Market Sector Update

• Domestic markets were under pressure in the fourth quarter of 2018 as elevated periods of volatility for the period erased the gains experienced in the first three quarters of the year. The S&P 500 Index, the Fund’s benchmark, declined 13.5% for the quarter.
• While most of the damage happened in December, with the S&P 500 losing just over 9%, October also saw a significant decline, making it one of the worst quarters for stocks in 10 years.
• This underperformance was led by the energy sector (down 24%) followed by information technology and industrials (both down nearly 17%) and consumer discretionary (down 16%). The solitary positive sector for the equity index was utilities, which was up 1.4% for the period.
• A sharp risk-off mentality drove negative returns across many asset markets in the U.S. We believe several factors led to the risk reduction, including concerns over a global economic slowdown, the prospect for continued interest rate increases and the unresolved trade dispute with China.

Portfolio Strategy

• The Fund’s delivered a negative return for the quarter, with a modest underperformance to the benchmark.
• With 10 of the 11 sectors suffering losses, there were few places to hide. The Fund’s top performing sectors for the quarter were utilities, which posted the only positive return, followed by consumer staples and health care. Conversely, information technology, industrials and consumer discretionary were among our largest sector detractors. We finished the quarter with a relatively high cash position, which helped to offset some of the Fund’s declines.
• With regard to individual holdings, underperformance of specific industrial securities–Airbus, Lockheed Martin, and FedEx– combined with a greater-than-market weighting in that underperforming sector, was a significant detractor to performance.
• We have selectively increased our weighting in semiconductors with the belief in long-term secular growth and highly defensible business models. We have modestly increased the weighting in financials to take advantage of the current slowdown in capital market activities. Finally, we believe volatility creates opportunity. We are looking at holdings in several hard-hit areas, including industrials, information technology, financials and energy with a longer-term eye on earnings and business model strength.

Outlook

• As we look ahead, global economic growth is very likely to decelerate over the next 12 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 and adjust the pace of monetary policy normalization. As the domestic economy grows, we expect the Federal Reserve to raise interest rates at a very modest pace and continue the process of winding down its balance sheets.

The opinions expressed are those of the Fund’s managers at Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 2018, 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 12/31/2018: Microsoft Corp. 5.0, UnitedHealth Group, Inc. 4.1, Alphabet, Inc. 4.0, Medtronic Plc 3.0, Coca Cola Co. 2.8, Verizon Communications 2.6, Lockheed Martin Corp. 2.5, Citigroup, Inc. 2.5, Apple, Inc. 2.5, Visa, Inc. 2.4.

Gus C. Zinn, CFA, served as a portfolio manager on the Fund until Dec. 03, 2018.

The S&P 500 Index is an unmanaged index of common stocks. 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.