal and monetary stimulus have been key to the market rally. The Federal Reserve (Fed) has become the lender of last resort and has been quite busy buying securities throughout the quarter. Its balance sheet entered the year at $4 trillion and now tops $7 trillion in just a few months. In addition, fiscal stimulus has been equally impressive. The federal deficit was expected to be $800 billion for 2020 entering the year and now stands at $3.8 trillion. The old adage “Don’t Fight the Fed” remains truer than ever and is backed up by a massive fiscal printing press. The market is expecting additional stimulus during the third quarter, and while there is some debate on timing, most believe bipartisan support will eventually occur. This unprecedented level of government support, however, should present longer-term risks around increasing deficits and asset price inflation. Asset prices are already eye-popping in some cases, with stocks moving higher with very little changed in their fundamentals. Reports of stimulus checks funneled into the stock market through retail platforms may be accelerating this trend. Stocks could still move higher of course, but risks rise along with valuations. Consumer behavior: It is fair to say that social distancing and the U.S. consumer way of life are not a good match. The pent-up demand for the younger population to be out of the house and with others is palpable. And while this desire does offer hope for recovery in service industries such as restaurants, retailers and entertainment, it is becoming increasingly clear that we are in a start/stop recovery for these industries for the time being. We still see attractive long-term opportunities for stocks under the theme of “close to home” entertainment, but we expect the ride will be bumpy. Such stocks should also respond extremely well on any positive vaccine development news. Growth/technology leadership: In our view, the most important dynamic in the market is the continued narrowness of large-cap growth leadership led by the information technology sector. With a backdrop of low rates, low inflation and low economic growth, the market continues to reward companies with above average sales growth. Additionally, large future growth opportunities result in elevated present values when discounted at today’s low interest rates. In some cases it seems the bigger the future dream for a company, the better the stock. Some of the hype may be justified given the current low-growth environment, but for an increasing number of stocks the valuation levels resemble those seen in the late 1990s. In addition, the market’s concentration is truly without precedent. Currently the top five companies make up over 22% of the S&P 500 Index (30-40% of most growth indexes), an all-time record. All five of these companies (Apple, Google, Facebook, Amazon, Microsoft) have technology at the core of what they do. While these trends of growth leadership and market narrowness are not new, many wonder just how long the trend can last. Currently the valuation gap between growth and value companies is near record levels. Yet many would argue, and we would agree, that growth will continue to be rewarded in such a challenging economic backdrop. We remain mindful of the increasing stock moves without fundamental justification. There is no doubt that the current pandemic has accelerated many trends that benefit leading technology companies including work from cloud technologies and e-commerce. Our focus will continue to be on areas of the market where we see long term above average sales growth driven by market share leadership and innovation. We will also look for short-term dislocations for market share leaders in attractive industries. Both of these angles contributed to purchases in the quarter of companies we think will benefit as the economy reopens. While most sells have been mistakes since the market downturn, the decision to sell Lululemon and Spotify were particularly painful as the stocks have moved materially higher since we sold them. Overall, as the economy reopens and normalizes, we are trying to balance the portfolio between high-growth stocks, which come with high valuation levels, and stocks with long-term appreciation potential. We look forward to updating you next quarter. Stay safe!

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 June 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 06/30/2020: Microsoft Corp. 7.8, Apple, Inc. 4.7, Amazon.com, Inc. 4.5, Union Pacific Corp. 2.7, Mastercard, Inc. 2.6, Morgan Stanley 2.5, Cisco Systems, Inc. 2.4, Danaher Corp. 2.4, Aon Plc 2.4 and Citigroup, Inc. 2.4.

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-capitalization U.S. equity market. It is not possible to invest directly in an index.

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.